Compensation · ESOP

Compensating an early stage developer

Anonymous

Last updated on September 23rd, 2020

Long time reader, first time poster. Hoping to gain some insights into the right compensation for an early stage Senior developer.


Back Story

I am the sole founder of a SaaS FinTech startup. I work full time in the business (no salary), and I have engaged the services of a UX designer and a Senior developer.


I acquired a financial application earlier in the year which we commercialised as a proof of concept. It earns a nominal amount with an ok customer base. I am now looking to extend the product with a web app which I will use to then raise funds.


I used a senior developer to assist with the commercialization of the initial product. And in return for his services (about 3 months' worth of part time assistance), we agreed to 10% equity.


Current Proposal

i have approached the same senior dev as I was pleased with his quality, to complete the web app by himself.


his proposal is the following


He is seeking +30% equity (taking him to a total of 40%) and in return:


- He will work part-time (maximum 20 hours a week as he has another job) up to a maximum of 6 months

- During that time he is comfortable in being the tech lead and developing the web app and bringing it to production.


We have agreed that the current value of the company is $200k based on an existing product, current customer base and current earnings.


Comments / Questions

- My initial reaction to 40% total is that it’s way too high for a part-time senior developer who has a 6-month end date.


- A mentor of mine did suggest we should look at more of a buy-in approach, where he earns a deferred salary which he can then use to buy more equity. I proposed this to the developer and he came back saying he would take $8K per month ($200k pa part-time) and then use the deferred salary to buy 20% instead (total 30%) with the remaining deferred balance paid once we raise capital


- If we did the deferred salary approach then should I set up something similar for myself snice I don’t earn a salary and the equity offer to the developer is coming out of my share?


Anyways, I’m a little lost how to approach this one. Any help or ideas is much appreciated. Thank you.

Jett T. Angel investor, startup advisor, entrepreneur, ideator, engineer, published author, producer, ...

September 23rd, 2020

Your developer is asking for way too much. There's just no way that a part-timer should acquire 40% of your company this way. For that reason alone it's definitely no. And what happens after those 6 months? Does he stay on?


There's much more to say. Not going to type out my entire rationale but DM me if you'd like to discuss it in more detail. I'll do it on the house cause I would hate to see you make what looks like a very big mistake.

David M

September 23rd, 2020

You need to be vesting shares regardless. But you also need to ask yourself what the developer is bringing. Look to exchange of value. He appears to be approaching this not as a startup venture. Equity is worthless if the company is not brought to a success and sold at some point. If it were me, I would offer him a percentage of sales. Not understanding the 6 month element. The other issue is whether or not he sees himself as a cofounder, and whether you see him as a cofounder. If your company has no success and can not move without him, guess what...he is a cofounder. If he does not want to see himself as one then he is asking for way too much. If you do not see him as a cofounder but he does, you may be shorting yourself if you find someone else. Regardless, you don't want to "give" anyone equity, and for anything beyond 10% I would want to make sure that person is bringing real value present...and future....and one way you achieve this is through vesting.

Thorsten Lorenz CoFounder CTO

October 1st, 2020

It is difficult to tell with the information you provided. Still taking it all together, 40% for a part time seems a lot to me. Others already mentioned some things that would matter that, in the end, come down to how involved that developer is in the end. Is it a job or is he looking forward to become a full time co founder?


Full-Time is the key. I am into tech myself. I would even accept a co founding role for 30-50% without additional payment for an early stage start up for some time. Note that this would be a risk for everyone as no one knows what the state will be after the initial period of 2 to 6 months. I would expect to own part of the company for my engagement.


Taking 200.000 split by 3 makes 66.666 or 11.111 a month. Depending on your location, you can get a local full time contract developer for that. A new developer would have to be on-boarded and not be as effective from the start. It may not work out with a new team member which is a risk you'd have to take.


Get in touch if you'd want more advice - since you are anonymous, i can't.

Mister Ed CEO / CTO / CPO / Software Dev / Product & Project Management / Ecommerce / InfoSec

September 25th, 2020

I've dealt with numerous cases like this (consulting, my own, advising, etc). If the dev wants equity, but wants 40% after the new work, is he expecting to retain 40% for life? No way to honor that and build a viable business that can scale and grow. Such an agreement would complicate things when more investment (cash or sweat) comes into play, and especially if you decided to look at VC or angel investments. Plus would you want to continue paying the dev 40% 20 years from now after 27 new iterations of the software and 10 new revenue streams are added that had nothing to do with what was developed by this person?


I would suggest you look at Slicing Pie by Mike Moyer. It helps decide how to split something of unknown value (technically no value), and keeps balance with further time, money, assets invested into a company/project. They grow or maintain their slice, but it grows smaller if they cut time invested. They even lose it if they totally leave (unless you agree otherwise, but their share decreases over time).


Here's a video presentation at Stanford a few years ago: https://slicingpie.com/equity-splits-at-stanford-university/

Matthew Mansour Technical CoFounder

Last updated on September 29th, 2020

I think a buy in approach for him makes sense for that much equity if there's an end date.