How should a developer determine their stake in an early startup?


4

I am a developer that has been asked to take part in an early stage startup (no investors yet other than the principals themselves). There is some code in place for the product and I would be working with 1-2 other developers on this to get the first version going. Since a true salary is not an option at this point, I would be working on this during my off hours without direct compensation.

At this point, I have started negotiating for compensation in the form of equity in the company. I have been reading about how to determine what would be a reasonable stake for my part in this venture (options pool size, vesting, etc.) but I don't feel that any of that advice addresses a venture that is at this young stage. I could estimate based on the compensation that I should be receiving for the work being done and the estimate of the amount of time I will be devoting to the project, but I am not sure how to translate that into a percentage of the equity.

Are there specific questions that I should ask that would help me determine what to ask for? What kind of equity should I be looking for? How do I evaluate whether it's a good deal and should I watch out for anything in particular?

Development Equity

asked Aug 18 '10 at 12:52
Blank
Garbage In Garbage Out
123 points
Top agency to build award-winning mobile apps: Utility NYC

4 Answers


1

Taking equity instead of salary may be your only option, but for what you're doing for the project, it's not an ideal situation. Valuation is difficult, and it could be years before you see any money at all.

What percentage of the work required to bring the project to market will you be doing? This will drive what percentage you could reasonably expect to be able to get, though you will have to negotiate for it. Additionally, what risk, other than your time, are you staking on the project? Will you hold any liability if the project fails?

Have the principals invested money in the project? That's worth equity as well, and you can convert their investment into hours at some conversion rate.

Last, if you were to be absent from the project, how replaceable are you? How about the other people on the project - are they easily replaceable?

Finally, from past experience, I have not seen a developer get more than about 10% equity in developing a partially developed project with multiple other founders. At 5%, you might be about the limit of what you can negotiate for, though of course, you can try to get as much as you think you can.

answered Aug 18 '10 at 13:29
Blank
Elie
4,692 points

1

I've heard this question asked quite a few times, so it's worth a lengthy answer.

Let's get some things clear and then we can get to answer your question.

Guess what you call someone who gets stock in exchange for money or work? An investor. So one easy way to look at this is that you're investing in this company. As such, you should analyze it the way any other investor would. Does the team look like they know what they're doing? Are they experienced? Does the market look promising? Do they have enough capital to get this thing off the ground?

Also, most start ups fail and as a rule, people investing in startups should only put in money that they're willing to loose. Chances are that this will fail, and all the time you put in is going down the drain.

Now the good news. It's an opportunity to learn about the world of startups. You'll work closely with the founders, and learn new things. In many ways making sure that this is good team that you can really learn from is more important than how much stock you get. After all, the likelihood of getting rich on working after hours are very sliim.

Having said that, you still need to figure out what's a fair deal. The easiest thing is to have them make you an offer. I'm assuming that they're more experienced, and have some idea of what they want to offer you. Always think in percentages, not number of shares. In other words, if they say you get 5000 shares, you need to know how many total shares are allocated. Obviously 5000 shares out of a million are very different than 5000 out of 100 million.

Beyond that, it's really hard to come with numbers, but I'll try to draw up some kind of scenario. Let's say that the company's worth is 50% tech and 50% business (I don't know anything about the business, you can come up with your own assumptions). The tech part is the code. Let's say that there are 1000 hours of code already invested and you and one other coder put in another 250 hours. So the two of you together contributed 20% of the code (250 out of 1250), and you contributed 10% of the code or 10% of the 50% that is the tech contribution to the company which means that you should get 5% of the shares. There might be other considerations, that the founders took earlier risks, came up with the idea, and you should only get 2%, but at least we have a ball park idea of how to value you contribution.

At the end of the day, though, it's much easier to just figure out if it's an opportunity that seems interesting, get them to make you and offer, negotiate a bit and get to work. You'll learn a lot, and gain experience that'll guide you for the next time something like this comes up.

answered Aug 18 '10 at 13:58
Blank
Dror
1,833 points

1

I'm new to startups, but this is what I've been able to draw from my advisors and other voices much more experienced on the topic.

If you're not giving at least 20 hours a week to the project and the founders are going in full time, I wouldn't even begin to think in terms of equity.

If I was a founder, I would be strongly considering bringing you on under a convertible note.

The problem with this is that if you're not married to the idea, team and vision of the venture, then you will probably give less of a damn than everyone else who's going all in. If you're simply considering based on what you can get, then you're better off going with whatever arrangement that allows you to walk away with a check versus a piece of the business.

I disagree with Elie because trying to 'get as much as you can' will only lead to a bunch of back and forth, which is a waste of everyone's time.

If you're in, then commit. If you're not, then go the convertible note route.

If you haven't even considered vesting for at least 1 to 2 years, then the founder has no piece of mind or anything to keep you from finding a way out and taking what you've managed to negotiate.

The idea of getting 10% of equity is laughable and I would probably ignore that developer for the rest of my life if they aren't married to the idea, give at least 40 hours a week for a tenth of the time I or my other cofounders have already invested.

Also, I don't think the point of startups is to 'always' do anything anyone says. The point is to do things differently, soundly, with respect of the people involved. A founder may be new to startups just like you. To say only work with people who have a record of success is a spoiler to innovation and is part of the problem.

Be flexible, set up roadmaps, be realistic with your availability and communicate in advance should you not possess the time to commit to the project. It will save everyone time and energy by being up front about what your expectations and availability are.

answered Jul 9 '12 at 18:03
Blank
Os Xy Z
11 points

0

Fred Wilson did a terrific session on employment equity that I recommend watching. It was more meant for the founders and co-founders of the startup but the advice applies to those employee joining early on in the startup. Here is the link

answered Jul 10 '12 at 00:12
Blank
Abdallahalhakim
1 point
  • Good link, but perhaps you can summarize some of Fred's points that pertain to this question, in case the link gets broken at some point? – rbwhitaker 6 years ago

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