Advising · Ownership

What's the right equity/compensation split at the earliest stage?

Ranjeet Devgun IT Consultant

November 6th, 2014

I am a developer and been approached by my friend with an idea that could be worth spending efforts on.
So I have been offered 1% of ownership with no payments for any effort but just ownership.
He is definitely putting some money into it from his own savings as he strongly believe it could be a huge success till product reaches a stage.
I somewhat agree to the value of the idea. But as we all know it can go anywhere to a worh of multi-million/billion to nothing depending upon how solution is build.
Also I haven't really started working yet whereas he expects me to.

His argument is, "that's my idea and I own it and still offering 1% that should be good enough" considering he thinks its going to be a huge success. If he makes a billion then 1% is worth but anything in millions is nothing without any other payments for all efforts I am supposed to put.

Since he is a friend and we worked together in the past, he approached me to work on the idea and own major piece of development since I have good experience now. Also he has an architect who has asked no ownership but payments on hourly basis. Who else is there is something not fully clear to me yet.

My questions are:
1. What % of ownership I should be expecting?
2. Should I have payments of my effort + some % of ownership?
3. Should I go with no payments with condition that I should be paid for all my efforts (based on decided hourly rate) when we get funding or make some money in addition to some % of ownership?

Corey Blaser

November 6th, 2014

I think you need to find someone else to get into business with. 

The fact that he is adamant that he owns the idea and therefore should own 99% of the equity means that the company will fail. There are no if, ands, or buts. It is pure greed. He will not be able to convince investors or other partners that you will need to come in with that kind of an outlook. It will waste your time and probably ruin your friendship.

It is best to be honest about it to yourself. Find people who you can trust to be reasonable and mature about the way startups work. You will be happier (and more successful) for it. Good luck. :)

Amir Yasin Developer, Architect

November 6th, 2014

1% ownership is a joke.  Here's a secret:  Ideas are a dime a dozen...they're meaningless without effort put behind them.  If you're the one putting that effort in then you have a right to expect compensation for that. VERY VERY VERY VERY VERY few start ups reach the billion or even 100 million dollar mark, so 1% is very likely to be significantly less than $100000 on exit.  If it were me, I'd ask for a reasonable chunk of ownership or in the alternative to be paid hourly.  A few questions before we can really get down to what you should ask for:

- What skills does your friend bring to the table (subject matter expertise, graphics design, etc)?
- How much money is he putting up?
- How is the company going to be structured (i.e. LLC, S-Corp, C-Corp)?

Reuven Granot Corporate Strategic and Scientific Officer at Perlis Ltd

November 6th, 2014

I agree with Amir and Eric Your friend not seriously understands that actually he should offer you to be co-founder or pay you real value.
In my Start-Up I gave 15% equity at this stage to a developer, since I could not pay him real money.
I do agree that this is a big risk for both sides.
Giving real equity up front is risky for your friend. So suggest him to give it as you perform work on an upfront agreed equity. This is called vesting.

If you want to help him build his Start-Up right I suggest you both read a new book by Mike Moyer called: "Slicing the Pie". It is on Amazon, or ask Mike for a copy. I very much appreciate his discussion and instruction how to reword contributors to a new start-up before investment.

Brendan Duffy Product Manager

November 6th, 2014

I'd be wary of working with someone who thinks that the idea--an idea he cannot execute on without your/someone's help--is worth 99%. That's a faulty assumption, and it would prompt me to ask how many other faulty assumptions he's operating under.

My advice:
Give him a few data points--links to articles that discuss dividing equity stake in various early-stage scenarios. Include some famous company founding stories. It's possible that he'll come around and realize that the idea is merely the kernel of what might become a great business someday.

If he's a quick study, he'll realize that he needs other people to make his vision a reality, and that he'll need those people for the long haul. If he offers merger equity, it will be easy for his critical team members to walk away, and that's something he should want to prevent at all costs.

If he still insists that his idea is the key driver of the business, he misunderstands business. Walk away.

(Oh, and here're my two cents on the split: pre-product, pre-revenue, pre-customer, pre-partnership, with an unproven entrepreneur, you should be looking for between 45% and 50%. And you should be vetting him to ensure that he can complement your skill set in critical areas.)

Sati Hillyer Looking to Hire a Ruby Engineer to join OneMob - 2015 Gartner Cool Vendor for CRM Sales

November 6th, 2014

Whats the stage of the business? It sounds very early, i.e. pre product, pre team, pre customers/revenue, etc. Is this guy technical? 1% seems very low considering you are not getting any salary, unless you are working on this part-time. Just go to AngelList and you can see companies in SF giving full-time developers 80-100K and up to 1% and they are probably a lot further along. Good luck!

