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We are planning for a software startup and following is our setup.

  1. There are 4 people who came up with idea. But these people can NOT code and build a product.
  2. These 4 people are also going to invest in idea from day zero for next 1 year for maintaining office expenses, salary to CEO, developers in next point(3, 4) etc.
  3. Out of these 4 investors, one of them will also work full time as CEO and withdraw a salary which will also be 60% less then his market salary.
  4. There are 2 developers who are single handedly going to build the product. Developers will get salary which will be 25- 35% less then their current market value.
  5. 4 investors also believe they have connections and understand the market which can ultimately make the product success.
  6. We will hire employees in future and would like them to stay longer term like a UI/UX developer, sales team etc.

People who came up with idea and are also investing, are not willing to make developers their shareholders, except through vesting. Is this logical and commonly followed practice or should developers also be part of core team with founders equity from day zero?

What should be the suggested way of equity division from your side?

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Why would developers take 25-35% less salary with no equity stake? If you want developers with no equity, just pay at or above market value. – TimJ♦ Jul 11 '12 at 20:22
Tim, actually 4 investors are okay with vesting equity but not with the idea of sharing it from day 1. Developers however are arguing that since there is no product and they will be sole maintainers, they should also be treated as founding members and get equity from day 1(with repurchase rights). – JohnM Jul 12 '12 at 1:55

4 Answers

up vote 2 down vote accepted

Looking at your question, it doesn't seem to meet the "fairness, or perception of fairness" point that Joel Spolsky made when answering a similar how do I divide equity amongst partners question.

Not everyone has to agree with his view, but its a worth a look.

I also agree with Apollo about the value of ideas without execution (I've made other posts along those lines) and well as JohnZ's posit that paying sub market rates to developers without any skin in the game is a big flight risk.

I would consider the gang of 4 the seed investors, with the 1 full timer as the true founder (with an understanding of what a startup CEO salary actually is, not what his current CEO salary / executive position is), and then create an appropriate vesting / cliff / for the developers (if you truly intend of making them full timers).

Looks like you have an interesting conversation ahead with the gang of 4! Good luck.

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But Jim, since there is no product right now in place besides idea and investment from 4 people, shouldn't the developers be also treated as founders? and get the equity from day 1. – JohnM Jul 12 '12 at 2:01
@JohnM valid point - but I wouldn't consider them founders. Depending on the terms of incorporation, the initial investors + exec may have different agreements / classes of stock (preferred vs common, for example). I personally wouldn't provide developers "equity" from day one - a options package with 1 year cliff then vesting would be more in line. But there are many ways to define this in a more equitable way than giving the developers no upside opportunity AND below market salaries. – jimg Jul 12 '12 at 3:30
up vote 3 down vote

Looking at the information you have laid out, even 20 people answering here won't help you. It is already getting convoluted, especially since people expect equity for having an idea, which is wroth zero without execution. There are 7 billion people in the world and I guarantee you about a thousand have the same idea right now. Only those who execute on their idea have a chance at making money.

That all said, I highly recommend for founders involved to read Founder's Dilemma. That book will get you started. Then those founding the company need to do bit more research to understand what the market is like and what you can expect to see. Several weeks invested on educating yourselves is going to pay off many times over in long term.

P.S. I have also written an article recently: "Building Compensation Package Series (part 1): Startup Equity Compensation Framework 2.0"

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Thanks Apollo. i am going through the resources :) – JohnM Jul 12 '12 at 1:54
up vote 2 down vote

So if the developers don't have shares, why would they take less than market salary?

Furthermore, when the going gets tough, these salaried developers will clock out at the end of the day. If you want them to have above average loyalty and interest in keeping the product running (crunch time at the end of the week, waking up at 3am to fix something, etc.) you're going to have a hard time finding that unless they have a significant upside (read stock) in it getting done.

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John, actually 4 investors are okay with vesting equity but not with the idea of sharing it from day 1. Developers however are arguing that since there is no product and they will be sole maintainers, they should also be treated as founding members and get equity from day 1(with repurchase rights) – JohnM Jul 12 '12 at 1:57
up vote 0 down vote

The idea itself is worth 0 in equity, so you can remove that from the picture.

What matters is:

  • Who puts the capital
  • Who creates the product
  • Who makes the sales

And these factors matter only as much as their necessity.

For example, if it 's a fully digital product, capital need is usually low.

If it 's not a complex product, the CTO as equity is less important since the capital can be used to pay for the development.

And then you have the sales issue, but you 'll be stupid to give substantial equity to people who "believe they have connections and understand the market". Har har! :D Just like the developer, their previous performances on business development is what matters here.

For the CEO, working at whatever % below his salary means nothing, unless he 's already a (successful) CEO. You don't measure performance negatively, you measure it positively, i.e. what does he bring in the table I can't find cheaper elsewhere?

Ultimately, we can't balance the above for you, because we lack the details of the start up. That 's one of the burdens of the entrepreneur. Give too little and you may fail, give to much and you 'll be a sucker.

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