Handy to do the time zone translation, but keep in mind that there's 4 time zones here, so that's a 3 hour swing :-) I'm guessing you're assuming Pacific time - contrary to what HN might suggest, there ARE startups in the US that aren't in California. :-)
You're 5 hours ahead of the east coast, 8 hours ahead of the west coast. Being available 1-6/7pm for the east coast seems fine.
And as others have said - it's a great idea, especially given the shortage of technical talent. The biggest challenge I could see would be whether you can provide enough hours (value) for each startup, while simultaneously working with enough startups to give you the multiple pies you mentioned, and all this on top of a full time job. In any case good luck, and let us know how it goes!
Giving equity to contractors is a bad idea. Contractors can't vest, and you're effectively granting unlimited upside in exchange for the assumption of very, very little risk (he's literally promising "evenings and weekends" time) and the delivery of transactional services.
A better plan for an offer like this is deferred compensation.
Of course there's risk - very large risk. The fact I'm willing to subscribe contractually to a minimum number of hours in return for a small percentage of what could potentially turn out to be nothing should the startup go belly up. That's the fun of it - I'm along for the ride - not looking to make a quick buck.
That's why deferred compensation isn't of interest.
People who work on their own startups on evenings and weekends aren't generally considered to be taking a very large risk. People who'd do contracting for equity in other startups where there is already some traction likely less so since there is more likelihood of those startups being successful.
Also your post implies you are looking to do this for multiple startups. Not only does this kind of send a bad message that you'd not be that invested in a company you literally owned, but it also reduces your risk profile since you are trying to "diversify."
Yes, this is a valid point. It will require management and careful planning on my side. By many pies, this will initially probably be around 1-2 maybe 3 projects, and I do have a lot of time / flexitime from work. If this begins to get traction, I would consider making this more of a full time thing.
Don't startup advisors like Tim Ferris do basically the same thing? Advice/market/time for a small amount of equity? The only difference here seems to be that it's developer skills instead.
Advisors should provide connections to get your business to the next stage. Whether that means helping you land a Series A or getting you intros to business partners, it's typically worth a lot more than dev skills - which is why they can justify taking equity.
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.
Instead of thinking of it as an ongoing subscription model, it could be structured as equity in lieu of cash for whatever services are rendered. Lawyers and advisors will sometimes do this.
This should be reviewed with a lawyer, because I believe it adds tax/accounting complexity for both sides (but maybe not in UK?). Also, if we're talking common stock, this would force an early startup to balance keeping their share price low and thus paying a lot more stock for the value provided, or raising the share price (possibly too high, too soon) in order to pay less.
Edit: Saw your reply to the OP, below. I do agree that an experienced, rational entrepreneur would likely steer clear of any arrangement like this, to have a clean cap table and to avoid dilution. But of course "the right way" to do things changes over time, and there is a real shortage of technical talent. So I don't think it's crazy to see something like this become a trend.
As developers get more valuable, they get more expensive, and their rates go up. But from that it doesn't follow that 1099 developers should be paid in equity. Equity has baggage.
That would work, though the devil is in the details. The contractor would need to structure this as a loan with an interest level proportional to risk (i.e. high).
Or, if he wants some of the upside, structure it as a convertible loan. That actually may be a better idea for both parties, rather than a straight up shares for work trade.
Then presumably the founders ought to do do the same... ie. charge 3-4x their opportunity cost as "investment" into the company. Then that brings the contractor's proportion back down (to say, 10% assuming he's working quater-time and there are two other full-time founders). And then of course, his role should be substantially discounted based on commitment to the company.
Plus, using 3-4x rates would be awful when talking to investors. The opportunity/contractor inflated rates would quickly dilute any investments over time.
EDIT: I'm agreeing with tptacek. Trying to compensate a part-time contractor to get founder-level equity (eg. 10%) in proportion to "time put in" would be bloody insane!
>Trying to compensate a part-time contractor to get founder-level equity (eg. 10%) in proportion to "time put in" would be bloody insane!
I'm arguing the contractor should be compensated fairly. We're going through this entire exercise because the founders don't want to pay the contractor a market wage. So the service that is rendered should either be structured as a loan (convertible or otherwise), or the contractor is compensated with shares proportional to the amount of work under a fair valuation of the company. Don't like those options? Pay the man for the work he did. What's the alternative? Work for free?
It depends on your business model, e.g. Wizards of the Coast did it this way: They payed in stocks. One share equaled $0.50. e.g. a "drafting table" was valued 200 shares, or about $100 of fictive money. This later became $280,000 when WotC was sold to Hasbro.
Normal investors, especially the YC group who exploits kids fresh from school, think this is insane. Workers should not be payed in equity. Only rich people should become richer.
But for WotC it worked out well. I would prefer the WotC model, over accepting peanut money from YC.
Contractors most certainly can vest. A company can grant restricted stock subject to vesting to non-employees.
This is still a bad idea for a number of reasons. The most notable: the author clearly lacks all understanding of the implications of what he's asking for.
