I'm in the process of registering a company for my start up. I've been developing the concept 60 hours a week for the past 6 months. I've attracted the interest of a high profile UX academic that wishes a 20% stack in the company in return for general smoozing startup activities, and UX advice. We have great complementary skill sets, however they are unwilling to commit certain number of hours per time frame.
Given I'll be seeking investors, and have practical no track record in start-ups is it wise to cut this deal to see my company move forward? Is there any other things I should consider when making this deal?
20% sounds like way too much, considering what you are getting in exchange is unclear. I'd give 20% to someone who is my co-founder and will take a very active role in running the company.
If you want, give 20% with vesting over 4 years. So most likely, you'll get rid of this non-performing academic and all they'll have is 5% (still too much in my opinion).
For your reference, a famous advisor in a startup usually gets from 0.25% to 1%, vesting over 2 years.
Don't give anything away if you don't know what you're getting in return. General smoozing without time commitment does not sound concrete enough to me. Either try to get him to commit to a certain activity, or (even better) have them pay for your stock. If they are willing to put their money where their mouth is, you know that they are really interested. You need to find a price that is lower than what you'll ask of the investers, but still significant.
In my opinion, for getting out there and doing the 'smoozing startup activities', the best person for the job is you: the founder himself. Who better knows your startup and its goals, and who else best stands to personally benefit the most from these activities other than you?
Regarding UX, as a designer, I've always been skeptical of people who label themselves as experts. It's not that I don't recognize its importance--depending on your application, product, website, whatever, it can be critical--I'm just skeptical of those practitioners who present it as some kind of mystical art. Because it's not.
It's hard to say for sure without you providing more information, but chances are you're not designing the next Microsoft operating system. Know your product, know what core value it provides the end user with, follow the KISS principle, and hire qualified designer/developers and you should be off to a good start. This is obviously easier said than done, but improvements can likely be made incrementally over time as user feedback rolls in.
Will having a UX expert on board make that big of a difference? Is that difference worth a fifth of your company? These are questions that only you can really answer in the end.
My obvious bias aside, hopefully I've given some valid insight into why I would hesitate to give 20% of the startup away for something that may not be as important a contribution as you believe. Personally, I would only consider it if he was capable of providing proven connections to investors (and then the UX advice is just a bonus).
But even then I'd think twice about giving such a large chunk away to someone who doesn't exactly sound ready to commit.
I know 1/5 sounds like a lot, but that depends on the value of your company.
What will your company be worth if this person doesn't produce? If the sales/investors rely on this person and they don't produce, you haven't really given them anything nor have they earned it.
Are you taking the risk of missing out on partnering/giving 20% to someone else who may do a better job? Consider your other options. If you think you can attract someone who is better, you may want to wait.
Put something in writing that if the company doesn't make a certain number of sales and you have to close it, you keep your code (Since this is what you've done so far.). Make their 20% contingent on results and not punching a time clock. Give 10% now and another 10% if you hit certain levels of sales and/or investments.
Other posters have made great comments already, so I'll ask about how 20% ownership looks in your funding roadmap. 20% is a lot, and if you're planning on taking on other funding down the road, you'll have given away 20% of your company early on. Is this UX person critical enough to the vision and, more importantly, the hands-on realization of your product that their ownership stake will not become a burden in the future? Or are you desperately trying to reach a short-run milestone?
Short-run ain't worth 20%, unless you're getting something REALLY valuable in return.
It's hard to know if it's necessarily too much. For example, if you needed funding, he closed funding for your company in a month, and you probably could not get funding without him that would be a deal so consider value not price.
Still, You should always negotiate down from his asking and consult a lawyer if your gut says you need him.
One thing, "UX advice" may not be as useful to you as UX deliverables/UX work (research, testing, wireframes). Not sure though.
Apart from all of this, it sounds like you may want to compliment your skills with someone who's going to be involved. If I were you I'd look for someone you want to be a part-owner who will commit or if that's not possible, find an intern/student who would love to have something to put in her/his portfolio.
There is no doubt that a high-profile UX expert might add more than 20% value to a product. But idea that they demand 20% before achieving anything means that they're very unsophisticated or assume that you are.
If you really believe they might make a difference propose a convertible debt for their consulting time, paid with cash or stock options. I'd thought if I want to work with such people in the first place – 20% demand is clearly unreasonable.
i'd take the cynical perspective - IMHO there are a great many people who aren't entrepreneurs who want to jump on the coat tails of the real entrepreneurs and make a very strong play of their value, normally when you are feeling a bit unsure about things.
trust your instinct - you posted the query - it means you have doubts and they are probably right. You know 25% for some uncommitted sschmoozing is a joke. You also know as an entrepreneur that the job in hand is much harder than that and it's going to take all your energy and experience and most of all passion - YOUR PASSION - you are clearly not being offered any of the latter in return. would he offer you the same if the tables were turned?
i suspect you know the right answer....
Good luck and enjoy the ride!