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Forming a new software startup, how do I allocate ownership fairly?

We have a team made up of four co-founders. Our equity split is:

Co-founder #1 40%

Co-founder #2 5%

Co-founder #3 15%

Co-founder #4 20%

Employee Equity pool 20%

Co-founder #4 is the only technical member of our team, and he could really use some help from a designer. We are boot strapping and pretty much cash poor, so we are looking at creative ways to compensate a designer. We do have a designer that is very interested and wants to be involved. The following are some ideas I have had for compensation, but before I approach him with these offers, I want to make sure they are reasonable and fair. My goal is to build a team, and I want him to be happy. Please advise on the options below.

  1. 5% equity. With this option he would donate his time (part time, 10 hrs a week) to the business. He would be given a salary at the time of funding, or when we become profitable, and also come on as a full time level one employee.

  2. 3% equity. With this option we would offer him a deferred compensation, and a full time position when funded. He would be paid "back pay" for the hours (also part time) he put in during construction at the time of funding.

  3. 1% equity. With this option we would pay him cash as we go at say 50% of his normal hourly rate. He would have the option to keep his 1% equity and not join the company, or join the company at 2%.

Are these offers in the realm of feasibility, or am I way off base? Any suggestions or input would be greatly appreciated. Thank you very much!

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What is the role of Co-founder #1? – frenchie Oct 20 '12 at 1:11

marked as duplicate by Zuly Gonzalez♦ Oct 20 '12 at 16:39

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Before I give you help with your question: In general its a bad idea to have more than 2 co-founders. It can work out, but if your business becomes really profitable, you will have hell of politics.

Now to the question: If you want to give him equity, consider first if he is a superstar designer or not. If not, it will hurt you in the long run, when you see that he is getting a fair amount of money, but his performance is poor. And if the time comes you can afford better people, you are trapped with him, he will become a bozo. Instead of equity you should consider to give him just profit-share + salary (if possible). Anyway, 10 hrs a week is nearly just one day in a week, which means 4 days in a month. Im not sure, if thats enough.

All in all I would be very reluctant to give people equity too easily. I would always first try other ways like the mentioned profit share (5% of the profit at the end of the year) + salary once there is enough cash-flow. But keep the option to cancel the relationship without too much legal problems. After say a few months or a year, when you could get a sense of his performance and his commitment, you can consider equity. This way you are on the save side.

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