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A professional colleague/friend of mine is putting together a product that is in demand from Educators and students and has asked me to join in - he has funded the wireframing of the online venture and will fund the building of the website. He has asked me, as someone who has the right "connections" to be the lead sales/implementation person and sell the product. I will use my personal connections and experience in the industry to market the online product.

He will be working full time out of his office abroad and I will only have time to work on it part-time in the US. I will not be paid a salary - but my participation and connections are important to the venture.

Key Points:

He brought up the original idea - and I have expanded on it. I am being offered 10% equity in lieu of any salary. If the product is $50, I make $5. He thinks we can sell $1 million the first year, I am skeptical of this...it is a subscription so he believes the profit will continue. I think it could be acquired if this works - but then what happens?.

He has experience as an entrepreneur and is 15 years my Senior and is managing the building and business end as well as International Sales. I have the credentials and name recognition to sell the product in the US.

What seems fair? I've never been an equity partner before and would be considered a "first employee" I guess. He offered 10% but wants me to feel compensated (ie: I think there's room for negotiation). but I want to be fair and smart about it.

Thanks

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10% of equity does not mean "the product is $50, I make $5". – DJClayworth May 23 '12 at 18:57

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In my experience, you should never accept equity as sole payment unless you are working on the project with a very close acquaintance or friend (or if you do not expect to be paid until/if the company is acquired). Most start-up equity offers will not bring any return because of the management risks involved in the launch, nor are they usually liquid enough or desirable enough to sell to another investor.

You may be able to do better by:

Come to an agreement on a fee for your work and sales commission scale-able for your future contributions and have him write you an IOU to be paid on the first opportunity in a fair year along with whatever equity offer. Make sure your fee is prioritized ahead of shareholder distributions in the case of bankruptcy or company failure, which is likely...

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Your equity should be based on your sales in the first year. Personally, if you didn't generate any sales, I wouldn't give you much equity (Time and effort deserves some reward, but no sales would demonstrate you over-sold the strength of your connections.). You may have consider the cost of running the business and how much support you're given. If your partner has to get personally involved in each of your US sales to provide technical expertise, that diminishes your role. A well-built (i.e. expensive) website may provide a similar advantage.

Ideas are important and your partner is going to want as much control as possible (Because it was his idea.), but having paying clients helps improve the idea and diminishes the risks of the early capital investment. Create an agreement that could get you up to 40% depending on your US sales volume.

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