How much equity should I give for contracted labor?
I am the sole founder of a bootstrapped startup (idea conceived by me, revenue model and business plan developed by me, and I filed a provisional process patent for the concept). I have incoporated as a Delaware C-Corp, and authorized 12M shares (10M common, 2M preferred). I have issued 6M shares to myself with an associated capital contribution of $60K.
I now need to hire software developers to build a proof of concept. I have had the work sceoped by a local developer who estimates 100 hours of work to get to a working prototype and his bull rate is $100/hr. This implies a conract value of $10K. This developer believes in the idea and concept so much that they are willing to take compensation in equity. I am cash strapped and welcome the idea of compensating in equity versus cash.
My question is this: and how much equity should be granted for this work and how should it vest? Thanks!
Equity Independent Contractor Contractor
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If you have a local professional with a proven track record of building products similar to what you need and they are willing to do it 100% in equity you have struck gold! I don't have much feedback on the vesting schedule though... I would assume if I was making something for equity and was really coming in as a CTO and part of the business 'part-time' ~25% – Ryan Doom 12 years ago
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isn't 25% a lot, especially if you assume it vests based on completion of the project and proposed scope of work? I can see 25% if vesting was over several years, and the person was working more as a full time resource on the project (i.e. goes beyond the milestones outlined in the statement of work). – Ric Bray 12 years ago
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I don't think 25% is a lot. They are donating all of their time to build your product. Just because you have the 'idea' wouldn't mean you would get more. They are essentially wanting to partner with you to build your core business product for $0. That seems significant to me. – Ryan Doom 12 years ago
1 Answer
The developer estimates it will take 100 hours. It will therefore take 300. During the 300 hours the end result will suffer from feature creep as you see it evolve and show it to people and you'll ask for things to be added / done differently.
Ultimately, he'll be sucked into the business doing far more without pay then both of your originally intend. I would look around the 25% mark, otherwise he'll quickly get frustrated when that happens. 25% is also worth going that extra mile for, much lower and it's a lot easier to just walk away when it gets tough.
As an aside, given you've filed a patent, haven't you already spent more on the legal costs than the developers intended time? Wouldn't it have made more sense to leave the legal part, pay the developer for the 100 hours? Then you'd get very early feedback whether you have a hope or not, and then maybe go to an angel for something like 25% for 50k, sort the legals with that plus have money to continue on the product.
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same comment I had for Ryan, and for $10K worth of work 25% would imply a value of $40K for the entire equity pie. something seems out of whack here for a deliverable that's completed in a specified time, and the then the contractor (and the 25% equity stake) can fully walk away from everything? – Ric Bray 12 years ago
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My point is he won't do $10k worth of work, it'll end up as 30-40k, software always goes this way. You could reduce that stake if you have a good track record, otherwise he's investing 30-40k into a first timer who hasn't started creating the product, just done the paperwork (no offence intended in that description if that's the case). That's a serious risk in my book. – David Benson 12 years ago
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Agree with all your points David. Ric, idea/sales people over value their contributions - so do the technical people. It's somewhere in the middle. Your developer probably has plenty of ideas. He is missing the sales part as you are missing the technical part. Both are needed. If someone asked ME to work for just equity I would want to be 50/50. But I have a long list of successes I can point to. So the risk is low for the sales guy, whereas the risk for me would be high unless he has successes he can point to. Somewhere between 0 - 50% is correct depending on perceived risk on both sides. – Ryan Doom 12 years ago
