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I've read similar questions but like anyone asking a question I think my situation is different.

My background: I've been working full time since 06 and currently work as a Sr. Developer on a small Govt project doing Java/J2EE by the day and have been dabbling into RoR for past 1.5ish years. My salary is between 110-115K (just stating this to avoid false pretenses that I am doing the projects since I don't make enough at day job)

I'm working on two different start ups as the sole developer. In both the projects the person I interact with is in the middle of me and the two founders for the startups. The person is my co-worker at my full time job and started a company 4ish months ago. Both the projects are in very early stages with Alpha release for one about to go out in beginning of June. I've told them my interest in equity if/when the funding rolls in. However, we have not sat down to actually talk about the actual numbers of equity shares and neither have me, founder and the middle person sat down together yet (we plan to). The alpha release for one of the startups going out in June will involve 20-25 people using the app (no money) but with that we'll get good feedback.

I love working on the projects after my full time job and am getting to know stuff on the way as well.

I've heard bad stories from developers regarding working for equity but I want to get an opinion. Whatever steps I take will be after the alpha release and feedback from actual users. Also, all the code is in my private github repository and no paperwork has been signed. What options should I take?

  • demand to sit down and talk about equity shares after alpha release?
  • see the course of the start ups and stick around until there is funding?
  • open my own company and forget equity but just ask for money now (might not be any right now)?
  • open my own company and demand for more money (not equity) when there actually is funding?
  • if I take the equity route then how much should I be negotiating for?

Please share your opinions from past experiences.

Note that the person in the middle is trustworthy as I know him for about 6 years and worked with him on a project outside work previously as well, which didn't take off ...he didn't gain any money from it but did provided me with $3000. Even though, the $3000 was less than the hourly charge.

Update

Had a meeting yesterday with "middle men" and I am so glad I had that meeting sooner than earlier. Made me face the reality. They said they were going to offer me 5% equity as they had decided with the founder than they would be getting 10% equity. So they would give me half of that. I did not think that was a viable option for me since there were no other developers and NO upfront money whatsoever. The founder has setup the company and has been talking to investors but investors have told him that before funding him, they need to see someone technical with him. So I think he was in need for tech co founders and found these people in the middle. People in the middle tried to say how they've grown from developer level and 'can get it done' either themselves or findsomeone else. At that point I moved away from the conversation and said then go ahead. When I asked whether they will be telling the founder that that is it? they said no, since they've committed, they can't go back on their word and would pursue it in .NET (language they know) along with some other developer. Everything went smoothly. I am a bit disappointed but this has given me bite of reality. I went home and closed the heroku link I had set up for the product.

As a lesson.

  • Founders need to look at developers as technical co-founders rather than coders. there is a difference in first employee and a developer who works on the first version of the product

  • Developers, I think our time would be better spent working on our own ideas rather than working for small equity and working like dogs.

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+1 for "I think our time would be better spent working on our own ideas rather than working for small equity and working like dogs." Most developers have ideas for projects, and my response to people who have "great ideas" and no cash is, "If I'm gonna work for free, I'd rather do it on my stuff, which I think is way more cool." :-) – Bob Murphy Jun 7 '11 at 4:19

5 Answers

up vote 7 down vote

The way you're doing things, with a vague verbal understanding, can be hazardous for both parties:

  • They can easily take your work and try to stiff you. Then if you want to get what you deserve, you'll have to duke it out in court.
  • If they succeed, and they don't have things worked out with you, it can be a huge liability for them. A perfect example is the effect the Winklevoss twins are having on Facebook right now - it's a huge mess!

It's to everybody's benefit for you to get something in writing from each company as soon as possible. Of course, you're all very busy, but you need at least a letter stating your percentage and other equity terms before the alpha, with a promise to do a more formal grant of shares or options by a particular date.

As far as whether you get stock or options and when, or what percentage you should get, that's partly a matter for negotiation and partly a matter for lawyers. There are lots of ways of going about that, and the tax implications of some of them are rather complicated.

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you were right. it was hazardous but i'm glad I had the talk sooner than later. disappointed I am but life moves on :( – josh Jun 6 '11 at 18:19
up vote 5 down vote

I no longer work for complete equity on any projects. If you did, then why wouldn't you just build it yourself and own it all yourself? Then if these guys are going to offer marketing and business management, let them work that off for free and you will give them shares.

Working for equity ONLY works when you are also compensated. Take your REGULAR hourly rate, say $100 an hour, you get paid 50% of this in cash and then 50% get's paid to you in stock/ownership shares. That would be $50 an hour in cash and $50 an hour in stock.

Bill them weekly, because you're taking so much less then you normally would, you need to be able to cut all ties and walk away the moment that this company runs out of cash. Expect your stock and your cash every week, NO VESTING contingencies, vesting must be instant.

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This approach has a lot of appeal, but you need to make sure the shares aren't treated as income, or you could wind up with a big tax liability. – Bob Murphy May 25 '11 at 23:27
Working for equity makes sense when you are NOT compensated, as long as the equity split represents the real investment. In your example, the developer should be the majority founder. – Alain Raynaud May 26 '11 at 3:39
If it's a legitimate company, then they'll have millions of shares and by the end of the project you may have at most 30% of the company. If the owner is just one guy that wants you to build on equity, WALK AWAY! – Jonathon Byrd May 26 '11 at 5:48
taking my code, screwing the in between people + founders and own it all myself would mean cutting off all ties with the three people. In addition, I would need marketing help and relationships that the founder has built with businesses/investors. But I do like the idea of having equity and cash both by billing them weekly. – josh May 26 '11 at 15:36
now I'm wondering whether I should name names :) – josh Jun 6 '11 at 18:20
up vote 3 down vote

It is well past time for you to meet with the "founders". By your description, you are one of them. I read that you trust your "go-between" but why is he keeping you separated? It sounds like someone is already taking advantage of you. You need to get at the very least a Memorandum of Understanding (MOU) before you do any more work.

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Yes, he is a founder, he just doesn't behave like one. – Alain Raynaud May 26 '11 at 3:39
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Since I was not involved in the "idea", I wanted to have something to show for before demanding a huge percentage or being a founder. As I have that now, I'll ask to be involved in active discussions with the founders – josh May 26 '11 at 15:32
Good for you, @josh. You have a lot of folks rooting for you here! – Kenneth Vogt May 26 '11 at 16:38
up vote 3 down vote

Why do you say your situation is not covered by other questions here? As far as I can see, your situation is entirely typical and has been covered in depth.

Also, you know what to do: talk to the "founders" ASAP. It would be a huge mistake to wait until some event happens, like funding or paying customers. Both for legal, tax and many other reasons. Unless your goal is to work for charity and give away your effort, which is what you are currently doing.

My impression is that your co-worker friend is the source of the problems, he is shielding you from having a real discussion with the other people in the project.

Potentially, you deserve 30% of whatever company is being formed. It could be even more. But that's never going to happen if you don't ask for it or if you wait.

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Thanks for the advice. I am going to ask to meet with the founders and get something on paper asap. – josh May 26 '11 at 15:29
up vote 2 down vote

When you work for equity, you assume a substantial amount of risk. Just make sure that if you do work for equity, that your share of the reward is appropriate for your share of the risk. Don't do 99% of the work and take 1% equity.

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