1. The author's client would need to prepare the legal documents for his equity compensation package, which could easily cost several thousand dollars. Depending on the structure of the compensation, the company might have to bear additional costs. For example, a 409A valuation can easily exceed $20,000. Please note that 409A can apply to a variety of deferred compensation structures, so your suggestion that the author seek deferred compensation is not necessarily a good one.
2. If the author wants stock options, he would only be eligible to receive non-qualified stock options. These lack the advantageous tax treatment of ISOs.
3. If the author receives stock outright with no vesting, the full value of the stock would produce immediate taxable income.
4. If stock the author receives is subject to vesting, he's going to want to look at an 83(b) election if he doesn't want to find himself in a world of hurt.
5. All of this is complicated by the fact that the author is a foreigner. The UK has a tax treaty with the United States, but he'll want/need the counsel of a competent accounting and legal professional in both countries. Additionally, in some scenarios, the author may not even be able to work with a US company. For example, he could not be a shareholder in an S-corporation, as foreign ownership of an S-corporation is forbidden.
If the author knew the burdens he was placing on his prospective clients, and more importantly himself, it's unlikely he would ever offer his services in this fashion. So as valuable as his skills and experience might be, I would argue he's doing himself a disservice by trying to sell his skills and experience in this fashion.
You could vest according to time. Although you probably wouldn't do the typical four year vest with a one year cliff in the scenario discussed here, you could easily demand that the contractor continue to provide certain services, such as x hours of support each month, to the company over a period of time (say one year). You could also vest upon arbitrary milestones (completion of prototype, launch, acquisition of first paying customer, etc.).
All a vesting schedule does is state when certain restrictions associated with the stock (or stock options) lapse.
Classification does not matter, except for incentive stock options, which are not possible here. You can grant non-qualified stock options to contractors and you can of course issue stock (restricted or not) to just about anyone.
I hate to be that guy, but part time, evenings and weekend only, remote workers who want equity and not hourly/project compensation are basically the exact opposite of the type of employment arrangement startup founders are probably interested in. I'd be happy to proven wrong but sounds like a pretty raw deal for founders, since this type of arrangement not only dilutes them or takes from the options pool (which, if they are funded, is a much bigger deal than paying the person) but also introduces all kinds of overhead and unnecessary pain in dealing with the logistics and lack of focus the employee will inevitably have.
The only time this could be a good deal is if there was a real lack of engineering talent available for hire, so I guess if you consider startups outside of the talent hubs it could make sense. But even then, if the startup is considering remote workers, this is far less appealing than a full-time, M-F, salary based employee.
I think there's some valid points in there, though I think that the cost of hiring a full time employee is often beyond the budget of an early phase startup, especially when founders and initial owners have covered most of the early work and only require an on-demand ad-hoc technical assistance or advice to deliver and support the product in the end.
>are basically the exact opposite of the type of employment arrangement startup founders are probably interested in.
That all depends. For example, if I'm an average Joe with an idea for a web-app, I sure would like someone to build it for me for 10%-20% stake. Makes sense for me, not so much for the contractor. On the other hand, a mature startup with investors, option-pools, and technical talent, wouldn't really go for something like that. Too much hassle and not enough reward.
Between those two extremes I'm sure there's some middle-ground where it makes sense for both parties.
I was initially very skeptical of this idea but then I thought: "Well, some of the money that investors would put into a startup would just go employees and other service providers - why not skip a step?"
There are definitely alignment issues and other landmines that may make this a bad idea, but at the same time, the best way to find out what's wrong with this model, how it can be improved, or how it could work in some form, is to try it out.
It'd be great if you posted a follow up in a month or two after you've gotten some traction.
In general, I like your idea :) and I've tried this route myself. Here's how it failed for me:
Outside people can rarely judge the quality of your work. If you're willing to work for free, they'll assume that your work is worthless. At least I was treated quite bad by the startup that I tried to help...
This is an interesting idea. As posed though, I don't think it is workable. As noted other places in the thread, equity for contract dev work is pretty silly.
Posed slightly differently though, he could be a technical co-founder for someone else who is also still working a day-job. Helping do bits of work for a "startup" with full-time founders does not deserve a large piece of equity. (I know the article said "small", but 8-18% as noted elsewhere in this thread by OP, is not in fact small.) Being a technical co-founder though would deserve this kind of equity or more, depending on how many people involved and what the work/money requirements were.
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[ 4.5 ms ] story [ 130 ms ] threadNot sure if that is a joke or a typo
If you ever in London, come to our office and say hi!
And as others have said - it's a great idea, especially given the shortage of technical talent. The biggest challenge I could see would be whether you can provide enough hours (value) for each startup, while simultaneously working with enough startups to give you the multiple pies you mentioned, and all this on top of a full time job. In any case good luck, and let us know how it goes!
UI, UX, design. Frontend developer, backbone experience. YC alum. SF
bp@brandonpaton.com
:)
A better plan for an offer like this is deferred compensation.
That's why deferred compensation isn't of interest.
