Getting involved in startup, equity negotation advice?

durron597 · #1 10-23-2007, 07:14 PM

An acquaintance from High School (let's call him Joe, not his name) recently got in touch with me through a mutual friend about being involved in a website startup idea he has. He told me the idea, we've had a few meetings at this point, the idea is pretty fleshed out.

Background: I am a programmer, Joe has a finance background and background in the industry the site is in (I do not).

I told him that I am willing to do this in my spare time, working for equity. I am contributing $0 financially to this endeavor, only my time. He will pay for web hosting, servers, etc., and he will do all marketing work involved (which will be fairly substantial).

There is a third person involved who will be hosting the temporary server for development until Joe buys access to what will be our production server. He is also a programmer, with a significantly less "polished" background than me, but has more experience in our specific development environment. I am not sure what Joe has planned as far as this person's share of the equity.

So my question becomes: how equity much am I contributing? Obviously I want to figure out what the equity would be before I do anything; should I be setting up a contract with a lawyer now? When he approached me, he said "I have programmers, I am looking for a partner."

Thoughts?

durron597 · #2 10-23-2007, 07:21 PM

Other details:

I should add he quit his job and is funding this project 100% through savings. I will not be quitting my job until (at the earliest) he can afford to give me a salary equal to what I make now. If that never happens, I am not going to quit.

As far as current expenses, there really aren't that much. The other programmer is hosting the site until we go live; he is paying $500/month for a small amount of office space that I won't be using.

I should be considered a key decision-maker for the company in addition to being a programmer here... but the application specification has already been written out by him (though I've made comments). He asked me to write up a detailed timeline, which will be the first thing I do after this equity stuff is decided.

I will probably be working ~20 hours a week approximately on this effort once all this is worked out.

El Diablo · #3 10-23-2007, 07:42 PM

durron,

This is always very subjective. Given the fact that he has put in a lot more time already and he will be focused on this prob 50+ hours a week while you are 20 hours a week, he should be a much larger partner than you.

Basically, you're trying to figure out what your respective contributions are in terms of making this company a success.

That's a combination of time spent, ideas contributed, and other contributions to the company. So if we both start it and we're totally committed full time and bring the same amount of things to the table, more or less, then 50-50 makes sense. If one of us brings more skills, contacts, experience, knowledge, whatever, that person should get a bigger chunk. If one of us puts in more time, that person should get a bigger chunk. And so forth.

I'd just look out at a year or so period (or however long it takes to get from concept to something that's actually pretty real) and say, OK, from here to there, I'm probably about 20% (or whatever) responsible for the total success of this effort.

Boris · #4 10-23-2007, 07:42 PM

Given your commitment level and risk exposure, I'd say you are worth max 5% of the company.

Honestly, based on all the start-ups I've seen, it doesn't sound like you are a good fit for the company. I think there has to be a pretty high level of trust and dedication among the core founders. statements like "He asked me to write up a detailed timeline, which will be the first thing I do after this equity stuff is decided." and "I will not be quitting my job until (at the earliest) he can afford to give me a salary equal to what I make now." are not what I would be looking for in a business partner.

durron597 · #5 10-23-2007, 07:46 PM

[ QUOTE ]
I think there has to be a pretty high level of trust and dedication among the core founders. statements like "He asked me to write up a detailed timeline, which will be the first thing I do after this equity stuff is decided." and "I will not be quitting my job until (at the earliest) he can afford to give me a salary equal to what I make now." are not what I would be looking for in a business partner.

[/ QUOTE ]

I have my reasons for being this skeptical.

edit: so in other words i'm not being the type of guy expressing concerns about trust for just because i'm being like that, i actually have valid reasons for being concerned.

MissT74 · #6 10-23-2007, 07:46 PM

My ex husband did this several times in the past (he's a DIVINE web builder).

I think you have to make the choice. Do you want a percentage of the company (equity) or do you want to get paid an hourly rate for your work (even though you don't get paid right now)

The reasons:

1. If you ask for equity in the business, are you willing to do all the work and get nothing in return? Are you willing to take that risk?

