How do I figure out how much stock to give a developer working short term in exchange for equity?


2

I recently participated on a team with a developer at a hackathon. The person has their own freelance business, so unlikely to join fulltime later. They expressed interest in helping with my project on contract (which I can't afford) or equity basis. The help would be in terms of basic MVP to get going. The startup is very consumer/sales focused and not tech/software based.

As this is not about equity between fulltime cofounders, I'm not sure how to approach this. And this is not regular parttime either, it's more of a finite amount to be done upfront. Are there any good rules of thumb, proxies or templates to use in calculating equity-work exchange rate?

I am concerned about getting this right in order to prevent equity issues with potential employees or fulltime cofounders (I have none yet) and VC in future.

Development Equity Compensation

asked Jun 18 '11 at 03:31
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Anonya
11 points
Top agency to build award-winning mobile apps: Utility NYC

1 Answer


2

I was recently involved in a situation similar to yours where I was in the role of the developer. The company was just beginning to create their product, and didn't have a lot of cash.

Once we agreed on an hourly rate and the project scope, we then identified the payment terms:

  • The first 200 hours would bank a multiple of the hourly rate, in our case 3x ($50/hr * 3 = $150/hr banked, for a total of $30,000 banked).
  • From 200 to 300 hours was split between cash and a banked amount, in our case 40%/60% and did not include any multiple ($50/hr * 40% = $20 cash + $30 banked for a total of $2,000 in cash and $3,000 banked).
  • Anything over 300 hours would have a higher cash/banked amount split, in our case 70%/30% ($50/hr * 70% = $35 cash and $15 banked, for a total of $1,750 cash and $750 banked - only needed 50 of these hours).
  • The final payment of the banked amount will be paid our quarterly from 15% of the profit for the quarter. Overall I earned $5,750 in cash, and banked $32,750 that I hope to get paid over the next couple of years.

Overall it was a shared risk. They were dependent upon me to deliver the code, and I was (and still am) dependent upon them to turn a profit.

While I don't have any equity in the company, I will still enjoy a decent return for my effort since the rate was much higher than my normal rate.

All in all, I was happy to work out the deal.

answered Jun 18 '11 at 04:15
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Brad Ullery
121 points
  • Thanks for responding; that's an interesting approach which does not directly equate the salary to stock units. -I'd read elsewhere that one should avoid tying $rates directly to stock because that effectively creates a price/valuation on the stock, which would be problematic for the company in future. – Anonya 8 years ago

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Development Equity Compensation