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Development compensation for prototype pre-funding

Hey All,

So we are working on a new product and I'd like to generate some interest prior to beta launch. As most do, we are thinking of a basic 'coming soon' landing page with high level detail and a form to submit contact info to get potential customers to let us know they are interested.

Anyone have experience doing this and can speak to best practices? I'm interested in tips on driving traffic / sign-ups to the page, tools to get the page up, etc.

The product is aimed at brick & mortar SMBs.

All the best,
Jason

28 Replies

Daniel Eberhard
2
0
Daniel Eberhard Entrepreneur • Advisor
CEO, Koho
Hi Chris,

I have been giving this some thought myself. Personally, I am leaning towards an equity option with an aggressive buy back policy. So equity would issued as the development moved forward but because jumping in with a founder I don't know is a significant risk, I would mantain the right to repurchase their equity at 100+x% within the first two years. This should leave me an option if things are progressing and the CTO isn't working out and mitigate their risk with a quick return. Just an idea I am toying with.
Jonathan O'Shaughnessy
1
0
Jonathan O'Shaughnessy Entrepreneur
Hm,

Good question Chris. I've never been in that situation myself so please take this answer with a grain of salt.

I'd imagine that you would use the same framework as you would use if you were further along (think classic CTO/CEO team and you were making your first hires). How would you determine how much equity to offer employee #1 or employee #5?

In the book Founder's Dilemas, there is a framework they discuss which I like a lot. It's a grid framework. On one axis of the grid, you divide each distinct stage of a startup into multiple parts - weighting each stage by a % of the whole. For example: pre-development was 10% of the total expected effort, early iteration was 40% and growth was 50% of the effort. On the other axis, you weigh each member's contributions. I.e. In stage X, founder 1 put in 90% of the effort, founder 2 put in 10% (or other employees/contractors/whoever). You then multiply across the whole spectrum to determine total contribution (and therefore, equity). Also note though, things are not always even. For example, what happens if one member is getting paid and the other isnt? There's no set formula here, but I think in this framework, you can start to hone in on specifictrade offs(how much is this first stage worth versus a later stage) versus getting mired in the ambiguity of it all.

Another way to say it is how much total effort of the entire startup did they contribute? Depending on the time requirements involved I would imagine this would be sub 5% for your specific case. That said, it might be a tough negotiation with someone depending on the time commitment.

Hope this helps.
Jonathan O'Shaughnessy
0
0
Jonathan O'Shaughnessy Entrepreneur
Yeah, Daniel brings up a good point which I didn't mention.

Everyone should vest equity. Everyone - you, cofounders, contractos, etc. It takes a lot of that future uncertainty risk off the table. It protects you and the people you work with instead of giving equity up front.

Happy to chat more about this if you want.
Bill Kelley
1
0
Bill Kelley Entrepreneur • Advisor
Business Mentor
Hi, Chris. Can you do 50% of market rate? Because if you can, and you can give your CTO/lead programmer candidate the option of A. equity or B. compensation from the first significant investment, you can have a conversation.

Honestly, it's going to depend on the appetite of the contractor. If he/she finds your project attractive, the compensation package will be less significant. And I've found some people are far less interested in eventual equity (which is subject to dilution) than actual pay in the medium term. A lot depends on how much they've been involved in startups in the past.

I'm sure you know to get an NDA/work product ownership document on the table early on.
Michael Brill
2
0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
I know this isn't the question you asked, but if you delay finding a co-founder until after you've developed a product, then you're really looking to just hire an employee, not a co-founder. A bit pedantic, but extremely important because these days everyone wants to (a) work on their own ideas, (b) work for a super-hot well-financed startup, or (c) work for Google/FB/etc. And speaking from recent experience, I took the approach you're talking about and sort of ended up in purgatory with a reasonably-developed product but hard to get anyone to emotionally buy into it.

In any case, to your question, I was able to work with a few developers at reduced rates in exchange for equity. We simply established market rates for their service, determined how much cash I could pay them and then paid the rest in options. That was determined by using a reasonable expectation for Series A pricing and used that (you can poke holes in that as ignores the value of prefs and equity pricing doesn't really have a direct bearing on option pricing, but it's close enough and people understand it).

Jonathan's recommendation is as good as any... Fred Wilson uses one for early employees: http://www.avc.com/a_vc/2010/11/employee-equity-how-much.html.

But, again, I think you need to first answer the question of whether you want a co-founder or not.
Felipe Lara
2
0
Felipe Lara Entrepreneur
Concept Designer | Creative Director | I help entrepreneurs and developers build better games
I found an interesting method in this book:
http://www.slicingpie.com/
It is working well for me so far and it seems fair for all, but you need to trust the people working with you and they need to trust you.
Take a look. After a bit of research and looking at different options including the method that Jonathan mentioned from the book, Founder's Dilemmas, this is what worked best for me and my team.
Michael Coates
0
0
Michael Coates Entrepreneur
To me it is very simple, you either compensate them with dollars, stock or a combination. Just look at it from their point of view, what would it take to incentivize you to take below market for a job? Sent from my iPhone
Kristann Orton
0
0
Kristann Orton Entrepreneur • Advisor
Helping clients design at the intersection of business goals and technology needs | Innovation Catalyst
If it helps when I was offered a job in the mid '90's (yeah, I'm dating myself :) @ Microsoft, the salary was 1/2 of other offers but they included stock options that would have been worth about $1M ~5 yrs later. I took the job with the higher salary sigh. - Kristann Kristann Orton [removed to protect privacy] [removed to protect privacy]
Chris Hartman
0
0
Chris Hartman Entrepreneur • Advisor
Experienced Product Development Consultant
Thank you for all the feedback. These might be the best quality responses I have ever seen in such a short amount of time.
Vadim Oss
2
0
Vadim Oss Entrepreneur • Advisor
Co-founder at Rentini
Hey Daniel,

I like all comments here and I think by digesting them all you may develop a pretty good strategy for yourself. However, I've been through that brainstorming sessions about equity split for co-founders and employees. Here's what I learned combined with many advices from my lawyers.
You always do a "cliff" for any equity offer. It could be a month, it could be one year. My lawyer recommended a year and it seems to be common in the industry.
You always want to have your equity grants on a vesting schedule. It's normally 4 years, could be 2-3 years though. Some people you talk to may be concerned that it's too long but you can offer a new equity grant every 6 months with a new vesting schedule date. This will keep your and your partners happy as long as there is a perfect fit.
A cliff of one year means even though their vesting schedule started on day one they can't quit on you 6 months later and grab a half of what you promised for the first year. You need a full product and not 50% of it, that's why you need a cliff. Vesting schedule (or/and cliff) could also be contingent on the product delivery. If milestones defined for the first year are met 3 months earlier then certain portion of equity is vested (or cliff is over). This will motivate your partners to deliver their product sooner.
A couple things that didn't work in my experience, not saying it will not work for you.
- A developer with another well-paid full-time job is focusing on his/her full-time job. You will be a priority #2
- A market salary will not affect much their motivation
- A happy mix of equity/reduced salary works better than either one of these options on its own
I would be happy to chat with you more on what I learned from my own experience. It's always better not to repeat mistakes that others already did before. I made a lot of them:)
Cheers!

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