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Cash and Equity for Contractors?

I've got a very early stage startup and I'm looking to hire a contractor to do some iOS dev work. I was originally hoping to hire him as a first hire, but for reasons of his own, he's not interested in that right now (but he is interested in contract work).
In any case, I've got some cash to pay, but not tons, so I'm considering doing some sort of cash + equity deal for his work.

Has anyone else done anything like this? What were your terms? How much equity did you provide? In this case, we discussed his monetary rate being about 68% of what he normally charges depending on the amount of equity.

Thanks.

21 Replies

António Gomes de Menezes
0
6
CEO SATA Airlines
For future correspondence, please use [removed to protect privacy] or visit www.amenezes.uac.pt
Manny Acevedo
1
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Manny Acevedo Entrepreneur
Business Systems Analyst & Entrepreneur
Only cash. Never give up the equity. If he's not willing to come aboard in some way, then keep it simple.
Get a quote, pay only for milestone delivery and just move on.

As a side note, learn to code if you don't know how and be your own technical founder ;)
You can't do it all, but at least you'll know if the dev work is up to par
Duane Nickull
1
0
Duane Nickull Entrepreneur • Advisor
Chief Marketing Officer, Co-Founder at Cheddar Labs
We do this very well and at a low cost. Hot Tomali (www.hottomali.com). Contact us for a quote too as you more forward. duane at nickull dot net.
Rick Nguyen
0
0
Rick Nguyen Entrepreneur • Advisor
Cofounder @ Spot Trender
Depends on the developer's experience and how complicated your project is. Some factors that can affect cost:
-How complicated is the product?
-Level of experience of programmer + Seniority of programmer's current job. For instance, a VP of Engineering from Google might want half of your company - but then you can happily put his/her name on pitch deck.
-Your general knowledge of programming and project management. The more experienced you are with managing project, the more efficient you will be at managing price.
-Your ability to sell your vision. The better you sell, the less equity you have to give.

I've done a range of these, from paying full time market salary to offering 50% of company. Some scenarios that worked well for me before:

-When looking for cofounder: 25-49% equity, no pay - with badass engineers that share your vision and passion. Major plus if he/she understands business fundamentals.

-To get prototype done: outsource this stuff with independent contractors. Pay per milestone, no equity. I paid $5k/month for a fulltime outsourced dev.


Mike Moyer
3
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
I do this all the time. I invented perfectly fair equity model to determine exactly how much equity each person deserves. It's called a Grunt Fundand it will tell you exactly what to give your contractors. Send me your email and I'll send you a copy of the book I wrote on the subject called Slicing Pie: http://www.slicingpie.com/contact/
Ron Sheridan
2
0
Ron Sheridan Entrepreneur
co-founder at PREE
idea A: Take the dollar amount OUTSTANDING and add a premium percentage say 20% and offer him a convertible note, with no fixed valuation and no cap, (likely you don't have that anyhow), add on a small interest percentage and when you raise a big seed round or A round you will have a valuation, and he can convert at that rate.

The key is closing those deals you have to close in order to SHIP the product and start gaining traction..imo.
Bob Binder
1
2
Bob Binder Entrepreneur
Member of Technical Staff at Software Engineering Institute | Carnegie Mellon University
Equity should be reserved for persons making an irreplaceable contribution of IP, leadership, or money. As contractors are usually replaceable (they usually do not possess truly unique skills) they don't qualify imo. Before issuing equity, remember that every person with an equity position will probably have to sign off on any material action your organization takes (depends on your bylaws.) This can be a royal PITA. Instead of direct equity, you might want to consider options (or one of their variants). You can structure vesting conditions to be contingent on time, a liquidity event, a type of funding round, etc. This can be a reasonable compromise between direct equity and no equity. Finally, if you go ahead, get a lawyer who's been around the block to write the agreement and make sure you understand everything that it implies.
Mike Moyer
0
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Convertible Notes are always a good idea
Jake Carlson
6
0
Jake Carlson Entrepreneur • Advisor
Software Development Manager at Oracle
Contactor vs Employee makes no difference. Their commitment to the work you are doing is what matters. I was given the choice to become an employee or stay contact with a startup I'm working with right now and was given equity either way. Being an employee does not magically make someone harder to replace; what matters is the actual work they are doing and value to the company. Giving equity is a good way to entice the person to stick around a do a good job, but equity can be granted to contractors as well as employees.
Kevin Lentz
1
0
Kevin Lentz Entrepreneur • Advisor
Let's ship great products
I have done this in the past, and if you go the equity route, I recommend that you structure it as an earn-out or some other performance/milestone-based approach. Everyone needs to eat, so those projects that are paying the contractor will take precedence over equity-only projects. This can lead to weak deliverables or missed milestones. And you don't want to be locked into a fixed equity percentage in those scenarios.

If you can absolutely nail all the requirements up front, and then determine the value of the end contribution, you can calculate the equity percentage of the contribution against your pre-money valuation.
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