equity max of 23% split among "development" -- a ripoff?


1

I've been working on a project with three other people: one is a developer, one is a manager type, and one is a sales type. I'm a developer. The two developers were invited into the project by the other two. My expectation was 25% of the company equity would go to me right away. However, the other two recently offered the development group this:

5% of equity would be split among when the gross revenue is 1000/mo.
7% of equity would be split among when the gross revenue is 10000/mo.
11% of equity would be split among when the gross revenue is 100000/mo.

That leaves 23% of the company revenue split among two developers (or perhaps three if we go through on our plans to bring one more person into the project). I can understand some desire to make sure that the equity of the company does not go out the door to disinterested parties. There is also some desire (not among development) to reserve 25% of equity to bring a true entrepreneurial-type of CFO.

Does this sound like the typical deal? I'm tempted to push for 30% split among development -- maybe three rounds of 10%. Or should I demand more than that? I like these three people a lot. I don't want to destroy any relationships there, but I've been considering dropping out.

Equity Revenue Shares

asked Mar 29 '13 at 13:28
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Brannon
146 points
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans
  • Can they dilute your equity position? Do they have the right to issue additional shares? If so you could end up with considerably less than 23% in the long run. – Mark0978 8 years ago

1 Answer


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There is no such thing as "typical" deal because everyone bring different value to the party. What the structure described is basically earn-in, reaching certain revenue milestones triggers value accretion (in terms of recognising equity participation). Now your concerns are

  • total split between dev v management - without knowing the product (some transaction startups are very tech intensive) I cannot say whether this is fair or not. However, if the point is to align everyone to a revenue target $100k/month then are the same triggers in place for the management?
  • thresholds ... are the 1, 10, 100k trigger points appropriate for the firm and what space you are competing in? Selling enterprise software is different from flogging ads. This is where you need to objectively assess the business plan and the capability of the sales/manager to achieve the milestones. Also if they are paying for commissions and general admin out of their person split of equity (presume 25% each), then it is more balanced as it avoids dilution
  • apportion amongst developers as you wanting 25% upfront ... this is a toughie as value is measured in different ways. A top-notch innovative UX is scarcer than hen-teeth whereas CMS builders are a dime-dozen with existing frameworks. Given that the trigger levels and total split are somewhat independent, perhaps you can craft a shareholders' agreement that allow the developers to trade or cross-sell their shares as you see fit so if you really need to bring on board talent, you can work out the suballocation or compensation yourselves.

Ultimately any type of partnership you want to be comfortable sitting across the table from the people sharing the load. If every time you feel like being screwed-over then it is a sign that something is bugging you or you have a sense of unjust (whether valid or not) compensation for your contribution. It is best to talk it out in front rather than being passive-agressive and not putting time/energy into bringing the startup to life. If you can come up with a better equitable scheme, then it shows that you have thoughtfully considered the business incentive side.

answered May 3 '13 at 12:19
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Drllau
501 points
  • I like the suggestion of making all the shareholders responsible to pool into something necessary to bring in additional help. – Brannon 8 years ago

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Equity Revenue Shares