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I have an opportunity that involves building a mobile application that basically improves a food industry process.

This application has a very good idea, but it is rather hard to implement, so the guy that came with the idea asked me and other 5 developers to join his team. The problem is that he can only provide us about 1.5-3% maximum of equity of the company.

We will work after work hours because all the developers (5) have a job. The project is also big, and we don't expect to launch it in the next 8 months or so.

What do you think..Is it worth it for such a low equity? We probably won't get more after we launch. The best scenario would be that we get high salaries, but even so, the owner could easily get other expert developers when the company makes profit.

closed as primarily opinion-based by Pete B., Dheer, DJClayworth, Nathan L, JoeTaxpayer Mar 13 '18 at 19:32

Many good questions generate some degree of opinion based on expert experience, but answers to this question will tend to be almost entirely based on opinions, rather than facts, references, or specific expertise. If this question can be reworded to fit the rules in the help center, please edit the question.

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    Sounds high-risk, low-reward to me. – jcm Mar 13 '18 at 10:54
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    The problem is that he can only provide us about 1.5-3% maximum of equity of the company Seems to be a greedy bloke. Why don't you all get together and ask for more equity ? – DumbCoder Mar 13 '18 at 11:00
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    This is a job and you should be paid for your labour, but 'equity only' compensation schemes are not unusual in the world of startups. Everyone hopes their app will be the next Facebook, Instagram, Snapchat etc and if it does well, you could end up very wealthy. Or, like most startups, it will fail and you will be time poorer and none the richer. – Roy Mar 13 '18 at 12:52
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    Nobody can tell if it is worth it for you except you. – DJClayworth Mar 13 '18 at 14:14
  • any business startup is about negotiating. If 3% is not worth it, negotiate a higher valuation. You have to be willing to walk away. Business is not charity. – rocketman Mar 13 '18 at 15:17
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The problem is that he can only provide us about 1.5-3% maximum of equity of the company.

If you get paid enough to do the job you shouldn't care what the equity percentage is; then you can think of equity as a bonus.

Every day many startups "start up". Statistically, most startups fail, so you should assume there is a good chance this one will too. If it does fail, then equity percentage doesn't matter, because 3% or 100% of zero is still zero.

There are obviously many factors that go into making this decision, but before you make it you should figure out how much you can get paid per hour if you pick up a side programming job, and call that rate X. That should be your baseline.

From there, if a company is willing to pay you X and also give you some equity, that's great. If they want to reduce your hourly rate by giving more equity, that's negotiable, but don't go too low because statistically the equity will never materialize. (For example you may decide it's not worth it to go lower than half your hourly rate.)

Many startups try to get people to work for free with the promise of big future payouts, but most of the time that is similar to this game: You pay me $1000 and then we'll flip a coin. If it's heads, you get your $1000 back. If it's tails, you get nothing. If the coin lands on it's edge, you get $1 million. Wanna play?

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First you should get a decent business proposal. This should list all assets and investments the startup currently has. It should also consider how much investment (time * your rate * risk-bonus = money) is required from you. It is important to clearly outline the extent of your involvment. IF you say you invest 500 hours and it is later discovered you should contribute more, you have a clear expectation to get paid more!

He can price in the Idea, but only to the extent it has currently been worked /developed on. So no napkin-drawing = $5 Mio!

This will give you a clear view of the fairness of the offer. If the Idea is sound he should also be able to get investors to pay you working full-time in exchange for your equity, so this is more a matter of preference and alignment of interests. If the professional investors stay away from it assume it is not worth as much as the owner thinks it is.

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You'd have to have some idea on how to value the company. 3% of what? Is that 3% split between the developers? Is it 3% of the app or 3% of a larger business?

From my days in the Thunderdome, the rule of thumb was that 10% of startups succeed, so basically an investor needs to be able to make at least 10x. Likewise, you need to factor that into the value of that 3% -- you need to be able to see it being worth more than 10x the value of your time that you put into the company.

Is it equity or is it options? The details of these kinds of deals are typically not very friendly, so it's worth looking into what it's going to cost you up front (tax implications or price of option execution). The payoff needs to be big enough to offset your upfront losses plus the risk.

When it comes to startups, ideas are easy -- it's execution that matters. So one thing to consider is, do you even need this guy? Couldn't you guys create the app without him? I don't intend to sound backstabbing, but rather point out that the onus is on him to be competitive. So does he bring something to the table that even remotely compares to what you could do without him? It could be he has cash from other investors, a team that's solid and executing, some patents, and some industry expertise that you all lack. Would it cost you less than 97% of your own company to replace him and everything that he brings to the table? Could be... it's up to you to subjectively evaluate.

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1.5-3% maximum of equity of the company

Is extremely low.

Even if the salary can compensate you for the low equity, what is the point? How much more are you going to make over a 1, 5 or 10 year period?

We will work after work hours because all the developers (5) have a job.

If you're willing to work after hours then you might as well develop a business and bet on yourself.

  • How do you know if it's extremely low when the capitalization of the company hasn't been divulged? – quid Mar 13 '18 at 18:19
  • The percentage is low, intrinsically. 3% of a large number is still 3% of a large number. Even if the mkt cap is large you will still feel cheated if you developed the product, nurtured it through MVP, beta and launch and then walked away with 3/100ths of the pie. – ProtoHumanCam Mar 13 '18 at 18:33
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    A ratio is meaningless on it's own. Who is contributing capital how is the capital contribution being valued? (what is the capitalization of the company) Sure, if no one has contributed any capital yet and there are only 6 people, 3% is low. But, if someone will be funding all the business expenses AND paying you AND you don't contribute capital AND you get 3% of the equity, 3% can be a lot depending on the paid in capital and your regular pay. – quid Mar 13 '18 at 19:08
  • @quid - I agree that if they are paying salary then you can't expect to take a lot of low-risk equity. However, taken that this is a second job, the person might as well either take the risk and start their own company or take the risk and ask for less salary and more equity. – ProtoHumanCam Mar 13 '18 at 22:02

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