Ask HN: shares instead of cash when collaborating with a startup?

My friend and I startep to create a little framework for our own development needs. Luckily we met a guy who was creating his startup and was interested in our work. We worked with him and setup a server infrastructure for his needs, we (my friend and I) made an effort on the price as he was our first (and only) client and because he did not have a lot of cash.

Now he wants to work with us on the next iterations and wants us to be part of his startup (which does not have any investors yet) as shareholders. He then offers the following deal:

- He asks that we each pay €3500 to get 5% of the shares of his startup (startup with €30.000 involved at the beginning). - He asks that we give him: * the iPhone application we are currently developing (that will interact with the server we put in place in the first iteration) * the 2nd iteration of the server (improvement of the server we developed during the first iteration) - In return he will pay us €3500 each for the products mentioned above (this is a way to show us that the €3500 we paid to buy the shares will not be lost for us) - In 12 and 18 months time-frame, he will sell us some stock options for a small price (we will have to pay €500 at each milestone to get 2.5% of the shares)

=> In 18 months we should then have 7.5% of the shares each (without talking about investors as this will dilute our participation)

My friend and I are new to this kind of shareholders / partners relationship and can not really figure out if the deal offered is interesting or not. The startup is really promising and investors will probably be there quite soon but still... we have the feeling that our work is not paid enough.

What do you think of this deal ?