How much equity am I worth?


2

I had a problem that required a database solution. I designed the concept of the database and over a 2 year period developed a crude system that worked.

In trying to find help with the programming side of things I talked through the concept with someone who had experience in setting up software systems to see if they could help create the solution. (At this point the solution was just for me not for commercial sale.)

They then went away and started development on a system of there own to do just what I wanted but with the plan to create a web based solution for commercial sale.

They have been tapping me for my thoughts on how this should work and have used my original design as the bases for theirs. It looks completely different of course.

We are now in a position of them having created a Beta version that they are trying to get investors to back and have managed to get some serious interest. I suggested we join forces as they want my input to make the idea a success.

So I have offered a financial and time investment from myself with access to all my workings and networks within the industry. I really believe in this solution and think it could be a great success.

They really want me to be apart of it but now we are at the discussion stage of what my investment is worth they have come back with a 4%.

This is based on a $10,000 investment and my time.

My biggest issue with this is they are basing there calculations on the value of my investment on what they perceive the company will be worth once they reach the point of seed funding. (They are suggesting I only pay the $10,000 at this point.) Surely all the work I have put into this already should be accounted for. It's not like I am just coming into the project at the seed funding round.

There is an obvious naivety on my part here and I know they are the ones who have actually put all the work into creating the beta solution investing there own time and money to do it so I'm not looking to be greedy. I just want what is fair.

Any help on this would be very much appreciated.

Thanks

Equity Investment Shares

asked Apr 17 '11 at 11:43
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Paul
11 points
  • OK, so that is one half of the story, what do YOU think your equity stake should be? – Brian Karas 8 years ago
  • To be honest I don't know. How do you calculate the value when it's like this? If we had set it up together from the beginning it would be simple but we didn't. They got it off the ground and I can get it to the finish. – Paul 8 years ago
  • I think we should be basing my investment on the value of the company at the time when we started to join forces. As there are no sales at that point it should be based on what each party has put in to the business in terms of time and money. We would be adding my solution into theirs. They currently own 80% and another investor owns 20% (The investor is working on the marketing and helping with strategy) I feel my input is worth at least the same as the other investor and I would be happy with a 60/20/20% split (with obvious dilution later). – Paul 8 years ago
  • Did you make him sign a legally-vetted non-disclosure/non-compete agreement back when you reached out to the software development guy for help with your idea? – Marc 8 years ago
  • No I did not do something so thought through. Seems stupid now. – Paul 8 years ago
  • Thanks for the feedback everyone. I've been in steady negotiations for a week or so and we are heading to a mutual understanding. We've all put our point of view across in writing and are about to sit down and discus the final details before drawing up the paper work. Which I will of course get checked by a lawyer. If anything it has helped by disagreeing so early. If all goes well it at least shows we can sort differences of opinion out. – Paul 8 years ago

6 Answers


3

Paul, if you feel you are worth 20% negotiate towards that. I don't know about you but if I felt I was going to add that much value and felt like the compensation wasn't fair, I would start to resent it after a while - which isn't good for your relationship or the business. So you have to be happy with whatever you negotiate or it's not going to work.

I would say 4% might be a fair compensation for what you have do so far. Do they need you to get to the next stage? If so, then you are worth more than that.

Do you trust these guys and do you want to work with them for the next 3 - 5 years?

If the answer is yes, make a list of what you think you have contributed so far and what you can contribute in the future and how that will move the business forward. Then go back and negotiate.

(You may find the articles on the Founder's Pie useful in assessing what your contribution is worth.)

answered Apr 27 '11 at 14:45
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Susan Jones
4,128 points

2

As I see it you have 3 connected problems:

  1. The overall principal under which you and the others are going to work.
  2. Your prior effort which was unpaid
  3. Your shareholding in the new company

How I would suggest you present the concept to them (and yourself) is to break down the issues

In Principal agreement. Before going any further you need to get the overall boxes ticked and make sure you want to jump in with them..
It should cover the basics

  • Share split, buy in time (say 2 years to get all of your shares OR key milestones)
  • Who owns what – pre-existing IP and customer base is owned by the company and is part of the contribution in return for shares in the company. This can also be their time and effort mated to your initial thinking.
  • What happens if someone leaves (do the shares revert to the pool, stay with that person or do they need to be bought out by the other partners). I would suggest anything in the first 6-9 months is a pure revert to the pool, after that first option to buy out from the other parties ... this should be evenly bought if possible.
  • Sweat equity multiplier. If there is a period of no money what is the value of shares or what is the repayment on the time invested (agree on a figure 1 month = $8K or something) and it is paid out once things pick up.
  • Sunset. What is the agreed “end goal” is it to be bought out, to publically list, to grow into a large player. This is important that everyone understands … it is allowed to change along the way. If it is a buyout, who and when is the goal and what is the minimum price so you're all happy.

These are the key things to get peoples agreement and signature to before starting then soon afterwards I follow up with a lawyer written contract to cover the bases properly.

