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How much equity should an hourly programmer get?

We are an early pre-funding stage startup.We took a wrong development path, and nowwe think we are on the right one. Our programmer has been able to (at a reduced rate) create a very simple scenario. However, I want the scenario to be a bit more complex and on a business topic before I show it to potential investors.

The programmer has gotten very caught up in the project, and is willing to work at a reduced rate, but also asked about equity. What should I offer him? Should I do it by milestones like, business scenario, alpha test, MVP, etc.Or is there a better way to do this?

I am open to ideas!

10 Replies

Mike Moyer
2
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Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
The best way to split equity in any bootstrapped company on the planet is called Slicing Pie. It is a formula for not only determining a perfect split, but also the right buyout price if someone leaves the company.

When you, your developer, or anyone else dedicates time or contributes money or ideas or anything else and does not get paid, they are essentially betting the fair market value of their time or contribution on the future outcome of the company.

Their equity should reflect their bets relative to everyone else's bet.

It's a simple, but powerful concept that is used all over the world.

Every other method for dividing up equity is basically a guess. Only Slicing Pie applies a logical formula that always gives you the right answer.

I've written a book on this subject and you may have a copy if you contact me at SlicingPie.com
Michael Schaiberger
0
0
Michael Schaiberger Entrepreneur
Medicaid Managed Care & Health Benefit Professional
use a wage blended gain sharing model based on stretch goal accomplishment for the equity shares thanks mike schaiberger
Will Andre
2
0
Will Andre Entrepreneur
Interim CMO
David, it's a good and common question. I have always approached it by taking the agreed fair market rate, and rolling the balance in to a convertible note. For example if the fair market rate for your developer is $100/hr and s/he's working for $50, the developer is effectively loaning the company the other $50/hr. Let's take that to a year, you land an equity investor on a pre-money valuation of $5,000,000 and the developer has worked 2,000 hours at $50/hr ($100,000 cash) plus $50x2,000 in loans ($100,000). The company has gotten $200,000 worth of work for $100,000 in cash. The developer gets the $100,000 cash plus 5% equity ($100,000/$5,000,000) for the loans. I have found this to be a very equitable solution. One caveat is that you'll need to have a conversation around valuation goals as the developer's equity % goes down with the higher valuations, but you ought to be able to back fill some of those upside concerns with either "Sure, your piece is smaller, but look how much it's worth," or with options. Hope this helps!
Richard Reed
2
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Richard Reed Entrepreneur • Advisor
Director of Marketing at Labdoor
Great responses by Mike Moyer and Will Andre. I second this approach but in order not to scare off the developer who may or may not be a sophisticated investor, I typically determine a likely scope of work (as discussed above) and then the founders agree to an equity allocation that reflects that contribution, and then offer it to the developer in the form of a stock grant that is subject to a vesting period with a cliff. A common example for a very early stage company would be a 3 year vesting grant with a 6 month cliff, so if the developer walks away before 6 months, no equity is granted.
Matthew Mellor
1
1
Matthew Mellor Advisor
CEO of Strenuus
Do you have an independent contractor agreement with this person? I'm not certain, but I would think that an equity stake would probably be construed as employment, and soyou would have to address withholdings, unemployment, work comp, etc. Worth researching.
Steve Everhard
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0
Steve Everhard Advisor
All Things Startup
The first question is probably do you see a long term relationship with the developer or are they getting you over a hump? What is driving their request for equity? Is this the best reward for their discounted work?
Equity requests are fashionable but of limited value unless a large liquidity event is on the horizon. Early funding rounds won't release funds against shareholding and they aren't much of a lock-in if your programmer opts to walk away. I wouldn't offer %age at this point.

Sidney Sclar
0
1
Sidney Sclar Entrepreneur
SID the SECURITY PRO at sidthesecuritypro.com
Zero equity now. Future options to buy at today's prices five years from now.


David Coleman
0
0
David Coleman Entrepreneur • Advisor
Collaborative Strategies Inc., Founder and Managing Director
Wow! These are all great and very practical answers. Some fit my situation, others don't. But they all have given me a lot to think about, as this seems to be a more complex issue than I first thought.
Joseph Wang
1
0
Joseph Wang Entrepreneur
Chief Science Officer at Bitquant Research Laboratories
One thing that you are going to find is that it become much more messy now that they've done work for you. It's better to deal with things like payment before they do the work.

The other thing is that it makes a big difference whether you are viewing the programmer as a co-founder or as a hired gun. It also makes a difference whether the person you are talking with wants to be a co-founder or a hired gun. If the person is a co-founder then you want something pretty large, since he is the CTO. If they person is just a hired gun, then you want to keep the thing pretty small, and increase the cash amounts if you think it is too low.

One analogy is that you can have a maid/butler do your dishes, or you can get your housewife/househusband to do it. The dishes get done, but the relationship is very, very different. Having a maid/butler do your dishes versus having housewife/househusband do the dishes will both work, and as long as everyone is on the same page as to what the relationship is, then it will be fine. However, very bad things happen when people misunderstand the nature of the relationship.

It also helps to reduce everything to cash. Market rate is X, you are paying them Y in cash. The difference is equity but then you can calculate what you both think the equity is worth. Once reason this gets complicated is that you are dealing with a programmer as an investor and this gets you into all of the other issues dealing with investors.

If you are open to ideas, then you can see if you can negotiate something on the IP front. I am willing to work for a lot less on open source projects than on closed source ones, because I can use the work that I've done on open source for future projects, whereas this is not true for closed source.
Rajiv Menon
0
0
Rajiv Menon Advisor
Founder at Informulate
David,
Mike Moyer's Slicing Pie is actually a great book, and highly recommended for your scenario. An honor to be on the same thread as him. That said, you first need to decide whether this person is going to be a long term member of your team. If not, no equity. Simple as that. Make sure that your agreements are clear, and that you retain source code with NDA etc. The other aspect is why you are now adding scope to the project. Don't fear the M in MVP, it needs to hit the market and time is of the essence. You can learn a lot more and plan the future better if you know how it was received by the market, NOT by the investors. Your aim is not investment money, its paying customers. If you have that, investors will come to you.As an advisor, I often need to distinguish funding validation with customer validation for my clients. Hope that helps, and let me know if you want to talk.
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