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Yet another equity sharing question, because I couldn't find a similar one that matches my exact scenario.

So I have this start-up, and my product is already live, getting great reviews, media coverage, user feedback, business offers, job applications, etc. Lots of exciting potential but no revenue yet. To date I spent around $11K on it, by hiring contractors for UI/UX, programming, and PR.

Now I want to bring some of those people to the fold to improve the product and do even greater things. What should I offer them at this stage, as I have no more cash to pay them with, and they were all paid for their previous efforts from my pocket? At this time none of us will be able to work on it full time, including myself, as we all need to feed ourselves somehow with side projects until we secure funding.

I feel I took all of the risk up to this point by paying everyone else, and the product has proven it's worth with all the favorable feedback, and many people want a piece of it. At the same time I don't want to come across as too greedy by offering too little. I like the vesting idea but I don't know what percentage to offer. Any thoughts?

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1 Answer

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You have to place a valuation on the company, and a valuation on what these people contribute/add going forward.

Simply speaking in terms of percentages doesn't work. "5%" sounds like a nice number, but if the company is worth $10, then 5% is worth nothing. If the company is worth $10B, then 5% is WAY too much.

Also, if you give shares outright vs. granting options, then you have effectively paid these people with a sort of currency, meaning they will most likely owe taxes on this. Or, in others words, you've in effect given them an IRS bill for the privilege of working for you.

IMO, in a case like this, equity is rarely a good proxy for actual cash. You will likely run into unknown legal issues (either now, or in the future for your company) if you handle the paperwork wrong or make stock grants that could potentially allow these people to group into a controlling interest of any kind. It would be highly unwise (again, IMO) to proceed without the services of a proper attorney or lawyer proficient in these things.

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Thanks for your thoughts, Brian. A lawyer will surely be involved in that process. I am also toying with the idea of their work accruing a convertible loan over time: i.e. they keep track of the work they do and treat it as a loan they have given me that adds up over time, convertible to shares under certain terms. Do you know if there are any examples of this? – CMonster Nov 18 '11 at 0:24
Yeah. Sorry - this sounds lkike "I seek for idiots" too much for me to be comfortable. Especially when converting into a loan basically they gie up the upside for still having the risk - worthless crap. – NetTecture Jan 17 '12 at 9:58

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