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I've been contacted by a early start-up company (2 people) to do work in rails for a product that they could potentially market to dentists. The person who contacted me (one of the two owners) knows me for last 3 years and works with me for his 9 to 5 job. I was told that there might not be any money upfront, and I'm assuming there might not be any money at all if the product doesn't take notice.

I would love to do the work as it will keep my skills honed and I'd gain some experience as well. However, since there is no money upfront this task doesn't sound like a consulting or contracting work. Would I be out of line to ask for equity, not for the whole company but only for this project/product? I will just make some % of the total they make on this product. For me I see two benefits in this, I've been thinking of opening my Consulting company and this would be a great way to get my first client and If I do good enough work on this product then I can showcase it on my company's profile.

I've thought about the negotiation conversation and what the other person might say. They might say they can just get someone else who won't want equity. However, who would be willing to work on a product without any up front or hourly money? Furthermore, they are aware of my competence in helping them deliver a finished product as well.

Please give me some suggestions whether asking for equity in this case would be out of line or would I be putting an axe to my foot by asking for equity?

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Keep in mind that this will be work, not hobby programming, so it will become a real drag after a while without compensation. – Tony BenBrahim Apr 2 '11 at 9:58

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up vote 4 down vote accepted

I'm never really an advocate of doing that amount of work for free for any reason.

You should get some kind of immediate compensation for your efforts. It can be cash, stock, all-you-can-carry office supplies, whatever.

We've all heard the story of the struggling little company that went on to be huge, and then fairly rewarded all the people who had selfishly contributed to its success, but that is mostly a story. The odds are literally 10,000:1 that this company never produces a dollar in profit. There are similar odds that they do produce a profit but never pay you for various reasons (you helped on product X, but that morphed into product Y which is what really made money so we don't owe you anything).

I would say ask for options in the company. The formal company, not just some percentage of the project you're working on. Do NOT (IMO) ask for straight equity, because if you are granted actual shares there are accounting issues that go along with that for tax purposes that you'd probably rather not deal with. Along with that, setup a structure with them where you get the first $XXX of the product sales and then .0x% of future sales (not profits) from the product. None of this is, IME, unfair or unreasonable for any company that has any real shot at success.

The other option is that you do the work for free just for your own personal networking benefits with the guy you work with, but my bets are on that not having much long term value.

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+1. Solid advice. Even Interns usually get paid, or get a reference from an ESTABLISHED firm. – Frank Mar 16 '11 at 15:12
up vote 1 down vote

As a startup founder, I would be reluctant to give equity to anyone who won't be on the team full-time. You've only got so many points to give.

Another solution might be to ask for an option. For example "I get the right to buy 1% of the company for $10k anytime in the next 10 years." That way, if it turns into a $5m company, you can cash in for a nice $40k score....but meanwhile they haven't given up equity in the beginning stages.

The most common thing, however, is to do the work for an increased fee that can be paid back after the company is producing revenue. Something like "I would normally charge $10k to do this....$5k to do this for a friend, because it is a lot of work. But I know you guys are just getting started...so how about this....a contract where I do the work now, and you pay me $1k/month for 8 months AFTER you reach $x in revenue. That way I get something extra for my risk and you get to pay over time once your company is ready for it."

Bottom line---there are a lot of ways to be flexible and creative! If you do good work, they're very likely to turn to you often when they need work done (and can pay for it..we hope!). But I'd get SOMETHING out of the deal more than building your portfolio.

Sorry for the ramble and the made-up numbers...I've seen this situation a lot and this is all IMO from my experience.

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That is a good idea. Kind of like profit sharing? I can propose that instead of actual equity sharing on this project. however, would it be possible to open my own LLC in next few weeks and the checks I get for the work can be on my new company's name... – user8682 Mar 16 '11 at 14:59
Profit sharing is another option, although different from what I proposed above. Yes, you can set up an LLC extremely quickly...just put in your contract that the contract is assignable to an LLC that you create in the future. – Andy Swan Mar 16 '11 at 15:03
FWIW, I don't like these suggestions. The scenario sounds, to me, like the typical case of the idea guy who thinks he has a grand new idea (which is neither new or grand), and wants someone to just "make the website" for him. If it becomes profitable he can just as easily reincorporate and wipe out the 10% thing. How does the OP really know what their revenue is? He'll get the run around trying to collect. IMO, if they can't pay NOW, they won't pay EVER. – Brian Karas Mar 16 '11 at 15:47
@Brian not entirely true. I've worked with them before on a consulting work they were doing for someone else. At that time I had agreed to do the work now for free but later get paid (when they make money). The software was never used, for many reasons..one of them being that client said they are OK with papertrail.. However, these guys did pay me some 2500 and iPat for putting in the work. – user8682 Mar 16 '11 at 16:20
Josh - it's good then that you have a track record of working with them, I just wouldn't rely too heavily on that though. Maybe I'm just a cynic from seeing to many things go sideways too many times, and I just think that in general "pay me now" vs. "pay me later" will yield better results averaged over the long term. Good luck either way, at the very least it sounds like you are taking a rational approach. – Brian Karas Mar 16 '11 at 17:41
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up vote 1 down vote

Let me get this straight, they cannot afford to pay you (a small salary or hourly wage), and they cannot afford to give you Equity?

Why dont you build your own Dentist software? What is so special about these two guys that you cannot do alone? I want to you start and realize your value.

Most unfunded startups do actually give out generous amounts of equity. Its usually done on a performance basis. My advice to you is to go for a combination of $ and Equity. If they cannot afford it, then they cannot afford to launch, sell or do much with the product. You are looking at a lottery ticket at that point, with low chances of success.

Maybe its best for you to spend the time you would with these two clowns working on something you can do alone, something smaller, and "closer to the money"

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They were the ones who came up with the idea to me. I can (in best case scenario)take their idea...develop it...and market it to people who they were going to market to...or find other willing people. However, clearly I would be burning the bridge with these two people for any further work. all relationships would die. – user8682 Mar 16 '11 at 15:17
So come up with a different idea. Without knowing your project i am guessing its either a website builder for Dentists, or some software where they can manage their back office including appointments. Chances are the idea is not new. Why not do the same for realtors, mechanics, lawyers, or some other clowns? Honestly, unless if they have discussed what they could do for you, versus what you could do for them, chances are you are going to get RAPED, and that bridge will be burned. If that were not the case, i doubt you would spend so much time debating over the possibilities in your post – Frank Mar 16 '11 at 15:20

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