I don't think you're out to make a quick buck, which is why I suggested an alternative to your plan. And, obviously, equity could end up being worth zero. The problem is, the owners of a company have to allocate equity on the assumption that it's not going to be worth zero, but instead worth a huge amount of money; else why be starting that particular company?
Your incentives aren't going to align with those of any rational founder. The people that will take you up on an offer like this are disproportionately likely to fail; the ones that succeed are likely to regret having given up equity to a nights-and-weekends contractor. Note also that this is a signaling issue; the cap table of a startup comes up pretty quickly in due diligence.
I really think giving equity to contractors is a bad idea.
Why not instead sign up for a scaled deferred compensation plan? You could ask for 2x or 3x what your normal rate would be, perhaps scaled by the startup's first valuation. You'd capture some of the upside, but not an unbounded amount, and you'd be along for the ride without the baggage that comes with ownership.
I think what I'm looking for is something fundamentally different to what that would offer. I'm looking for ownership, to be a part of the startup and assist from a technical point of view from MVP through to ongoing development of a polished product, and that justifies ongoing equity based commitment.
What is a range of percentages you might think would be reasonable for assisting with technology from MVP through ongoing development? Let's assume that you take a key role in actually implementing the MVP.
That would be incredibly difficult to put a figure to without a product to work with. For example, I would want less equity for a web application because they are generally less taxing and can be done in shorter time and therefore the contracted hours would be less. An iphone app would probably come in slightly more due to the complexities of development, testing and launch, but it really would depend on how much involvement the founder needed, the requirements of the individual project and the complexities involved. By a small percentage, I mean a small percentage :)
For example, a founder asks for help building an iphone app MVP (it's a very simple app, gives you recipies for great coffees for example) - I would probably be looking for 8-12%. This would be on the basis that he has put the legwork in to approach outside investors, has put together a reasonable pitch with backing, etc and may be expecting to sell the app 30,000 times for $0.99 within the first 18 months from launch.
Maybe for a more complex, time consuming and bigger project, I would ask for perhaps 15-18%.
As I say, all depends on the project and it's individual complexities.
Yes. The idea of giving whole integer percentage points of equity to someone who can't vest makes me nauseous.
There's three problems with your plan:
First, if the high-end of what you'd think of asking is 18%, then it seems likely that even the low end of your ask is in the founder/first-employee range. You're talking about numbers that hired CEOs get.
Second, the stake you're looking to take in these companies practically guarantees conflicts down the road; you're asking for so much that you're going to have to take an intense interest in valuation and dilution concerns. Who involves a contractor in things like that? Who gives a contractor a veto on funding or acquisition? Who funds a company that values 8% of their company so low?
Third, despite having risked virtually none of your own capital (again: evenings and weekends, divided among multiple companies), you're asking for a share comparable to what early employees who dedicate themselves to the company and take reduced salaries get; those employees, by the way, will all vest, unlike you.
I don't think this is a workable plan.
I think there may have been an interesting conversation in the 0.1-0.5% range, although my plan was to explain why it's dumb for both sides to give 0.1-0.5% of a company to someone as direct compensation for a transactional service, and how you could have made more money and made startups more happy by coming up with a clever deferred comp scheme pegged to equity valuations.
It sounds to me like you're thinking of this in terms of revenue share - a deal where you get 15-18% of revenue (for an agreed period of time) might make sense for something like an iPhone app. That's not the same thing as startup equity though. As others have commented, anything that complicates the cap table like this can make it MUCH harder for companies to raise investment later on.
Along the lines of a traditional royalty model perhaps? I could see that being an interesting third possibility, versus either equity (as monkeymeister suggests) or deferred compensation (as tptacek suggests), or just plain cash. But yes, it seems like a good fit mainly for cases like an iPhone app where you have a specific delineable product to apply royalties to, roughly like you do with books or music albums.
Agreed - this is also another option. Perhaps I've placed a little too much emphasis on the equity stake side. This would also be a great way to proceed, with a straight royalty or revenue share option for the like of a partnership agreement.