Also your post implies you are looking to do this for multiple startups. Not only does this kind of send a bad message that you'd not be that invested in a company you literally owned, but it also reduces your risk profile since you are trying to "diversify."
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 keep reading "percentage" and that word makes me nervous.
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? :)
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
This should be reviewed with a lawyer, because I believe it adds tax/accounting complexity for both sides (but maybe not in UK?). Also, if we're talking common stock, this would force an early startup to balance keeping their share price low and thus paying a lot more stock for the value provided, or raising the share price (possibly too high, too soon) in order to pay less.
Edit: Saw your reply to the OP, below. I do agree that an experienced, rational entrepreneur would likely steer clear of any arrangement like this, to have a clean cap table and to avoid dilution. But of course "the right way" to do things changes over time, and there is a real shortage of technical talent. So I don't think it's crazy to see something like this become a trend.
Oh I'm sure the startup would prefer deferred compensation, but it makes no sense for the contractor. He'd be taking all the risk.
Or, if he wants some of the upside, structure it as a convertible loan. That actually may be a better idea for both parties, rather than a straight up shares for work trade.
Plus, using 3-4x rates would be awful when talking to investors. The opportunity/contractor inflated rates would quickly dilute any investments over time.
EDIT: I'm agreeing with tptacek. Trying to compensate a part-time contractor to get founder-level equity (eg. 10%) in proportion to "time put in" would be bloody insane!
I'm arguing the contractor should be compensated fairly. We're going through this entire exercise because the founders don't want to pay the contractor a market wage. So the service that is rendered should either be structured as a loan (convertible or otherwise), or the contractor is compensated with shares proportional to the amount of work under a fair valuation of the company. Don't like those options? Pay the man for the work he did. What's the alternative? Work for free?
Normal investors, especially the YC group who exploits kids fresh from school, think this is insane. Workers should not be payed in equity. Only rich people should become richer.
But for WotC it worked out well. I would prefer the WotC model, over accepting peanut money from YC.
See http://www.peteradkison.com/blog-entry-2-wizards-of-the-coas... for further reference.
This is still a bad idea for a number of reasons. The most notable: the author clearly lacks all understanding of the implications of what he's asking for.
1. The author's client would need to prepare the legal documents for his equity compensation package, which could easily cost several thousand dollars. Depending on the structure of the compensation, the company might have to bear additional costs. For example, a 409A valuation can easily exceed $20,000. Please note that 409A can apply to a variety of deferred compensation structures, so your suggestion that the author seek deferred compensation is not necessarily a good one.
2. If the author wants stock options, he would only be eligible to receive non-qualified stock options. These lack the advantageous tax treatment of ISOs.
3. If the author receives stock outright with no vesting, the full value of the stock would produce immediate taxable income.
4. If stock the author receives is subject to vesting, he's going to want to look at an 83(b) election if he doesn't want to find himself in a world of hurt.
5. All of this is complicated by the fact that the author is a foreigner. The UK has a tax treaty with the United States, but he'll want/need the counsel of a competent accounting and legal professional in both countries. Additionally, in some scenarios, the author may not even be able to work with a US company. For example, he could not be a shareholder in an S-corporation, as foreign ownership of an S-corporation is forbidden.
If the author knew the burdens he was placing on his prospective clients, and more importantly himself, it's unlikely he would ever offer his services in this fashion. So as valuable as his skills and experience might be, I would argue he's doing himself a disservice by trying to sell his skills and experience in this fashion.
All a vesting schedule does is state when certain restrictions associated with the stock (or stock options) lapse.
Classification does not matter, except for incentive stock options, which are not possible here. You can grant non-qualified stock options to contractors and you can of course issue stock (restricted or not) to just about anyone.
The only time this could be a good deal is if there was a real lack of engineering talent available for hire, so I guess if you consider startups outside of the talent hubs it could make sense. But even then, if the startup is considering remote workers, this is far less appealing than a full-time, M-F, salary based employee.
That all depends. For example, if I'm an average Joe with an idea for a web-app, I sure would like someone to build it for me for 10%-20% stake. Makes sense for me, not so much for the contractor. On the other hand, a mature startup with investors, option-pools, and technical talent, wouldn't really go for something like that. Too much hassle and not enough reward.
Between those two extremes I'm sure there's some middle-ground where it makes sense for both parties.
That depends on who is managing the remote workers :-)
There are definitely alignment issues and other landmines that may make this a bad idea, but at the same time, the best way to find out what's wrong with this model, how it can be improved, or how it could work in some form, is to try it out.
It'd be great if you posted a follow up in a month or two after you've gotten some traction.
Outside people can rarely judge the quality of your work. If you're willing to work for free, they'll assume that your work is worthless. At least I was treated quite bad by the startup that I tried to help...
Posed slightly differently though, he could be a technical co-founder for someone else who is also still working a day-job. Helping do bits of work for a "startup" with full-time founders does not deserve a large piece of equity. (I know the article said "small", but 8-18% as noted elsewhere in this thread by OP, is not in fact small.) Being a technical co-founder though would deserve this kind of equity or more, depending on how many people involved and what the work/money requirements were.