I'm roughly following lean startup methodology, having started with an idea, making mockups, showing to several potential customers, and even running a couple of crude pilots. Positive signals so far.
Now I want to build a real "Minimum Viable Product" prototype that can function in the real world. I've identified a veteran developer of successful websites in the past (i.e. they make money), and have gotten to know him over several months. I'm trying to figure out the cash-equity offering to have him develop the prototype, over say 4 months of part time work. I want to offer both, since he deserves some cash upfront, and I want his equity to keep him engaged.
If my max cash payment to him would be say $10k, what equity should I expect to give him? Would it be 1-5%?
From the other angle, if I want to give him max 2% equity, how much cash should I expect to pay?
(If things go well with this prototype, he would consider joining full time should he be available, at which point we could revisit the equity question)
Your guidance is appreciated.
Here is my 2 cents: If you start a software company do not outsource your core competence. I know a lot of high-tech startup that outsourced their code to India and now struggle with that. I've never seen anybody with positive experience on that.
I'm a Software Developer myself and starting entrepreneur. Every week I get 3-4 offers from business people who 'have great idea and just need a coder to implement it '. When people say "I'll give you 5% if you build this app for me " my answer is "What do you bring to the table that makes you own the rest 95%?". Most of them have nothing to say except for "Well I think I have a great idea". Guess what? The idea is worth nothing. The implementation - that's what really matters. And guess who's going to implement the biggest part?
Another thing is - do you want you co-founder to be motivated to work on your idea? Do you think he's going to be motivated by your offer? He might accept it but first bump in the road and he's going to be looking for a new 'more stable' job.
Why are you giving equity so early in the process?
Chances are your product would evolve into something different in the future, perhaps it'll require new code or even technology -- would your veteran developer be able to evolve with it or will you be looking for new developers?
Why not hire someone? If the cash is limited -- look into outsourcing. Post your project (or a part of it) on one of procurement sites, like elance.com and see what the bids will look like. There's a lot of talent around the world and you need to get the best bang for your money.
Best of luck.
Without knowing exactly what your project required or where it's going, I can't offer specific advice, but I blogged a while ago about what makes a speculative project worth it to a web developer.
The gist of it is: everyone should have skin in the game, but beyond that, it depends on your dev's interest in being married to the project (and you) long-term, his/her risk tolerance, how much time he/she can afford to take away from regular billable hours, and a where he/she thinks the project will go from here. Note that your project's likely success/failure is only one factor: a lot of this has to do with the dev's interests and situation. Do your best to negotiate an equitable arrangement with this developer, and if it doesn't work, try someone else. If many tries fail, re-examine your proposal, but don't think that one rejection is the end: we all have different interests, priorities, and risk tolerances.
Make an offer, and see what he says.
You're in the right range, though it would depend also on what his long-term commitments to your business would be. Are you trying to use equity as another form of payment, or is it because he will be contributing to the project for many years to come?
If the answer is the former, then it's quite likely to be expensive from an equity point of view, since he won't have anything invested in the business in the long run. If he expects to be in the business for the long haul, then he may want more.
I've negotiated this way in the past, and in one case, the price was 5% over salary, and in another, 10% over salary. You have to look at the real value he brings to the business, and what it would cost to get that value elsewhere.