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What's the right equity/compensation split at the earliest stage?

I am a developer and been approached by my friend with an idea that could be worth spending efforts on.
So I have been offered 1% of ownership with no payments for any effort but just ownership.
He is definitely putting some money into it from his own savings as he strongly believe it could be a huge success till product reaches a stage.
I somewhat agree to the value of the idea. But as we all know it can go anywhere to a worh of multi-million/billion to nothing depending upon how solution is build.
Also I haven't really started working yet whereas he expects me to.

His argument is, "that's my idea and I own it and still offering 1% that should be good enough" considering he thinks its going to be a huge success. If he makes a billion then 1% is worth but anything in millions is nothing without any other payments for all efforts I am supposed to put.

Since he is a friend and we worked together in the past, he approached me to work on the idea and own major piece of development since I have good experience now. Also he has an architect who has asked no ownership but payments on hourly basis. Who else is there is something not fully clear to me yet.

My questions are:
1. What % of ownership I should be expecting?
2. Should I have payments of my effort + some % of ownership?
3. Should I go with no payments with condition that I should be paid for all my efforts (based on decided hourly rate) when we get funding or make some money in addition to some % of ownership?

49 Replies

Jessica Alter
1
0
Jessica Alter Entrepreneur • Advisor
Entrepreneur & Advisor
There are just a ton of discussion that cover this topic as far as amount and how to structure -http://members.founderdating.com/discuss/topic/Equity for just some. Always good to do a search first.

What people want to know is where is this concept - what phase. If it's just an idea it's worthless. Also, you labeled "Advising" is that what you are doing or are you working on it day in and day out?
Amir Yasin
10
0
Amir Yasin Advisor
Developer, Architect
1% ownership is a joke. Here's a secret: Ideas are a dime a dozen...they're meaningless without effort put behind them. If you're the one putting that effort in then you have a right to expect compensation for that. VERY VERY VERY VERY VERY few start ups reach the billion or even 100 million dollar mark, so 1% is very likely to be significantly less than $100000 on exit. If it were me, I'd ask for a reasonable chunk of ownership or in the alternative to be paid hourly. A few questions before we can really get down to what you should ask for:

- What skills does your friend bring to the table (subject matter expertise, graphics design, etc)?
- How much money is he putting up?
- How is the company going to be structured (i.e. LLC, S-Corp, C-Corp)?
Sati Hillyer
3
0
Sati Hillyer Entrepreneur • Advisor
Looking to Hire a Ruby Engineer to join OneMob - 2015 Gartner Cool Vendor for CRM Sales
Whats the stage of the business? It sounds very early, i.e. pre product, pre team, pre customers/revenue, etc. Is this guy technical? 1% seems very low considering you are not getting any salary, unless you are working on this part-time. Just go to AngelList and you can see companies in SF giving full-time developers 80-100K and up to 1% and they are probably a lot further along. Good luck!
Eric Sullivan
0
0
Eric Sullivan Entrepreneur
CEO at FoundationLab
I would set some milestones and what would be delivered for that milestone. I would put a value in terms of hours for your time to complete that milestone and come up with an agreed upon valuation. Then you can kind of come to some semblance of a number and attribute that to equity %. Then go from there if he wants to continue the working relationship. I definitely think if you are having a substantial role from an early stage 1% is way to small. But every situation is different. You just don't want to agree to something and then a few weeks in feel like you were taken advantage of. Make sure it's a win win for both parties.
Reuven Granot
9
0
Reuven Granot Entrepreneur • Advisor
Corporate Strategic and Scientific Officer at Perlis Ltd
I agree with Amir and Eric Your friend not seriously understands that actually he should offer you to be co-founder or pay you real value.
In my Start-Up I gave 15% equity at this stage to a developer, since I could not pay him real money.
I do agree that this is a big risk for both sides.
Giving real equity up front is risky for your friend. So suggest him to give it as you perform work on an upfront agreed equity. This is called vesting.

