I have recently joined my friend in a start up which is yet to launch the service. I have been offered 5% equity as sweat equity after a vesting period of 1 year but the caveat is that it is linked to performance and so I think its unfair. There are no other people in the company other than the founder and I am not being offered salary till the company starts earning.
Please advise me on how I can negotiate a better deal or at least remove the performance clause.
What portion of the work will you be doing compared to your partner?
5% seems somewhat low if you will be doing a significant amount of work, but putting you on a vesting schedule is pretty standard practice.
That protects your partner in the event that A) Something happens to you, and you are unable to work, or B) you decide you don't want to be involved in the project anymore. Without a vesting schedule, your partner would be screwed, as you would be able to walk away with 5% equity in his company without actually contributing to it.
All startups I have worked with have used some form of vesting schedule. And in my current company, all founding members are on a vesting schedule to protect the company. It's just the smart thing to do.
There's an equity calculator floating around somewhere, I haven't found it on a quick search, but if you check on-startups, and look around on here you should be able to find it quickly. Use that to negotiate a better equity share for yourself. Make sure you have justification though, otherwise when the company goes into later funding rounds, the investors will ask why each person has the ownership share that they do.
First, read this thoroughly (including comments, many are very meaningful): Forming a new software startup, how do I allocate ownership fairly? Bring up these points to your partner. If you're putting similar hours and have a similar skillset or the value of your skill is similar to the value of his skill (what each of you are bringing to the table) then a 50/50 split makes much more sense.
You then have to factor in if he is putting in money and you are not. If so, then he should get a bigger slice of the pie. If not, then he should not.
Then think about the time he has already put in. If he's been slaving away for years and you're just coming in, then he should be compensated for that effort. If not, we're back to 50/50 split.
The vesting is absolutely normal and I would never give equity without it. As for the performance clause, I understand your concern. You don't want him to arbitrarily to say your performance was bad when it was not just to get your equity back into his pocket. You must have some objective measure. If I'm giving you equity I don't want you to stick around just to vest when your work is horrible. One solution to this problem is an arbitration clause whereby a third party (or a panel) would be the judge, in case you didn't agree with your partner's assessment.