We're an early stage start-up and we're bootstrapping, we're small but we're growing, we have our own customer base.. I started with just me, now I have 9 people in my team. However, none of them are technical. So I sought to hire a mobile app developer, now I have an idea of how much we need to spend to implement my idea, but it's too expensive and we're not there yet in terms of paying that much for an app.
I decided to approach a company and offer them partnership or profit sharing in exchange for the app. They asked for 25% equity for the first year, and 30% equity for the second year.
Now my questions are:
1. Is that too much? I have a co-founder and he has 25% of the company ownership, whereas I have 75%.
2. Because I'm still new to all of this, I'm not sure if the equity that they're talking about is entitled of ownership.If that's the case, I would need more time to think about it.
3. Do you think I would have enough to give some of my employees a share of their equity, in the future?
Thank you in advance!
Personally, I do not advise offering equity as payment for services. I agree that sometimes you have to, and I can understand offering employees equity, but it should be a last resort.
Offering Equity is akin to being stuck with someone (or people) you have no idea what his/her plans are or their level of trust, integrity etc. It can slow you down if you are tied to people who do not understand the business or have no respect for your ideas.
Also when the time comes for big decisions, you may find that you are unable to achieve this if you have the wrong people holding equity in your business.
for your Questions:
1. Is that too much? I have a co-founder and he has 25% of the company ownership, whereas I have 75%. - I think it is too much but it would depend on the value of work the company will provide and the impact of that app on your business. My advise would be to offer profit sharing and not Equity
2. Because I'm still new to all of this, I'm not sure if the equity that they're talking about is entitled of ownership.If that's the case, I would need more time to think about it. Equity is Shareholding which is Ownership.
3. Do you think I would have enough to give some of my employees a share of their equity, in the future? General Rule for me: Pay for services if you can. Save Equity for what it is best for - Investors. Some Employees deserve some form of equity but take your time to decide who. You can always offer employees profit sharing.
I hope this helps.
I will also suggest you the same as all it will not be a good idea to share equity rather hire a professional team not freelancer developer who can help you in building the app and pay them on completing each milestones.
1. It will help you in focusing your business.
2. Paying on completing each milestones will keep your app development in track and helping you focus on business simultaneously
Sharing Equity is providing partnership and as you said the business is growing so why not to share the money in app development and keeping equity
If you need any help further please do contact me firstname.lastname@example.org
Hope you found this helpfull
You may want to take a look at the book "Slicing Pie" by Mike Moyers. It outlines a dynamic equity model in which sweat equity is priced at a 2X multiplier and real cash is priced at a 4X multiplier. So, assuming no one has put in real cash so far, as a starting point you would add up all the sweat equity invested in the venture so far (each contributor's market rate * sweat hours invested). Let's say that adds up to $100K theoretical value (including the 2X multiplier). That would your pre-cash theoretical value. If you need $50K cash, then that 50K would come into the company at a 4X multiplier and would be worth $200K theoretical. Your post-investment theoretical value would be 300K. This would mean that the original founders would own 100K/300K = 33%, and the investor would own 66% for contributing $50K cash.
I have no financial incentives here, but I have bought Mike Moyers' books and LLC docs.
Do the math. How many hours of development work is required and what is the hourly rate being charged? A technical co-founder is the typical approach here and most likely the most successful. To have another company provide sweat for equity can be troublesome when the company doing the work decides it can no longer work for free and you need more development work done. Companies providing sweat for equity will usually cap the amount of hours they spend of sweat/equity projects so they are still doing a lot of paid work to keep their own businesses viable. They may also want a premium for the perceived risk they are taking, so you may end up paying more than if you were paying cash for the work being done. Understanding the hourly rate and agreeing the hours to be worked up front is an important step if you decide to go this route.
Other approach is try to find a app developer freelancer who can do in your budget instead of giving away equity for app development
One pathway could be a compromise. Offer a small (basically symbolic) portion of equity, say 1 or 2%. Also, pay a small amount of cash. Say, $1000 or $2000. Have a frank and honest discussion with the developer and let him/her know that while their services are appreciated, if they were to stay on with the company, the invitation to work with you is for an employee-level position, not a founder-level position. This is why you are confused about giving away equity. Your instinct tells you that maybe handing 25% to the designer of the app is a waste. I would tend to agree. It is a waste. You don't need to spend that much. A strong, young developer right out of college or in grad school should jump at the chance to use his skills, practice, for an amount of cash that pays one or two month's rent, and for a promise of basically free money (the 1-2% equity share) down the line. This is a fair deal. Your team conceived of the app, has done all the legal paperwork to formulate your company, built a website, and has been doing all the legwork promoting it. As the Founders, you have to pay yourselves first. Keep the large equity share. Save it for investors. You won't miss 1-2% down the line if it means you get your product to market and get lots of clients. Before you know it, you'll be on to your next project :) Good luck.
I wonder myself the same question if I could visit shark tank in any country for investors. The answer would be: do you believe in your idea but you need money? So, third party is enough for your investors cause business would bring a lot for sharing. At least I would give a bit little more if that means my idea begins to work as soon as possible, becaus my vision is seeing my baby to birth and grow
It's a bad idea to pay for services in equity.
Also in this situation, it's particularly bad. At the end of the second year, they will own 55% of the company. At which point they could if they wanted to, fire everyone including you and take everything.