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I've been working with a friend's startup for about six months now. We have minimal revenue thus far, but things look to be on the brink of coming through. My role with the company has yet to be completely formalized, but I'm having the conversation with him later this week. I am the only employee working on the project in the US, and thus am responsible for all the business development. I have no idea what to expect/request in negotiating with him. I've been putting in approximately 30 hours a week (in addition to my regular full-time job and another part-time job that helps pay bills).

A) Should I negotiate for equity in the company? I think yes, as he mentioned me being a "member of the founding team." If so, what is a reasonable percentage? There are currently two full-time and two part-time employees working on the project. None of us are on salary, or even hourly at this point. B) Should I negotiate for a percentage of contracts that I arrange? If so, what is an appropriate percentage? C) Is a hybrid approach best?

Being as he's a friend, I don't think he's looking to screw me over, and I'm not looking to do the same to him. But I'm putting in a lot of effort into this project in a variety of ways. How do I take care of myself while still growing the company?

Any and all input is appreciated!

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How can you have been working on it for 6 months, and still not have your role defined yet? Can you explain some more? – Alain Raynaud Jun 7 '11 at 21:52

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Sounds like things are going well at the moment, so there is no strain on your friendship, which is good.

However, having run a business with people who were my friends first and business partners second, I would strongly recommend you get yourself on a proper legal footing with your friend; that way, if things get bumpy, you don't have to concern yourself with those sorts of things and can focus on helping the business survive/grow. On the other side of the coin, if things work out well, you don't need to be worrying whether you will be looked after. If your friend has a reasonable grasp of business realities, he shouldn't find any of this threatening. (One more point, guessing from the hours you are putting in across your 3 jobs, sounds like you might have one or more dependents - if so, then their interests should also be protected in the event something happened to you.)

In terms of what you should be asking for, that very much depends on your aspirations. If you are happy to wait for your investment to mature, then a shareholding makes sense, and part of the 'proper legal footing' would be a shareholders agreement. There are lots of ways of establishing what your contribution is worth (see for example) but it obviously needs to be something you are both happy with and feel is fair. Conversely, if you are looking to generate more immediate income, then the % of contract value is perhaps better. As you suggest a hybrid model is an option, although understand that every penny you take out of the company has an impact on the equity valuation (as it is a penny that won't be spent elsewhere on growing the business), so be sensitive to the dynamics here.

Hope this helps. Good luck with the business.

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Thanks very much, Steve. This is very helpful, and clearly I have a lot more studying to do. Coincidentally, I don't have any dependents, just student debt and DC living costs :P – Bspring18 Jun 10 '11 at 20:27
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I agree with what Steve Wilkinson had to say.

In addition, there is a very good tool out there that enables you to have a conversation with your friend regarding founding shares and options. It will assist both of you in developing a plan for how to grow the company, attract other staff and what milestones you need to preserve equity in the business. I'm assuming that he'll provide you with founder's equity, but both of you need to think longer term than just your immediate situation. Check out www.optionsanity.com - I've used it successfully since we were just a few people and have grown the company around this model. In addition, new employees find the system fair and equitable.

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Worth pointing out the $500 setup fee - likely to put off most early-stage startups... – Steve Wilkinson Jun 11 '11 at 10:52

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