Equity deal?

[chuckkarev]

Hi indies!

I provide software engineering services for companies. My standard rate is 120$/h. I'm posting here because 1- I want to start creating bootstrapped products; 2- the one below I could see myself being involved in.

Last week, a new lead offered to find a deal that might cost them less per hour, but that could be compensated with a certain amount of equity. The company is starting up, has a few clients - mostly manual, but has partially started a few of them on the new platform. The company is a 1-person founder - which so far I connect well with - and he's been contracting 1 dev.

What is a good potential deal to propose them, i.e. a good hourly rate + equity %, maybe? What pitfalls should I avoid?

E.g. He mentioned equity as stock options, but I seem to remember reading/hearing that short of _real_ equity, it's not so much worth it.

Appreciate your help!

 

[adamadam]

@chuckkarev Hey! I'd say that its not necessarily a bad thing, it ties you to the project for later work, and of course give you exposure to the upside of their potential success, but if it goes south, it can also be a massive waste of time and resources, it'll all depend on one negotiating point - What is the company valued at?

You'd need to first negotiate their start ups valuation and figure out what % of the company you want to own based on your time.

So for example, if the company is valued at $1,000,000, and you give a 50% discount on your fee in exchange for equity, you just need to figure out how many hours the project will be and then multiply it by the discounted rate (50% of $120 = $60). So say the project is 200 hours, you're looking at (60 x 200 =12,000) which is a (12,000 / 1,000,000 = 1.2%) stake in the company.

So its in your interest to negotiate their valuation as low as possible, and if they're still picking a team, or are pre revenue, you may want to look at significantly lower than 1m.

With that in mind, I would just say from experience, be wary of going below 50% for a fee discount, particularly with a non-technical founder. Once they see you as a resource that wont incrementally cost them for every small idea that comes to mind, you'll find yourself doing way too much work.

I'd also say it's a particularly good idea to split equity/cost if you're not incredibly busy or need a larger funnel in the future. Start ups iterate a hell of a lot, and if they get funding/ revenue, you'll be in pole position for all that work

 

[chuckkarev]

@adamadam @adamadam that's super helpful, thank you!

So if I understand correctly, in the end what I would want to shoot for is

[the discounted charge amount planned, no matter the %] / valuation = [stake requested]

correct?

and I guess, if we end up doing further work (than the initial amount estimated), then equity could keep rising in the same manner (until, say, a given cap).

What do you think about stock options vs actual stock? Does it matter?

I'm asking because - if it's options, wouldn't I need to then spend exactly the amount I just received to actually have own the equity and make it worth it?

i'm such a newbie again thanks!

 

[adamadam]

@chuckkarev No problem - I was new at this once too and it's hard to find info on it!

That's correct! In the future, it will also be easier to negotiate for further paid work than a higher bump in equity but if you lay out some ground rules now with them for future work, you definitely won't regret it.

In regards to options vs stock, I'd agree with what you read, actual stock with few conditions attached is the best way to go. I haven't really seen stock options being used in a situation like yours, I think they're usually for companies that are easier to value (later stage).

On that note though, even regular shares can contain conditions/ moving goalposts that could result in you being screwed out of your shares when conditions change in the business.

Usually this kind of agreement will contain vesting periods and cliffs (this is standard and there's probably some good info online on how they work). The key document here will be a shareholders agreement. It will be up to the start-up to have one, and I'd recommend having your own lawyer look over it before signing it. I've had friends who ended up with 0 shares because of some shitty clauses in shareholders agreements. If the start up is too early for a shareholders agreement just draft a simple document that gives you shares in the company (preferably) immediately or with vesting!

(Definitely recommend speaking to a lawyer though if it looks like it'll go through - good luck!)

 

[chuckkarev]

@adamadam So helpful again. I've outlined a first proposal based on your advice.

Thank you so much! It made it really easier to have this starting point. Hopefully we find an agreement