If you want to help him build his Start-Up right I suggest you both read a new book by Mike Moyer called: "Slicing the Pie". It is on Amazon, or ask Mike for a copy. I very much appreciate his discussion and instruction how to reword contributors to a new start-up before investment.
Corey Blaser
14
0
Corey Blaser Entrepreneur
Founder at Origami
I think you need to find someone else to get into business with.

The fact that he is adamant that he owns the idea and therefore should own 99% of the equity means that the company will fail. There are no if, ands, or buts. It is pure greed. He will not be able to convince investors or other partners that you will need to come in with that kind of an outlook. It will waste your time and probably ruin your friendship.

It is best to be honest about it to yourself. Find people who you can trust to be reasonable and mature about the way startups work. You will be happier (and more successful) for it. Good luck. :)
Brian McConnell
2
0
Brian McConnell Entrepreneur
Head of Localization at Medium.com
1% is very stingy since you are basically being asked to join as a technical co-founder. Typically the founders equity is fairly evenly split between the founding employees. When you raise funding everyone in this group will be diluted, both by the new investors, and by the equity pool created for ongoing hires (who will expect to receive a fraction of a percent, vested over 3-4 years, in addition to being paid). I would also recommend that you invoice the company for your services, to be paid if the company raises money or there is a change of ownership. This way if the company is liquidated you are at least likely to get something for your efforts. If your friend isn't willing to offer better terms, my advice is to walk away from it because it is unlikely the company will succeed due to being unable to attract talent, or you will get screwed if the company does have a good outcome.
Brendan Duffy
4
0
Brendan Duffy Entrepreneur
Product Manager
I'd be wary of working with someone who thinks that the idea--an idea he cannot execute on without your/someone's help--is worth 99%. That's a faulty assumption, and it would prompt me to ask how many other faulty assumptions he's operating under.

My advice:
Give him a few data points--links to articles that discuss dividing equity stake in various early-stage scenarios. Include some famous company founding stories. It's possible that he'll come around and realize that the idea is merely the kernel of what might become a great business someday.

If he's a quick study, he'll realize that he needs other people to make his vision a reality, and that he'll need those people for the long haul. If he offers merger equity, it will be easy for his critical team members to walk away, and that's something he should want to prevent at all costs.

If he still insists that his idea is the key driver of the business, he misunderstands business. Walk away.

(Oh, and here're my two cents on the split: pre-product, pre-revenue, pre-customer, pre-partnership, with an unproven entrepreneur, you should be looking for between 45% and 50%. And you should be vetting him to ensure that he can complement your skill set in critical areas.)
Kevin Rohling
0
0
Kevin Rohling Entrepreneur • Advisor
Co-Founder/VP of Product at Emberlight
If you are working on this idea pre-funding, pre-traction, without pay then you are a co-founder and should be compensated accordingly. The amount of equity depends on many variables, how many other people on the team, FT vs PT. In any case 1% is not worth your time and also shows that he does not appropriately value your contribution, or perhaps he is a bit naive about how these things work. In any case, I strongly urge pushing for a co-founder title and commensurate compensation. If he pushes back then walk away. By the time the company exits your 1% will have been diluted down to 0.1%. -kevin
Ranjeet Devgun
0
0
Ranjeet Devgun Entrepreneur
IT Consultant

As Jessica asked, I was looking for similar articles and I actually read few before but my situation though not different than discussed so far but somewhat based on the fact that my friend says he owns the idea and wants to keep most of the share and I wanted to bring up to others to see what everyone thinks assuming trend is how strong idea is to be believed later it can prove to be nothing.

And as other members replied I too see 1% is nothing considering the stage I am pulled in and the value I am going to offer even though I am going to be part time. I agree to Reuven and others that anything b/w 10-40% considering it's a fresh start. Also I couldn't even discuss further on the settlement because he was so confident and think its most likely going to be a huge-huge success and 1% is sufficient for a technical co-founder. In simple terms he seems to be not aware of the real facts and that way he's going to harm his so far investment. Since he is my friend I instead want to discuss with him to think practical and bring all options on the table with the facts and then he want me to be in or out that's his decision.

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