Ask HN: Reasonable Equity? | Hacker News Reader

Ask HN: Reasonable Equity?

5 pointsmattm5 comments

I've been offered a deal to join two founders to help out with their software product. They run a successful small business in a niche area where I am living and have developed a scheduling and business management system for their niche that they look to sell to other similar businesses for around $100/month.

Here is the situation and offer:

- hired a company in India to develop the product

- invested $14,000 plus about a year and a half in time to get it ready (not full time as this is just a side project).

- both have never developed software before

- product is "90% done" - it looks decent but still needs those finishing touches and testing - I estimate 3 months

- offered 15% and I would need to put in money to match (but could wait until it was making money)

- would be part-time

The first founder is a natural salesman as he is very good at getting people excited in ideas and he networks a lot and has a lot of connections in the industry. He tends to be overly optimistic based on his expectations from others things we have discussed.

The second founder is good at sales but more realistic.

There is a similar competing product out on the market. From them and other people I've talked to in the industry, the people that use it hate it and many others have not signed up for it because they've heard it's crap. They have around 90 paying users at $80/month so that's $7200 in MRR. Based on that and better execution I see a possible market of maybe 300-400 users which would be $30,000-40,000/month.

I feel 15% is low since I would need to be involved in getting the product launched (and possibly even re-written based on how the code turns out to be). I did mention that I thought 15% was low and got the suggestion to come back with another proposal if I could demonstrate why a higher amount is a fair deal.

Is 15% reasonable? If I was to counter at 20 or 25%, what would I need to demonstrate to them to have that be an option?

There was a post of Joel Spolsky about equity. It can give you some ideas: https://web.archive.org/web/20131109064121/http://answers.on...

On the other hand, I’m not an expert, but if you wish to hear the suggestions from a random dude in the Internet ...

"The first 90 percent of the code accounts for the first 90 percent of the development time. The remaining 10 percent of the code accounts for the other 90 percent of the development time." - Tom Cargill

I.E. Don’t be confident that the finishing details will be easy and fast to solve.

“A verbal contract isn’t worth the paper its written on.” - Samuel Goldwyn

I.E. Get everything written. And remember that you are now a funder, not an employed.

Don’t put money, because you are not an investor. Equity is almost always worthless, the business will probably flop and you can lose your money. This is at a level of a FFF round (family, friends and fools :) ). But there is a small probability that this will be a success, so get all the equity you can, just in case. But remember that the difference between 50 and 60 millions dollars is apparently overrated.

Let’s use random numbers:

YCombinator invest ~$20,000 for ~7% equity and they are very good in the investing business, so give your partners a 5% equity for their $14.000.

They have been working in this for 1.5 year, with a standard “4 year vesting time”, that is a 15% for each one. (This is not the correct way to apply it, but it’s useful to guess a number.)

So there is a remaining 65% to split in equal parts. A 20% for you (no money added) sounds good. A 25% (no money added) sounds better, because they have already vested a part.

Try to get advice from someone with more knowledge.

Questions:

What is the relation between the current business and the software business? It’s the same company or an independent company? Will they work full time in this? How much will be their salary and yours? (I don’t want the number, only if it’s the same, or not.) Are you going to get the standard salary (~$100,000/year) or only enough to live? Vesting time? Other investor? Previous programers or partnerships?

Thanks for that quote! I will use that. Yes, I'm aware of the "90% issue" which is why I estimated three more months. They were telling me it would be 2 or 3 weeks. But I was able to look at the system in depth.

For your questions:

- they will also be using this product in their own business and want to sell it to other businesses. It is a generalised management and scheduling system. Customers schedule appointments and come in. (I identified that this is a risk for me because if we finish it but can't sell it, they still get the benefit of using it in their own business)

- this would be an independent company but I'm assuming we wouldn't draw up formal paperwork until later on

- they work full-time on their business. This has just been a part-time thing (which is why it's taken so long) and they will continue to be involved part-time (more on the sales side whereas I would take over handling all the technical side)

- no salary for anyone from this but they do get salary from their other business

- vesting time was not discussed but I would propose it for everyone based on this comment - https://news.ycombinator.com/item?id=559070#up_559211

- no other investors forseen or programmers other than if we decide to move away from the Indian firm

If you are possibly rebuilding their product because it was developed in india and neither founder has any technical knowledge i would ask for 33%. You would be their technical founder and since it is a technical product they need you. As to why a higher amount is a fair deal, they need you because they have no technical knowledge and sales experience or savvy is no good if there isn't a good product to sell. Sorry for the quick response.

Thanks for the response. I don't feel I would deserve an equal share as they are also willing to use the resources of their company (staff) for selling the product.

Researching more on HN, I feel 25% is reasonable vesting over 4 years. That would mean after 4 years, their contributing would be 50% more than mine (37.5% each). I believe they can help bring sales which would make that reasonable.

If it's basically going to be a lifestyle business and everyone's goal for the business a year out is to do little more than take checks from their mailbox to the bank, then 15% is great because the work is almost done.

On the other hand, if it's a startup in the Silicon Valley sense and everyone's goal a year out is raising Series B funding, then pretty much all the work remains to be done and equity should be evenly split and vesting on a schedule and everything else that Joel Spolsky might recommend for founding a company, because any imbalance between equity and effort will create an increasingly caustic environment should the value of equity take off.

If it's really a startup and the goal is an exit north of $50 million or something like that, then convert the cash investments into loans to the company with interest, not equity.

My last thought is that tough negotiations for equity in this situation are a bad sign. It's focused on how to divide a single pie rather than the pie factory that needs to be built. How the company got to it's current state is less important than where it is going. Good luck.

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