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I recently participated on a team with a developer at a hackathon. The person has their own freelance business, so unlikely to join fulltime later. They expressed interest in helping with my project on contract (which I can't afford) or equity basis. The help would be in terms of basic MVP to get going. The startup is very consumer/sales focused and not tech/software based.

As this is not about equity between fulltime cofounders, I'm not sure how to approach this. And this is not regular parttime either, it's more of a finite amount to be done upfront. Are there any good rules of thumb, proxies or templates to use in calculating equity-work exchange rate?

I am concerned about getting this right in order to prevent equity issues with potential employees or fulltime cofounders (I have none yet) and VC in future.

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I was recently involved in a situation similar to yours where I was in the role of the developer. The company was just beginning to create their product, and didn't have a lot of cash.

Once we agreed on an hourly rate and the project scope, we then identified the payment terms:

  • The first 200 hours would bank a multiple of the hourly rate, in our case 3x ($50/hr * 3 = $150/hr banked, for a total of $30,000 banked).
  • From 200 to 300 hours was split between cash and a banked amount, in our case 40%/60% and did not include any multiple ($50/hr * 40% = $20 cash + $30 banked for a total of $2,000 in cash and $3,000 banked).
  • Anything over 300 hours would have a higher cash/banked amount split, in our case 70%/30% ($50/hr * 70% = $35 cash and $15 banked, for a total of $1,750 cash and $750 banked - only needed 50 of these hours).
  • The final payment of the banked amount will be paid our quarterly from 15% of the profit for the quarter. Overall I earned $5,750 in cash, and banked $32,750 that I hope to get paid over the next couple of years.

Overall it was a shared risk. They were dependent upon me to deliver the code, and I was (and still am) dependent upon them to turn a profit.

While I don't have any equity in the company, I will still enjoy a decent return for my effort since the rate was much higher than my normal rate.

All in all, I was happy to work out the deal.

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Thanks for responding; that's an interesting approach which does not directly equate the salary to stock units. -I'd read elsewhere that one should avoid tying $rates directly to stock because that effectively creates a price/valuation on the stock, which would be problematic for the company in future. – Anonya Jun 17 '11 at 19:45

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