Share Split Guidelines I have written this section a few times in other answers.
We typically have a few standard metrics we use to run through how much a share is worth:

  • Idea: 3% - 5% - ideas these days are cheap, everyone is having them its execution that counts.
  • Technical: 15%-35% - all developers (including myself) think its worth more but if you don't have the rest in place then its just a cool thing that sits on the shelf being worthless to everyone. This is what both your shares will be diluted down to to start with.
  • Marketing / Sales: 15% - 30% - This is pretty important, if nobody knows about you, your nowhere ... but put KPIs against it - X new customers / sales in a timeframe.
  • Business: 20% - 30% - The leadership and vision, this is typically one or two people and they will make or break the company on its own, set the direction.
  • Finance: the remainder, depending how much they put up, others adjust accordingly.
Sweat Equity multiplier Basically your time * an agreed amount per day/week = your direct contribution that is comparable to you earning else where.

You took the initial risk and seed IP investment over 2 years while doing all the work so you take your contribution above and apply a multipler to it say 3X or 4X.

EG. Moving forward your continuing investment would look like

  • You agree that you normally get paid $5000 per month = ~$60,000 per year.
  • They can pay you $1000 per month
  • Your net contribution is then $3,000 per month
  • You invest 6 months at this rate so you have $3,000 * 6 = $18,000 your out of pocket
  • You agree that you will put a 3X multiplier on this so 3 * $18,000 = $54,000 that you should be paid ahead of the other guys in order to consider yourself equal OR this represents your buy in to the shareholding.

As the company starts to make a profit (assuming it does which is your risk), everyone starts to draw earning from the company.

The other way to look at this that the $54,000 owed to you by the company buys you a greater amount of shares in the company.

DISCLAIMER: I'm not a lawyer, just a venture developer who has done this a bit. The formal answer is pay a lawyer to draw it all up or there are websites that sell "packs" of legal documents for starting up a business.

Good luck.

answered Apr 28 '11 at 08:42
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Robin Vessey
8,394 points
  • Hi Rob, That's possibly the most complete answer I could have hoped for. Food for thought. Thanks – Paul 8 years ago

1

One approach you might try would be "milestone equity".

Start with a rock solid fully vested 4% right now.

As you continue to contribute and meet specific milestones going forward, you should be able to earn additional equity grants.

This is good for you and good for the other investors. It recognizes the contributions you've made so far and encourages you to continue to contribute and also feel good about your contributions.

answered Apr 27 '11 at 22:01
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Fitness Guy
316 points
  • Thanks Fitness guy that is a very good suggestion. – Paul 8 years ago

1

If I were in your shoes:

  1. DO NOT put any money into this business unless you get the equity you think you deserve. Get it all in writing with your own attorney.
  2. Do not do any more work for them unless you get in writing that you have the same kind of shares they do with the same dilution they get for whatever shares they are willing to give.
  3. Ask them for money to buy you out - or at least preference of converting shares at some liquidity event or at revenue generation.
  4. Be ready to just walk away and chalk it up as a learning experience.

It's not worth the headache to work with them IMO if you can't get what you think is fair. Their offer may be realistic - but what is important is that you fell you are treated fairly. if you do not feel that way you won't be able to be productive and it is better to walk away.

answered Apr 28 '11 at 12:49
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Tim J
8,346 points

0

Boil down your value to a few bullet points and tell them it's worth 25%, but settle for 20%. Your bullet points need to be truthful and convincing. However, these guys don't sound like partnership material to me; I think you will be taken advantage of, I'm sorry to say. Most partnerships fail, and this one feels like it's starting on bad footing.

answered Apr 27 '11 at 13:59
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Frankston Ralphington Iii
133 points

0

I would suggest that 4% might be what your inputs are worth at this point.

You had an idea, and they did some programming for you. Depending on where you are and what contracts you signed, ownership of that code might be in doubt.

Then they went and turned the idea into a resellable product. Presumably this was with your blessing, at the very least it has your implicit consent.

It sounds like the idea was never patented and I'm sure they could make a case that you authorized them to go on their own with it regardless. This leads me to suggest that the idea in and of itself has very little value for these purposes

The next question is how much are your future contributions worth? You mention having industry contacts etc, but can they get a foothold without you? (We can't answer that, however the answer is usually yes.) In other words, with a properly funded sales team, can they concievably be calling those contacts, without you, and close deals? Granted if it's a personal contact then this might at least get them in the door; but, honestly, if it's a compelling product then they shouldn't have a problem with this anyway.

So with those things out of the way, the only thing left is a financial investment from you. At which point 4% for a $10,000 investment might be a great deal for you.

At the end of the day the question for them is: How much impact in the companies growth/survivability will you make? And, what value is this impact versus investments made by others. Sometimes our inputs just aren't worth what we think they are once weighted against a big picture.

answered Apr 27 '11 at 23:13
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Chris Lively
443 points

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Equity Investment Shares