04-27-2009, 07:58 PM
What would be a reasonable percentage of equity for engineer #1 in the following situation:
- 5 month old startup - 1 founder
- founder financing everything: wages, office rent, equipment, patents, lawyer fees etc... also doing all the marketing and business work.
- seed round not done yet
- 2 consultants working few hours per week.
- engineer #1 full time contributing to 80% of the technical work and paid 50% market rate.
04-28-2009, 01:14 AM
Depends *A LOT* on how long it will take to bring product to market and/or to receive seed money, so that the engineer will then receive full market rate.
The fair way to look at it is the simple way: How much money is the engineer losing by taking only 50% of market rate? How much additional "smarts" does this particular engineer bring to the company? Try to set a dollar value on that. Then try to set a dollar value on what the founder has brought to the company at the point where both can begin getting paid. My gut feel would be that the founder should get between two and five times the equity, dollar for lost dollar, simply because his *is* the founder.
In other words, if the engineer is out $100K by the time there is real money in the company and the founder is out (say) $300K, then using my "two to five times" rule, the founder would get between 6 and 15 times as much equity as the engineer.
THIS SITUATION IS COMPLETELY DIFFERENT than most traditional startups, where typically 3 or 4 people--one or two engineers, a biz developer/executive, and a marketer--start a company jointly. Even if one person puts up a larger share of the capital than the others, he wouldn't expect to get more than double (proportionately) the equity and maybe only the same equity (because the engineers might be the only reason the company *can* start up).
But let's face it: If the engineer doesn't like your terms, you can go out and (one presumes) find another engineer who will accept them.
I suppose the final piece of the puzzle is the most important, in many ways: What is the *likelihood* that the company will survive to actually produce a product and to generate income and/or equity financing?