Equity · Stock Options

What is "Fair" in Receiving Stocks?

Pauljames Dimitriu Engineer at SPAWAR Systems Center Pacific

January 11th, 2015

I'm working with a group of gentlemen in a new online business venture.  As the engineer, it is my duty to get the website off the ground, which I have.

The owner of the company wants to give out stocks as compensation.  The big question, assuming he gives out, say, 1000 shares, what % should I ask for?  How do I open these negotiations?  This was not discussed when we started this project so now we have to go back and deal with this.

What are the appropriate questions to ask?  

Jennifer Fortney 20+ years’ experience in PR & marketing comms; Founder of Cascade PR, Chicago firm for small business & startups.

January 12th, 2015

I've read Mike Moyer's book and heard him discuss. It's a great read and really helpful in determining the best process. I recommend it to everyone. 

For me, I break it down by determining how much of my time and effort it will require - do I need to brink in team members to assist - and turn it into a dollar figure - my rates -, which I then put into % of overall valuation, if the company were to sell. 

I do agree with Michael, that as a developer, you are a key player, but almost everyone is when you're bootstrapping. 5% is a good number if the company is valued at $50-100M. If less, then you need to make sure that you feel good about being compensated for the time and energy you've committed - which could be over several years....

Great comments here. Hope we've been of help!



Anonymous

January 11th, 2015

Did you get paid to developer the site?

If you got paid then I would not expect any stock.

If you got paid a smaller amount then you would expect and it was discussed up front that you would do some work for stock then now is the time for that discussion.

It sounds like there was not the discussion about stock up front and work has now been done and you have been paid, I would expect that continue work is expected but still you will get paid. Its then up to the owner to decide if any sharing of stock should take place or if stock options should be available (Stock options are not stock and normally have a price and a vesting period of some sort).

Its always hard when your at this point and have not documented anything :)

Good luck.

Mike Moyer

January 11th, 2015

I've written two books on this topic that described a method for determining exactly how much equity each person deserves. The model, called Slicing Pie, has two parts. The allocation framework determines how much each person deserves. And, the recovery framework tells you the right buyout price (if any) when someone leaves the company.

The model into account the relative value of the various contributions of time, money, ideas, relationships and any other resources. It is dynamic meaning that it changes over time to stay perfectly fair.

Every other equity model relies on rules of thumb or guesses about the future. Because traditional models are always wrong, they are often paired with vesting schedules which are attempts to mitigate the damage caused by mistakes. 

The Slicing Pie model is the most reliable way to make sure each person gets the equity they deserve- no more and no less.

If you would like to take a closer look at how it works I will send you a copy of my book. Just contact me through SlicingPie.com 


Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

January 11th, 2015

Really the question is exactly what Thomas said:  Did you get paid fair market value for your work?  If so, then really any equity would just be a 'gift' from the company, and should be a small percentage.  If you discounted your work, then you can ask for more.  I am an independent iOS developer (and also a founder of a company)  - we offer a discount off our normal rate of around 10% for 5% equity.   If you did not get paid anything up front, you should ask for a lot more equity (and should have before you started the work).  Your time is money after all.

Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

January 11th, 2015

And BTW, that 5% is only for projects that we do the entire thing, not if we do smaller parts of it. 

Pauljames Dimitriu Engineer at SPAWAR Systems Center Pacific

January 11th, 2015

Thank you all for your answer.  I knew I should've asked for the distribution earlier.  However, no, I have not been paid anything yet.

Kerry Davis

January 11th, 2015

Paul, 

Are you the only Engineer on the project and is web development the entire technical side of the business? I am somewhat on the other side of this issue except I have paid market value for all third party development which has involved all of Android mobile app, IOS mobile app, Brower Extensions (all major browsers), back end hosted database and access scripts plus a fairly extension web page which involves not only display content but also several web app (javascript/html5) features.

Yet I know even after I have an MVP in place I will need to bring on employees and give them equity compensation.

I am not sure I agree with the others that say if you were paid market rate for your development you should not also get equity. That is like saying a 3 month contract is worth the same as a 3 year contract. All the major companies in the SF Bay area pay above average wages and still give equity. And your risk for a long term position is obviously higher than theirs.

But understand that it is also a difficult situation for your owner who should have, in my opinion, settled on a work debt equity (assign a rate or value to your work in exchange for that value in stock in the first round funding). And maybe you can approach it that way. Figure out what the fair market value of your work was worth, add a good bonus to that given the startup risk you have assumed, and tell your owner you would like to exchange that in the future at the first third party share valuation of the company in a seed or VC round dollar for dollar. in effect, you exchange your work hours not paid (at an above average rate or with a discount to the valuation) for first round shares similar to what some seed investors do.

Best of luck in any case!

Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

January 12th, 2015

@Kerry: I did not mean to indicate that you should not give your employees, especially key employees like those that developed your app, stocks (or really stock options). I highly recommend that you do, because they are key cog in your wheel going forward as you grow. The last thing you want to do is to have to find a new developer, the current one has a distinct advantage of knowing the code inside and out.

I am just saying that if the were compensated already at fair market value they should not also expect a large percentage of the company. But giving them some equity is a good and probably the right thing to do for someone as important as that developer is to the business.