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I was recently asked by a founder of a pre-funded web startup (he's the only member) to redo his entire platform, and I'd like some help determining a reasonable equity distribution for my situation.

The founder actually started the original website 2 years ago as a side project to help one of his other businesses. Now the site has 6 other customers and a monthly revenue of ~$1000. He now wants to turn this side project into a bigger, more profitable business of its own. However, the current site was not programmed well and he wants it to be completely redone. So, the founder has asked me (a programmer) and a designer to be a part of his team.

If I were to work on the project full time, I anticipate it would take 3-4 months to complete a new prototype (not including the many other features he has in mind for the future). While the new site is being developed, the old site will continue to bring in money. So far, the plan is that the $1000 revenue will go to the designer every month until his work on the new prototype is complete. In regards to equity, the founder would like to retain 51% of the equity, and he also wants to set aside equity for future investors and future employees. However, between the founder's equity, the equity for the future investors and employees, and potentially a small % for the designer, there seems to be very little left over for me. I have a few questions regarding this:

  1. Is it necessary to set aside equity for future investors and employees at this stage? If so, how much for each? Would it make more sense to dilute everyone's equity when we bring in new investors or employees?
  2. If I were to not take any pay for the development of the new prototype, what range of equity could I reasonably expect?
  3. If I were paid 25-50% of my fair market value, what range of equity could I reasonably expect?
  4. If there is sufficient revenue or financing in the future to provide salaries, would we be able to pay ourselves a salary without it effecting our equity percentage?

Thanks in advance for you help, and feel free to ask if you need additional details.

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Can not be answered because it all depends on how simple the site is from a programming pointof view (typical web developers are cheap, high end programmers expensive)and what the growth potential is. The last is important.

Just to give you an idea HOW relevant that is.

I currently get around 18k USD per month doing programming as contractor. Granted, not your typical "make a website" work. Anyhow... ...if you would offer me the 1000 USD per month while I work on your site, what would you have in there what would be worth more than double my loss of income within a 5 year timeframe?

if the site has serious growth potential - good. it it goes to 60 customers, 10.000 USD per month income.... not worth an equity share.

Given the numbers your showed, I would walk away. Equity is nice, but it is TOTALLY worthless unless (a) it has profits backing it up that are distributed (dividends) or (b) someone is willing to pay for the equity (buyout). All the rest is paper money, and that does not buy food.

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I agree. Unless the site has potential for SERIOUS money, you will not recoup the costs of the time you have invested and the income you have forgone. – Susan Jones Feb 20 '11 at 11:42
Thank you for your helpful feedback. I do believe the site has serious growth potential because 1) It meets a real need in their market, 2) Their current customers love it even though it has major problems, and 3) Very little sales or marketing have gone into the site because he knows it's not ready to scale. Even still, your warnings are appreciated and will definitely be factored into the final decision. – user7880 Feb 20 '11 at 20:46

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