Our lead developer, which is also the only developer on site, is leaving and we need to replace him.
How much salary and equity should we offer the new lead developer to make him a motivated team member ? We can offer a competitive salary. The real question here is how much equity with a competitive salary.
(lead developer would be based in silicon valley, have 5-7 years of php experience)
You mention that you will be paying a "competitive salary"
The question is: competitive to what? If you mean competitive even against businesses that do not offer any type of equity then I would suggest "zero" is the number you should be considering.
Generally equity is offered to those in lieu of other forms of payment. In other words, they take a much smaller, down to zero, salary in exchange for increasing the value of your company. I think a general rule is that each dollar of equity you give up needs to bring in at least 1.20 of value.
However, if you are offering a comp package that is similar to what they can get from a company that isn't offering equity then you are throwing your company away.
Also, Equity means you are immediately giving up a part of the company. Considering you are currently in business, have paying customers and are already profitable then this might not be what you want to do at all. At the most you should consider using stock options with a reasonable vesting period instead. Maybe those options are disbursed based on the developer going above and beyond what you would expect of a regular employee.
The answer to this is quite simple: Check your local market and identify what the current market rate for this role would be.
You also seem to link compensation with motivation - I suggest that you read "Drive" by Daniel Pink, or at least watch this short video that was adapted from a talk he gave: http://www.youtube.com/watch?v=u6XAPnuFjJc