Equity for First paid Tech-employee in a not-profitable financed Startup
I'm trying to be as specific as possible here:
We are a Startup 5 months on the go with three co-founders. Since none of us can truly code we need to employ our first Web-developer and we have found someone who fits great technically as well as personally to us.
We are self-funded and will pay him about $1,700/ month from his beginning - So opposed to other startups, he will earn money from the beginning. In addition we will give him some shares of the company. I am now thinking about the proper amount of shares that he should be given. Because we are paying him a regular salary, my gut feeling is somewhere between 1-4%.
What do you think?
Some more information about our startup:
* as of now completely self-funded and can pay employee.
* not yet profitable and still some time away from that.
* we will need to raise additional money from vc's to finance our startup within the coming 6 months.
Also: In the case of a first paid employee, what do you think about a cliff and single/double-trigger acceleration?
If you have any links regarding the issue of equity for the first paid employees, please let me know :)
Equity Founders Compensation Shares
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$1700/month is low -- pretty much a 'token' salary, so I'm not sure you can use that as justification to give a lower amount of equity than you otherwise would. I mean really, it's less than I make in a week as an experienced developer at a fairly small (but profitable) company. Is your startup a technology company? You probably need a code-slinger at the "co-founder" level, I would think. – James Adam 12 years ago
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Thanks James! What exactly do you mean by someone at co-founder level? In terms of the amount of shares? – Clemens Kemper 12 years ago
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You definitely can't miss this question if you have not read it: http://www.brightjourney.com/q/forming-new-software-startup-allocate-ownership-fairly – Billy Chan 12 years ago
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$1700/month is ridiculously low. Unless he's a total newb and can't get a job anywhere else.. and in that case, you don't want him. And there are *many* startups that can pay him from the beginning, so he should skip the ones that can't. – Casey Software 12 years ago
2 Answers
This is a perfect case for the use of a dynamic equity split. The dynamic split will enable you to determine exactly how much to give your developer and everyone else in the company (including the other founders).
The reason you are having trouble is because your company has no real valuation now and you are trying to figure out what "chunk" of equity you should give this guy. You have probably already allocated chunks to the other founders. When you give out chunks you will always have one of two problems for each person. You will have either given them too much or too little. It's never the right amount. A dynamic program will not only enable you to create a perfectly fair split, but also keep it fair because it will adjust over time as things change in your company.
Equity represents risk. Specifically, it represents the risk that you may never get paid. In this scenario you are paying the developer so their risk is reduced. In the model the current compensation is deducted from the person's market rate to determine what is at risk.
There's more to the model than I can explain here, but the bottom line is that it is perfect for this situation.
I think you should consider to put some milestones before giving him equity, and based on results, to go up to 10%, because the sallary is very low, and having a viable product is not possible without a good tech guy.
Good luck!