Steve Owens

November 6th, 2014

We work with a lot of start-ups and this kind of thing comes up all the time. Trying to determine what 1% of this company is worth is impossible. Here is a way around the whole discussion of valuation: 1. Bill at your normal hourly rate. Lets say its $100/hr for 1000 hours, or $100,000. 2. The company gives you a senior secured note for $100,000 @ 12% APR. 3. The interest on the note is added to the principle each month. 4. The loans must be pay off when $XX dollars are received by the company in the form of revenue or investment. 5. You also get $100,000 of warrants to buy equity at a value of deal the company has previously agreed to. Here is an example of how this might work: The company did 4 deals: Series A $10 per share Series B $20 per share Series C $1 per share IPO $100 share You get paid $100,000 + interest when the series A closes. At the IPO, you exercise your options. You pay $100,000 for 100,000 shares - that is what the company sold them for in the series C - and then the next day sell them for $10 million - because that is the current price. Of course, this is just one way this could play out. You could also end up with nothing because the idea goes nowhere. The point is, you avoid the whole pricing discussion until there is enough data to know what it should be. What ever you do, get legal advise! Regards, Steve Owens - Finish Line PDS A Better Way for Small Companies to Develop Products e | Steve.Owens@FinishLinePDS.com p | 603 880 8484 w | www.FinishLinePDS.com 94 River Rd | Hudson, NH | 03051 Click for Product Development White Papers ---- On Thu, 06 Nov 2014 16:11:11 -0500 Ranjeet Devgun<reply+dsc+1746@founderdating.com> wrote ---- FD:Discuss New Discussion on My friend has an idea and to build offering ownership that seems to be not at all promising Started by Ranjeet Devgun Consultant with Morgan Stanley and working on High Performance Trading. Was Lead Programmer for Samsung Graphics division India Division. I am a developer and been approached by my friend with an idea that could be worth spending efforts on. So I have been offered 1% of ownership with no payments for any effort but just ownership. He is definitely putting some money into it from his own savings as he strongly believe it could be a huge success till product reaches a stage. I somewhat agree to the value of the idea. But as we all know it can go anywhere to a worh of multi-million/billion to nothing depending upon how solution is build. Also I haven't really started working yet whereas he expects me to. His argument is, "that's my idea and I own it and still offering 1% that should be good enough" considering he thinks its going to be a huge success. If he makes a billion then 1% is worth but anything in millions is nothing without any other payments for all efforts I am supposed to put. Since he is a friend and we worked together in the past, he approached me to work on the idea and own major piece of development since I have good experience now. Also he has an architect who has asked no ownership but payments on hourly basis. Who else is there is something not fully clear to me yet. My questions are: 1. What % of ownership I should be expecting? 2. Should I have payments of my effort + some % of ownership? 3. Should I go with no payments with condition that I should be paid for all my efforts (based on decided hourly rate) when we get funding or make some money in addition to some % of ownership? FOLLOW DISCUSSION or Reply Directly to this email to participate in the discussion Manage your email notifications

Brian McConnell

November 6th, 2014

1% is very stingy since you are basically being asked to join as a technical co-founder. Typically the founders equity is fairly evenly split between the founding employees. When you raise funding everyone in this group will be diluted, both by the new investors, and by the equity pool created for ongoing hires (who will expect to receive a fraction of a percent, vested over 3-4 years, in addition to being paid). I would also recommend that you invoice the company for your services, to be paid if the company raises money or there is a change of ownership. This way if the company is liquidated you are at least likely to get something for your efforts. If your friend isn't willing to offer better terms, my advice is to walk away from it because it is unlikely the company will succeed due to being unable to attract talent, or you will get screwed if the company does have a good outcome.

Shingai Samudzi

November 6th, 2014

In all bluntness, I haven't met an entrepreneur who didn't think their idea would make millions. The vast majority never do. So let's take that potential out of your decision-making equation. What it comes down to is how much is your work expected to contribute to the product/venture? If you are essentially a CTO or key designer for this, frankly 1% is outright insulting. 99% equity for just having the idea is just nonsense. If he's not willing to budge, that may be a big red flag for his decision-making ability as a founder and more importantly, team leader. His great idea will go nowhere if he can't get intelligent cofounders and partners on board, and he won't if he isn't willing to share equity with them. 99% of $0 is $0. And based on the odds of startup success, this venture is more likely to fail than not. So you need to be rewarded appropriately for the time/brainpower investment you are taking that has such a high risk of failure. That way, if you do succeed, your reward is proportionate to the risk you took in working on this.

Gideon Sylvan CEO at Pellego

November 7th, 2014

That's too low, unless it's an otherwise competitive salary or he's Elon Musk.  I'm launching a company I believe could be also worth billions of dollars, and I'm currently looking for two developer co-founders.  I've been meeting with people and negotiations are moving towards 10%+ each with a minimum living salary (plus an options pool for the next few team members).  I have an alpha product built, and in theory I could go at it myself, but in the long run it's better to own less of something a team is committed to.  My goal is to get the company to the finish line, and part of that is minimizing costs (low salaries) and maximizing incentives (high equity).  1% is appropriate for a first 10 employee with a slightly discounted salary after the company has launched, gotten traction, and raised capital if applicable. 

Brian McConnell

November 8th, 2014

Amit, I'll make it easy for your friend. Run!!!!!! I worked for you, not you personally, but someone _exactly_ like you. Cheap. Enamored with his superior technical skills, yet ironically dependent on "lesser" people to actually get the work done. Of course, he was the hard working super-genius, and all of these other people were fucking idiots who couldn't wipe their own asses so they got blamed every time he fucked up, until they quit, which they all did. Want to guess how things worked out with your parallel universe counterpart? Not so well. He alienated _everybody_ who contributed value to the company. Several latecomer/copycat companies showed up and _kicked his ass_. They are all publicly traded companies now, two of them with billion plus valuations. His company is in a death spiral, and they have huge tax problems (he screwed a lot of people on the way down, and they screwed him right back when they ratted them out to the tax authorities, funny how that happens). A bit of advice, I'd quit putting your own money into this business. If you're not willing to share, and other professional investors don't see any value in it (so you don't need to risk serious money), I'd cut your losses and move on before you seriously damage your family and anyone else who gets sucked into this. I know you have a great idea and everything, maybe even a billion dollar idea, but statistics don't lie, and the odds are the idea is a piece of shit, and your attitude, well, let's just say people aren't going to be beating a path to your door to work for you.