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Founder Equity, Vesting Schedule, what is fair?

I am building a SAAS product to support the industry I currently work in (day job); I have legal sign off from my employer to build and test this product while I continue my employment. I intend to self-fund the MVP; I assembled a product plan and shopped it to SW development companies who could build out my product.

One of the development company owners I took the plan too is also an experienced entrepreneur; he has been running his development shop for a several years, in the past he launched companies, and most recently bought a small SAAS company (different market) and has most of his development staff assigned to that product.

After a couple of working sessions I am confident that his influence will be very helpful, he knows: product, product creation, UIX, and his team of engineers are well suited to build this application.

He likes the idea so much that wants to be an equity partner with me, but I would pay his guys hourly (at his cost) for the development work. Doing some rough calculations I can fund his guys for the first 4-6 months, then we would most likely seek outside capital.

I bring allot to the equation because in my day job I am the target user and I will immediately test the product in the real world (approved by my employer); on top of that I am funding the first 4-6 months of development.

He brings allot the equation too because he knows how to build products and has a team of engineers he can execute with.

I think bringing on this person as an equity partner sounds like an acceptable arrangement, as long as the founder equity split, vesting of that equity, and my cash investment into the company are fairly accounted for. I do worry that he might be distracted because he does own another company and he would not be focused 100% on my product.

If we decide to partner, what is a fair arrangement?

17 Replies

Bill Kelley
2
0
Bill Kelley Entrepreneur • Advisor
Business Mentor
Well, as I understand it, he's charging you like any other client. So his equity participation would be on the level of a board advisor. Maybe 1-2% after 3 years.
Patrick Holman
0
0
Patrick Holman Entrepreneur
Enterprise Technology Sales
He would not be charging me like a normal client. He would be charging me his cost of labor, a pass through to his developers (no financial cut for him).
Marc DeWalle
2
0
Marc DeWalle Entrepreneur
Entrepreneurial MBA with extensive experience in development and management of sales channels, partnerships and alliance
You need to date before you get married. So find a way to have him do some work (not just advice) before you do equity. That will tell you if you're getting his focus, plus you'll find out if you like the work and process. For now there is no need to discuss equity, since you're paying him. In any equity agreement, you should vest over a period of time and have a written agreement that spells out what you get for the equity (i.e. how many hours of his time per week).

- marc
Andy Agrawal
1
0
Andy Agrawal Entrepreneur
Director of Engineering at Zenefits
If he is charging you for the development work, equity does not make a lot of sense. He's a contractor at that point and it doesn't matter if the work is being subcontracted out or not.

I would also be very careful of an outsourced team like this. You shouldn't need a team of devs to build your first MVP. Often times with outsourced teams, the cost is deceptively low. You pay a lower hourly rate, but it ends up requiring a TON of hand holding, you typically get low quality code that is difficult to maintain and the extra layers of communication are harmful.
Mike Moyer
2
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
I LOVE problems like this. Hooray! I have the perfect solution for you. It's called a dynamic equity split and it will allow you to determine exactly how much each person in the company deserves. The split is dynamic so it adjusts based on the participants actual contributions to the firm. It also has protection in case a member of the team flakes out. I wrote a book that provides step-by-step instructions called Slicing Pie ( www.slicingpie.com ). The book is available on Amazon, but if you email me at [removed to protect privacy] I'll send you a free sample. The book was written for EXACTLY this situation.
Jeffrey Cary
1
0
Jeffrey Cary Entrepreneur
Senior Project Manager at netPolarity, Inc.
Hi Patrick. I was in the exact situation, and brought on a team with offshore development resources, with the principals as equity partners. 4 months into the relationship they developed internal issues and could not fulfill the terms of our contract. Learning from that situation, I am awarding equity (founders, etc.) from a new concept called a "Grunt Fund". There is a pool of equity that is shared, a defined value is placed on each individuals contribution, and they are compensated according their "actual" contributions. This keeps everyone honest, and everyone would be compensated according to their efforts. Long story short, they get out of it what they put into it. Hope this helps. J. Alan Cary Chief Executive Officer LifeSpan Behavioral Technologies, Inc. 760 Old Roswell Road, Suite 122 Roswell, GA 30076 (770) 580.2470 - Work (678) 767-0808 - Mobile (770) 334-2603 - Fax www.lifespanbt.com
Mike Moyer
2
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Patrick, Jeffrey Cary's answer is a dynamic equity split (thanks Jeffrey!). The Grunt Fund is the model I outline in Slicing Pie (http://amzn.com/[removed to protect privacy]). Like I said in my previous answer, I'll send you a copy if you don't want to buy it.
Jason Oliver
2
0
Jason Oliver Entrepreneur • Advisor
Founder and Technology & Product Executive
Since they are forgoing profits, assuming its a fair cost model, then they are investing that money into your start up and probably the leader is throwing in his time also. That all has a value, regardless. What I've done in the past is to add up that value based on actual time and roll it into a convertible note.

When you have a round of funding, you can roll the note into the round at the market value of the amount of value they have "invested" along side the cash investor. Also - you can have a clause in the note where you agree to be able to buy them out prior to the conversion at some agree upon value - 2x the actual cost - something like that.

Andy makes a good point to not over develop the project - keep it simple to prove out the model.
Luis De Avila
0
0
Luis De Avila Entrepreneur
Owner/Fullstack Architect at IdeaNerd LLC
Ditto the advice on being careful.

I personally see at least two issues...

1) There is a potential conflict of interest. You pay him, even if it's just at cost, for services. There is no risk for him there.
2) You risk time and money. He only risks time.

Definitely not a 50/50 split. What's his value? Developer connections, CTO/Team lead role, business connections.

I'll echo Bill Kelly. 2-3% equity with a built in vesting period and a perform or quit clause just in case it does not work out.

I'll also echo the advice on not needing a team to build an MVP. I've been recently chatting with other founders who've built MVPs for WAY too much. Find a Tech Advisor who you trust to sniff test the cost. Or find a CTO that will do the actual work.

I'm a nerd and own a dev shop so I know about development. I'm always available for quick tech advice. Just send me a note. And there are many on FD who I'm sure are willing to do the same.

Jay Snodgrass
0
0
Jay Snodgrass Entrepreneur
Investment Manager
Check out: https://angel.co/salaries
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