How do you negotiate your fee in equity?

Question

I was contacted by a startup to build an iOS app for their prototype hardware product. I quoted my hourly rate, but they said they didn't have any funding yet and offered me equity. At this point I would normally walk away, but their project sounds cool, and I don't think it would be a huge time commitment to make their app.

So what are best practices for negotiating a fee paid in equity?

One method I've thought of would be to go ahead and bill at my hourly rate, and then convert that to equity at their current valuation. I guess I would have to determine whether I thought their valuation was BS or not, and maybe adjust my own rate accordingly.

Another method would be to just do the work for a fixed percentage of the company, but that has all the problems of a fixed bid contract, I would think, such as scope creep and me underestimating the time it would take.

Answer 1

It all boils down to one thing, do you believe in the project?

Accepting equity is always a bet, because so many things can go wrong at every step of the startup way. The moment you accept, you are becoming an active part of the company as opposed to just a contractor, and you have to be ready to push the project ahead with all you can give, because your future income depends on it. Yes, it does mean scope-creep, responsibilities, long hours, and stress. But it is also be a very exciting ride and certainly extremely instructive.

If I were you, I'd estimate the time needed to build the app, multiply it by 2-3, then weigh that time against potential value of the product. You need to know as much as possible about the company, including their business plan and profit expectations. Only with a full picture in mind will you be able to make an informed decision. If their plan seems shaky, or if they do not have one, I would strongly recommend that you try to get at least some compensation. It's not uncommon to ask for low salary+equity in order to minimize your losses if the project doesn't work. If their plan makes sense, and you believe in it, go for it, and enjoy!

About the negotiation, remember that ideas are worthless, only products have value. So do not undervalue yourself just because it doesn't seem like a huge commitment at the time, you are critical to the company. Make an offer based on how many people are on board, and ask for an equal share (eg: if 4 people, ask for 25%). This gives you room to negotiate when they make you a counter offer. If they are also inexperienced and freak out, explain your reasoning and always keep the door open for negotiation.

Good luck!

Answer 2

Is there the list of hours already spent on the project? If so, You can add Your own hours into the same list. Agree (written form) with the company board members (or just CEO) on how those hours in the list will become real money. This is the simplest way I know of.

I would also say that all members of start-up company are equal in jobs they do. Entire team is necessary, so I see no reason why one of members would get less or more moeny (per hour) for the job he/she do while there is no income. Of course, members could have different level of competence, so the result would be better or worse at the end. For example, You can take not experienced programmer or experienced programmer - the final result will be different. However, start-up company has the members it has because: it cannot get better members on the board, it do not accept bad members on the board.

You could also try to buy some shares of the company. Buy shares at the current value - You will simply invest into the company as many investors do. You will have dividends later, even if You will stop working on the project. Privilege of buying shares at the early stage of the company could also be the benefit.

You could also combine those two ways (the hours list + shares), for example: Buy shares at later value instead of being paid for the hours from the list. Again, agree on such possibility before starting Your job.