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I'm looking for opinions on what you would expect the equity distribution to be in this scenario:

Person #1: Came up with the idea, left his job 1 year ago & went unpaid for 6 months, filed patent. Raised $1M in angel investments before hiring anyone (investors own 1/3 of company). Non-technical, sales-oriented, has good industry connections which will be important in this business. Spokesman for the company.

Person #2: CTO & principal software developer, excellent domain knowledge. Comes highly recommended. Responsible for hiring new developers, visiting clients. Was brought in 3 months ago, created proof-of-concept prototype. Hired with a salary which is somewhat under market (say 25-50k under). Invested cash in the company (say 10-30k). Will be major contributor to coding on version 1.0.

Person #3: Principal developer, good domain knowledge, also highly recommended. Worked on trial contract basis for 2 months, just recently hired full-time. Hired with a salary which is somewhat under market (say 20-30k under). Will be major contributor to coding on version 1.0.

It's likely that there will be a few (2-3?) more technical hires in the first year to help create version 1.0 and launch the product. Based on angel investment & equity stake, company value is estimated at $3-4M.

All opinions welcome, I am interested in hearing honest, unbiased opinions. Everyone involved has expressed an interest in doing what is fair.

Thanks!

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2 Answers

up vote 2 down vote accepted

First and foremost, I'd recommend going through this: Forming a new software startup, how do I allocate ownership fairly?

It's a complicated matter. For example, Person #1 should get some compensation for the unpaid work (assuming he was working and not chillin' on the beach). However, consider giving him debt, not equity to balance that out.

Person #2 put in some cash where person #1 did not. Although you could consider the commission he did not take for finding the angel investors (assuming he did not engage someone who did take a commission for that work). Also, consider giving him debt to bring his salary (though some would be unpaid) up to fair value.

In general, I would consider #1 the founder. I would consider #2, #3 and the other 2-3 mentioned as the next layer (referring to the above link).

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Thanks for your answer. I have read Joel's article before, it was interesting. So it sounds like you would say that person #1 is the one and only founder who should end up with about 50%? And person #2 and #3 (and maybe #4-5?) would be part of the second layer who would share around 10%? – boston123 Sep 13 '11 at 19:34
Yes, I would say that but it depends on how much work was actually done. He did file a patent, which may be important, and raised money (certainly important). That effort deserves a bigger chunk than someone coming in late in the game. However, as we say, the devil is in the details. Without knowing everything, I might be off base but that's my $0.02. – John Sep 14 '11 at 6:35
Who owns the patent filed? If he owns it, has he granted an unlimited, perpetual license to the company for use? – bwasson Sep 14 '11 at 15:47
up vote 2 down vote

If the developers are getting paid, they aren't sharing the risk of the business as heavily as the founder is (person #1). Therefor they shouldn't receive as high of an equity stake. For my company, the two founders split around 50% of the company, investors hold around 40%, and our developers hold the rest. 4-5% equity is pretty standard compensation for software development. Keeps your programmers happy and motivated, because they know if they develop big money software, they will be rewarded in the end game.

If they complain, I just remind them that at a non-startup company, they might make a little more in salary, but they don't share at all in the success of their intellectual property.

Work hard to keep your programmers happy though. There are cheaper ways than equity to do this. Soda, and a good working environment are pretty inexpensive in the long run.

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Hi, thanks for your answer. I appreciate the idea of motivating the developers. From what you are saying, it looks like the remaining non-founder and non-investor equity (10% in your example), all developers would split up about half (4-5%) of the remainder. Does this change for developers who get in earlier than others? How much would you say the equation would change if the developers were working for sub-market pay? – boston123 Sep 13 '11 at 23:10
Sorry, one more question. Would you expect the pay difference to buy equity at a similar "rate"? In other words, if an investor recently got 2% for 50k, would a developer working for 50k under market expect a 2% equity bump? (#s not real but you get the idea) Thanks again. – boston123 Sep 13 '11 at 23:11
We have a set dollar value of equity we distribute to our developers, and that is based on our internal valuation of the company. So if we set this at a $14,000 value, and the internal valuation share price is $.79 per share, we would include 17,721 shares in the developers compensation package. Doesn't really relate directly to a percent ownership in the company, but to a dollar value you want to give. – bwasson Sep 14 '11 at 15:46

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