How do I compensate for sweat equity in a software startup?

October 9, 2008 3:49 AM

How do I set up a fair system of compensation for people contributing sweat equity to a software startup?

I've got a software project that I've been doing alone for a while, learning as I go, and I've realized that with the wealth of talent where I live, I'm stupid to be trying to do everything myself--development, design, marketing. I've pitched my idea to an acquaintance who's a professional programmer, and he leapt at it, saying that he was so bored with what he was doing at work, he would love to have an interesting and potentially lucrative project to do on his spare time. If he's interested, I'm pretty sure I can attract team members with other skills. I have no money to pay anyone now, so all I can offer is equity in the company. How do I do this fairly and appropriately? What hazards does this approach present?

posted by Turtles all the way down to computers & internet (4 comments total)

Unless you get better ideas, I would honestly just convert hours to shares. Total shares is total number of hours put into the project, so folks who stick with you and keep contributing hours are at an advantage over folks who do one-offs. It sounds like there are a number of high-skill, high-expert roles you need to contribute to the project. You can make the total sweat equity shares be some percentage of the project's/asset's total value, and send out reports if/when that changes.

Maybe even assign a token dollar amount to each hour of sweat equity.

Define some payout milestones, or some formalized way to convert sweat equity shares to formal shares if you go public.

Maybe get a labor lawyer and finance lawyer to review your arrangement if you think this is going to be a valuable asset so you don't get killed by suits if someone gets pissed off later on and thinks their sweat equity is worth more.

Even if you don't do that, at the very least get an agreement everyone who contributes sweat equity signs, so you have some written understanding from participants.
posted by kalessin at 4:36 AM on October 9, 2008

I don't have a specific answer but it would probably be worthwhile to try this question on Hacker News. A lot of software startup folks hang out there.
posted by swapspace at 11:12 AM on October 9, 2008

I answered a similar question previously. Lot of other good responses in there as well.

Since the other person is the programmer and neither of you are bringing money to the table, both of you are working for sweat equity. Set milestones and tie equity payouts to completed milestones.
posted by junesix at 11:47 AM on October 9, 2008

I would also recommend reading Hacker News regularly if you are doing any sort of software startup. The commentary trends young and college-aged (and as such, is sometimes naive regarding some subjects that you'd expect young, precocious, 20-year old programmers to be naive about), but is really quite smart. There's a great community over there. The question of 'what's a fair compensation' has been addressed many times (search via google's site search).
posted by fishfucker at 7:54 AM on October 10, 2008