We have a physical product, with proprietary IP. My partner and I own 98.25% combined. We issued 1.75% ownership to a designer who wanted equity versus working "freelance". The designer owns his own business, has employees, and was frustrated from not receiving long term benefits of the products he designs for others (he now does it for a fixed fee).
We have 6% set aside, and offered him 1.75% of that. However, what he designs, we pay for his employees effort, not his (e.g., CAD visuals, 3D prototypes, etc.). His normal fee is $40k, but we a discounted rate of $20k to cover his employees time for their work. We don't pay him a salary, and he doesn't work full time for us. He was OK with the original agreement (4 yr vest cycle, etc.), but now he wants more...8.25% more (10% total). We haven't raised institutional money yet, and we believe we can be successful without him, considering the major IP is around our technology, not his designs.
Should we offer him more equity to keep him "happy"? If so, how much more is "fair"? I'm concerned that if we do offer more without him first vesting his time and current agreement, he'd come back to the wishing well looking for more. Your thoughts?
He can not suddenly want to change the agreement you had already come up with. It sounds complex and I hope you had an attorney draw up some paperwork. If you give up to much now you run the risk of having to little later on when it counts. Also, to give you an example. Some of the top seed funds, accelerators etc don't take as much as 10% and they in some cases will hand over $50K. If he backs out he's going to try and keep the work that he's already done until you give him what he wants. Get whatever you can from him so that you have something. Once you've gotten that then you can part ways. He knows that if he parts way and isn't fully vested then he's stuck.
First off, speak to an attorney that deals in this area and not just some general person.
Tell him you need whatever it is that he's produced as your attorney is asking for it to be kept somewhere safe because it's a business asset etc. Once you get that. Remind him of the original deal and thats it. If he walks and your half way done then thats what happens. If you don't fix this now, he'll keep asking for more later.