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Equity compensation for contributions to prototype development?

Hi everyone, I will likely be working with a very talented grad student who will help to develop the methodology, select appropriate data sets, and conduct much of the computational analysis to inform development of our prototype. He will also do some programming to help build the prototype. He will not stay on as CTO.

He has requested "equity". Could you let me know if this is type of equity request is typical (in addition to payment,) for someone who does not stay on as CTO? If so, what type of equity arrangement and proportion is appropriate? When would the amount be determined (before he starts work? after)?

Thank you in advance for your help and feedback.

5 Replies

Mitchell Geere
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Mitchell Geere Entrepreneur • Advisor
Founder at Daybear
Hey Charlene,

An equity and payment request is somewhat common however both are lesser than they would be if he asked for either. Also depending on what he is doing I would hold him to a vesting period (4 years is normal but you can link it to 4 years or until a CTO takes over) with in the terms of that vesting period he should maintain the software he created. This maintenance could be up-time of servers if relevant, resolving errors and implementing features where they don't meet specifications. I would like to know what you are paying him cash and what you are giving him in equity. In general if I do a deal and there is cash I give significantly less equity.

Hope that helps.
Daniel Lo
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Daniel Lo Entrepreneur
Co-Founder at LawGives
Interesting question.

In evaluating the skills he is offer, what is the competitive market rate? Would $15/hr be worth the equity that he is asking for? And visa-versa, could you pay him $15/hr?. He is also taking a substantial risk if your company is very early stage or you are not paying him cash (or both).

IMHO, your founders and first 3 (at least) employees should bring in factors that will make you successful. A grad student, who may need mentor-ship and is already scheduled to be replaced, isn't one of them.

However, if don't have cash and the exchange of equity for cash is good, then this essay may help you out.

http://paulgraham.com/equity.html

I think we need a bit more information on what stage your company is at, even after garage round any sort of equity discussion becomes near impossible, due to previous offers, existing offers, risk, valuation rounds, valuation of the company etc.




Charlene Brown, MD, MPH
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CEO & Founder, ReciproCare, Halcyon Fellow
Thanks for the feedback so far. I plan to pay the grad student, so the arrangement would be equity in addition to payment. I am torn between paying him via a fixed price per deliverable versus an hourly rate; do you have suggestions for an appropriate hourly rate? His main value-add is related to his computational skills and the work needed to build our model.

This business is pre-early stage...very early....just getting started. Still refining the business model, doing customer development and researching methodology. I will be bootstrapping this effort, followed by family/friends fundraising; there are no external funders at this time.


Robert Clegg
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Robert Clegg Entrepreneur • Advisor
Game Based Learning Expert
He should be a subcontractor. Whatever you are building should be broken down into milestones. Payments should be based on approval of deliverables against the milestones. Any equity should be based on full completion of the product or achievement of a certain major milestone or total completion of the work he promises. Make sure you have clauses that protect you if he walks away without completing milestones.

Do you have legal representation? You should be networking at startup events and incubators to find a law firm that represents start ups. They should have a team of people experienced in subcontractor agreements as well as stock and option pools.

You could even consider any funds he is taking below market rate as convertible debt. But put the option to pay off the debt with you.

I'm a developer. If you want to talk more free to contact me through FD. My prior venture my co-founder and I raised over 12M. I've seen a ton of equity bounce around, a ton of contracts, and a whole mess of developer interactions.

Charlene Brown, MD, MPH
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CEO & Founder, ReciproCare, Halcyon Fellow
Thanks to all of you for your comments and suggestions; they are extremely helpful!!
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