Comments
I don't think you're out to make a quick buck, which is why I suggested an alternative to your plan. And, obviously, equity could end up being worth zero. The problem is, the owners of a company have to allocate equity on the assumption that it's not going to be worth zero, but instead worth a huge amount of money; else why be starting that particular company?
Your incentives aren't going to align with those of any rational founder. The people that will take you up on an offer like this are disproportionately likely to fail; the ones that succeed are likely to regret having given up equity to a nights-and-weekends contractor. Note also that this is a signaling issue; the cap table of a startup comes up pretty quickly in due diligence.
I really think giving equity to contractors is a bad idea.
Why not instead sign up for a scaled deferred compensation plan? You could ask for 2x or 3x what your normal rate would be, perhaps scaled by the startup's first valuation. You'd capture some of the upside, but not an unbounded amount, and you'd be along for the ride without the baggage that comes with ownership.
I think what I'm looking for is something fundamentally different to what that would offer. I'm looking for ownership, to be a part of the startup and assist from a technical point of view from MVP through to ongoing development of a polished product, and that justifies ongoing equity based commitment.
What is a range of percentages you might think would be reasonable for assisting with technology from MVP through ongoing development? Let's assume that you take a key role in actually implementing the MVP.
That would be incredibly difficult to put a figure to without a product to work with. For example, I would want less equity for a web application because they are generally less taxing and can be done in shorter time and therefore the contracted hours would be less. An iphone app would probably come in slightly more due to the complexities of development, testing and launch, but it really would depend on how much involvement the founder needed, the requirements of the individual project and the complexities involved. By a small percentage, I mean a small percentage :)
Let's take the most generous interpretation of what you could want to do as a contractor.
I keep reading "percentage" and that word makes me nervous.
Understandably so.
For example, a founder asks for help building an iphone app MVP (it's a very simple app, gives you recipies for great coffees for example) - I would probably be looking for 8-12%. This would be on the basis that he has put the legwork in to approach outside investors, has put together a reasonable pitch with backing, etc and may be expecting to sell the app 30,000 times for $0.99 within the first 18 months from launch.
Maybe for a more complex, time consuming and bigger project, I would ask for perhaps 15-18%.
As I say, all depends on the project and it's individual complexities.
Making you sweat yet? :)
Yes. The idea of giving whole integer percentage points of equity to someone who can't vest makes me nauseous.
There's three problems with your plan:
First, if the high-end of what you'd think of asking is 18%, then it seems likely that even the low end of your ask is in the founder/first-employee range. You're talking about numbers that hired CEOs get.
Second, the stake you're looking to take in these companies practically guarantees conflicts down the road; you're asking for so much that you're going to have to take an intense interest in valuation and dilution concerns. Who involves a contractor in things like that? Who gives a contractor a veto on funding or acquisition? Who funds a company that values 8% of their company so low?
Third, despite having risked virtually none of your own capital (again: evenings and weekends, divided among multiple companies), you're asking for a share comparable to what early employees who dedicate themselves to the company and take reduced salaries get; those employees, by the way, will all vest, unlike you.
I don't think this is a workable plan.
I think there may have been an interesting conversation in the 0.1-0.5% range, although my plan was to explain why it's dumb for both sides to give 0.1-0.5% of a company to someone as direct compensation for a transactional service, and how you could have made more money and made startups more happy by coming up with a clever deferred comp scheme pegged to equity valuations.
But at 8-18%, I'm not sure where to go with this.
Technical cofounder
It sounds to me like you're thinking of this in terms of revenue share - a deal where you get 15-18% of revenue (for an agreed period of time) might make sense for something like an iPhone app. That's not the same thing as startup equity though. As others have commented, anything that complicates the cap table like this can make it MUCH harder for companies to raise investment later on.
Along the lines of a traditional royalty model perhaps? I could see that being an interesting third possibility, versus either equity (as monkeymeister suggests) or deferred compensation (as tptacek suggests), or just plain cash. But yes, it seems like a good fit mainly for cases like an iPhone app where you have a specific delineable product to apply royalties to, roughly like you do with books or music albums.
Agreed - this is also another option. Perhaps I've placed a little too much emphasis on the equity stake side. This would also be a great way to proceed, with a straight royalty or revenue share option for the like of a partnership agreement.