My software startup will be launching in the next month or so. Thus far, I've been self funding and have 100% of the equity. However, I'm thinking about giving my main developer/project some skin in the game - in some way/shape/form. A big part of this is to alleviate dev costs for now and after the launch. Also to give him a more vested interest in the companies success for the upcoming year. He's been a valuable asset and is interested in talking through a potential agreement. Any advice for a possible type of agreement for the next year or so we could create?
For a technical co-founder, the minimum should be 33%. If you've been paying him, there is no way he should be 50/50 but how to determine the exact number is a calculation of a lot of variables that are impossible to answer without knowing more about your situation.
Most investors want to see a team in place (especially a strong technical team) so incentivizing the right person now might make a lot of sense.
What is standard is for all employees (yourself included) to be vesting over 4 years, with a one-year cliff. Given that you have invested cash, that should be treated differently (not subjected to any vesting) but your "earned" equity should be vesting just the same as this developer.
BUT, keep in mind that if you are only a month away from launching, you might be best to continue investing cash. After a product is validated (assuming this takes place), the amount of equity a developer should expect to earn could be significantly less than 33% and even single-digit percentages.
Happy to talk through the specifics of your situation in a call.
Is the developer outsourced? Not always giving equity boosts the moral or productivity when costs goes down. He might be interested in equity as something he earned during hard work without reducing costs of development. I think the most important question is - what type of person the main dev. is.
Maybe giving funds for dev, he might start looking something on the side waiting for right time to move to something else, with or without equity.
My advise would be to make good sense of what kind of person he is and what motivates him before making any proposals - even mentioning equity until you are 100% sure this should be put on the plate.
Check out the book, "Slicing Pie," by Mike Moyer. It provides a fair process for splitting equity based on actual contribution instead of arbitrary standards. You can download the first part free at http://www.slicingpie.com.
I would hold on to all your equity as long as you can. If you will be launching soon then you will see what the adoption in either beta or prod will be and this will affect your valuation.
Skin in the game for your dev is great but do they want skin in the game or do they just want a salary?
As a owner you cannot be thinking you are going to get paid anytime soon as every dollar you get will go right back into the business.
Talking to customers is one of the most important rules of business. However, if you do not have a product, chances are, you do not have customers. This higher level can save hundreds of hours of work and help founders build the right product. Also notice how at this stage you still have not invested time or money in product development. In fact, you should have made money through presales before investing in the product. It may cost six figures to build a scalable and solid first version but can cost you less than ten thousand dollars to design the product. Share the designs with your customer advisory board and make the necessary changes accordingly. Take at least two rounds of adjustments before you move into product development. Passive advisors and ambassadors may be willing to spread the word and share their feedback over a phone call or email every now and then but do not wish to be actively involved in product development and design.
You can read more here: https://www.forbes.com/sites/abdoriani/2019/09/10/how-to-reduce-startup-app-development-costs/?sh=6e31fc06c818
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
It's great that you're considering ways to incentivize your main developer and reduce costs for your startup. Offering equity can be a powerful motivator, aligning your developer's interests with the success of the company. Here are a few suggestions for structuring an agreement:
Equity Sharing: You can offer equity as part of the compensation. This could be in the form of stock options or shares that vest over time, ensuring the developer remains committed to the long-term success of the company.
Performance-Based Bonuses: Instead of immediate equity, consider bonuses tied to specific milestones or performance targets. This can provide immediate incentives without diluting equity too soon.
Deferred Compensation: If cash flow is tight, you might agree to defer a portion of the developer's salary until after the launch, possibly with interest or additional incentives.
Profit Sharing: Offer a percentage of profits post-launch as an incentive. This ensures that rewards are tied to the company's success and profitability.
Combination Approach: A mix of the above methods can be effective, balancing equity, performance bonuses, and deferred compensation to suit both parties.
For more detailed strategies on reducing software development costs, you might find this article helpful: https://www.cleveroad.com/blog/reduce-software-development-costs/. It provides actionable insights that could benefit your startup both now and after the launch.
Best of luck with your startup launch!