2. If you work for an hourly rate are you willing to accept that hourly rate if the business goes through the roof and you no longer have access to equity but merely the agreed upon hourly rate?

As you can see, it's almost a Catch-22. Most businesses that my husband worked on was a simple hourly rate and very easy to say that, however, there was one company that he really, REALLY wanted equity in. He ended up just getting an hourly rate and 3 years after he built the site it was sold for 2.75 million bucks. (This site was very, very well known and in fact, was even discussed on 2+2 at one point. [img]/images/graemlins/smile.gif[/img] ) So, needless to say, we were upset/pissed that we didn't get our little 5% equity. Sigh.

Choose wisely, but also know that without you, they can't start the business. Sure, he can get someone else, but the idea was to come to you because you're willing to work for free instead of equity. It's almost a no lose situation for him. If the business thrives, he's OK giving you a piece of the pie, but if it fails you get nothing and you lose all the time/sweat/blood/tears that you put into it.

I think it's based upon what and how you feel about this business. Do you REALLY feel it can make money? If so, go for equity. If you're not sure, then go for hourly rate. This way you don't get screwed.

T

BPA234 · #7 10-23-2007, 07:46 PM

[ QUOTE ]
An acquaintance from High School (let's call him Joe, not his name) recently got in touch with me through a mutual friend about being involved in a website startup idea he has. He told me the idea, we've had a few meetings at this point, the idea is pretty fleshed out.

Background: I am a programmer, Joe has a finance background and background in the industry the site is in (I do not).

I told him that I am willing to do this in my spare time, working for equity. I am contributing $0 financially to this endeavor, only my time. He will pay for web hosting, servers, etc., and he will do all marketing work involved (which will be fairly substantial).

There is a third person involved who will be hosting the temporary server for development until Joe buys access to what will be our production server. He is also a programmer, with a significantly less "polished" background than me, but has more experience in our specific development environment. I am not sure what Joe has planned as far as this person's share of the equity.

So my question becomes: how equity much am I contributing? Obviously I want to figure out what the equity would be before I do anything; should I be setting up a contract with a lawyer now? When he approached me, he said "I have programmers, I am looking for a partner."

Thoughts?

[/ QUOTE ]

I think you can come up with some fairly decent and basic math scenarios and arrive at a reasonable number. But, first I think you have to address this
"I have programmers, I am looking for a partner."

How deep do you want to go and where do you want to end up?

durron597 · #8 10-23-2007, 07:51 PM

[ QUOTE ]

1. If you ask for equity in the business, are you willing to do all the work and get nothing in return? Are you willing to take that risk?

[/ QUOTE ]

yes. i am willing to commit my time to this idea.

the concern is not really about whether to go for $ or equity, but rather how much equity i am worth.

durron597 · #9 10-23-2007, 08:04 PM

[ QUOTE ]
[ QUOTE ]
I think there has to be a pretty high level of trust and dedication among the core founders. statements like "He asked me to write up a detailed timeline, which will be the first thing I do after this equity stuff is decided." and "I will not be quitting my job until (at the earliest) he can afford to give me a salary equal to what I make now." are not what I would be looking for in a business partner.

[/ QUOTE ]

I have my reasons for being this skeptical.

edit: so in other words i'm not being the type of guy expressing concerns about trust for just because i'm being like that, i actually have valid reasons for being concerned.

[/ QUOTE ]

Now that I think about this more, what this concern really is is, should I be getting involved in this at all?

Boris · #10 10-23-2007, 08:22 PM

[ QUOTE ]

Now that I think about this more, what this concern really is is, should I be getting involved in this at all?

[/ QUOTE ]

See that's what I mean. If you want a big share then you are saying you are going to do all you can to make the company successful (in addition to having the skills). I don't know about you, but I know that for me, I have a very hard time committing to something I think is effed to begin with.