Suppose there is a situation like this:
There are 3 people in a startup, the CEO, a partner, and an investor (very small angel). The investor does no work but has 7.5% equity and 7.5% net profit sharing already. The CEO is willing to give the partner 10% equity as well. So now the CEO has 82.5% equity left.
They starting making $10k in net profit on month 1, and then $15k month 2, and $25k month 3. Now that the startup is profitable, the partner wants to be paid a salary to compensate him for his time. He wants profit sharing in addition to his equity stake, but the CEO wants to give a salary based compensation.
My question is, how do you decide how much the CEO should pay himself and his coworkers in a startup business? Like for example, if I went to be a programmer out of college at some corporation I could get paid $65k in entry level salary per year, but those are standard rates. The partner wants an increasing share, so if we are making $500k a year he wants $100k salary, and if we are making $5 million a year he wants a $500k salary..
I'm a little confused how to fairly pay off the other people in the startup, especially since I do most of the work and I am least expendable.
What the partner wants is slightly unreasonable - only equity should allow for profit participation, but not salary. You should first establish a salary based on these factors:
1. Contribution to the business - hours and level of skill
2. Market value
3. How valuable the person is to the company (easy or hard to replace?)
4. What your company can actually afford to pay
If your partner was contributing while not compensated fairly in the past, he/she should have been given or promised equity in the business. Sounds like you (CEO) is willing to give some of your equity to partner - a reasonable move. Whatever equity you give to partner, don't give it all without a vesting schedule. Typically, equity vests over 4 years, but sounds like there was some sacrifice by the partner already so you could have his equity vest over 3 or even 2 years. The partner should participate in a profit through equity only, and CEO should be protected through a vesting schedule.
P.S. Read up on getting paid salary versus owner profit distribution if you are an S corp - there are tax implications. TLDR: as an owner you are better off getting money through profit than salary because of payroll taxes (13%), but salary can not be too low or IRS will come after you.
TLDR: Don't mix equity and profit with salary, they are different compensation methods.