Startup Equity Disagreement


1

I was recently a member of a small startup. I made the mistake of waiting too long before discussing equity/payment. Once we did discuss everything there were many disagreements and I eventually just quit. I want to know if my demands were too far off or the "founders" were just greedy.

I am a computer science college student at the University of Michigan. I went into a venture with two business students at U of M. The idea was basically a real estate listing site with a few unique ideas. This last summer I spent about 300 hours building the website while interning at a large successful company. In all I would say I personally did about 90% of the site with the technical cofounder doing the other 10% and taking care of all the hosting and deployment.

This technical cofounder was working on at least one other startup while the non technical cofounder was also working on at least one other startup. The non technical founders father was also working with us since he had prior knowledge in the industry, while he was working at another job. The total capital raised between those 3 founders was between 5 and 10 thousand dollars. The equity was currently being divided up as 10% for the technical cofounder, 20% for the non technical cofounder, and 70% for the founder's father and future CEO and financial/business personnel.

Our initial agreement (not in writing) was that I would get between 0.5% and 1.5% equity based on the time I worked in the next 2 years, with a salary once the company became profitable. Once the beta launched and I still hadn't seen any salary, I told them I could not continue working for free. The time I had put in was already worth over $5,000. I demanded a deferred salary from now on, or 4.5% equity. They didn't take kindly to my demands so we parted ways with a deferred payment contract.

I just want to know for future reference if either party was being unreasonable or if this was a fair deal. Their reasoning for my low equity was their predicted valuation of 3.7 million dollars after 2 years. I felt that this way too optimistic in the current economic and real estate climate but they felt confident about this prediction.

So was I being unreasonable or were they taking advantage of me? Also should I have been considered a cofounder or an employee?

Equity Micro Startup

asked Sep 1 '11 at 04:48
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George Muresan
8 points
  • You did the right thing by bringing up the issues and by parting ways IMO. It is difficult to say if either party was "wrong" or unreasonable. Clearly they did not value you as much as you valued your contributions. Always better to know where you stand and split when things become untenable. – Tim J 9 years ago

1 Answer


1

As a developer myself, I would say that your requested compensation was more than fair, especially considering that, without your contribution they would be very unlikely to hit their predicted valuation within 2 years (it's hard to make money without a product!) I would definitely say that they were taking advantage of you, especially since you were providing their entire business model.

Since you were the one building most of what the company was made of, by the sound of it, I would definitely have considered you to be a founder. Also, by not considering you a founder, the company has to either consider you to be a contractor or an employee. I'm not sure of the laws in Michigan, and I am not a lawyer, but unless you were expicitly doing work-for-hire, you hold the copyright to anything you produced, including code, images, etc. Since they did not pay you, and there was no in-writing agreement, would say that you have full rights to the code you wrote, including rights to decide if they need to license it from you to use it for their business. Given that consideration, I would say that your requested compensation is more than fair.

answered Sep 1 '11 at 05:09
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Cdeszaq
126 points

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Equity Micro Startup