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RANT How to structure introduction of new partner?

TreyAllDay

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Hey All,

First off, thank you for any help. I would appreciate some feedback on my proposed structure for introducing a new partner to my business. I set off to create a "Create your own intranet" software last year that was showing HUGE demand, however I have 2 problems: I coded it terribly, and I tailored the service to my two biggest clients needs, which ended up making it a bit un-scalable and difficult to use for clients who just signed up via the internet - I am bringing on a ton of trial customers but losing them hand over fist because it is not as easy as advertised.

I have determined the software needs to be rebuilt from scratch and placed in a separate legal entity. I want to bring in a coder I've known for years who would be absolutely perfect, and is interested. However, he's not just interested in money, he wants some skin the game and to be part of something significant but lacks the marketing/business skills. Here's my proposed offer:

- Offer him $5,000 to recode the basics from scratch so I can get it back on the market. (200 hrs at $25/hr).

- I'll continue to sell the new service as part of my current legal entity, however once we achieve $1000/month, I will place the service in a new business entity and give him 7.5% equity and I will look after all marketing, legal, incorporation, accounting, etc. This allows me to run the experiment of seeing if the new version will sell, without having to commit anything.

- Once we hit $3,000/month I will hire him as CTO at around $30,000/year which I don't believe he is making much more than now as a coder.


Any feedback, things I am missing? Can these stipulations be even added into an agreement he signs? If it is relevant, my current version of the software is netting $130,000 per year, however only among 4 large customers.
 

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eliquid

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I see lots of issues here, but I have a question first.

What kind of coder is he at $25 an hour, or making less than ( currently ) $30k a year?

Is this some type of remote developer in an Asian or small European nation?
 
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TreyAllDay

TreyAllDay

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I see lots of issues here, but I have a question first.

What kind of coder is he at $25 an hour, or making less than ( currently ) $30k a year?

Is this some type of remote developer in an Asian or small European nation?
Thanks for your question! Nope hes from Canada, I've known him for about 10 years. Self taught, and was doing labour and working with a few companies over the last few years. Best programmer I know and we started a few small businesses back in college that went under.

He just took his first actual "job" coding last year as an entry-level front end developer at a creative agency, and I don't know his salary but I know that role in an agency typically only pays between 35k - 45k a year which ends up being between 17-22/hour. I know he could use the upfront money, and is very sick of agency life so would take a pay cut to do his own thing if we got to the salary stage.

I'm relatively flexible though on the contract/salary or equity as at this point it's like I'm losing thousands of dollars losing customers.
 
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JScott

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I see lots of issues here, but I have a question first.

What kind of coder is he at $25 an hour, or making less than ( currently ) $30k a year?

Is this some type of remote developer in an Asian or small European nation?
This was going to be my question... If he's even a half-decent, semi-experienced developer in North America, he should easily be making six figures these days. If he's really only making $30K as an entry-level developer, he's probably not as good as you think he is. I would set very specific goals before offering him equity or anything else of long-term value.
 
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TreyAllDay

TreyAllDay

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This was going to be my question... If he's even a half-decent, semi-experienced developer in North America, he should easily be making six figures these days. If he's really only making $30K as an entry-level developer, he's probably not as good as you think he is. I would set very specific goals before offering him equity or anything else of long-term value.
Damn I had no clue devs made that kind of money. Highest paid dev I know working for someone is making like $52k.

It seems like there are a lot of talented self taught devs out there and if they aren't operating their own business or contracting they'll accept a lower paid entry level position and will have to do it for years if they have no " work experience" and especially if they don't have a degree

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Damn I had no clue devs made that kind of money. Highest paid dev I know working for someone is making like $52k.

It seems like there are a lot of talented self taught devs out there and if they aren't operating their own business or contracting they'll accept a lower paid entry level position and will have to do it for years if they have no " work experience" and especially if they don't have a degree
A developer with no work experience and no degree likely isn't a very good developer. There are lots of intricacies when it comes to writing efficient, scalable and secure code that are VERY difficult to learn without actually working in a place where you can see how professional code is written and without having the opportunity to work with senior developers who review your code and teach you the tricks of the trade.

It's kinda like trying to write a novel having never taken an English class or having read a real novel.

That said, it can be very difficult for someone who is not an expert to look at code (or to look at a finished product) and to determine whether that code is efficient, scalable and secure. It's easy for a product (and the the underlying code) to look great before it's really stressed -- only once it's stressed will you know if the code is truly was written well.

For reference, the least expensive freelance developer I have on my current project makes $35/hour. He's in Italy and is the equivalent of what would be a developer with about 5 years of experience in a corporate technology environment. If he moved the US, he'd probably be making $80-100K/year.
 
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TreyAllDay

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Hmm. Given that he's experienced enough and I work out a liveable salary; any feedback on the incorporation at 7.5%?

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JScott

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Hmm. Given that he's experienced enough and I work out a liveable salary; any feedback on the incorporation at 7.5%?
Why would you pay him $25/hour (a rate that seems commensurate with his current earnings) *and* give him equity?

Personally, I'm not a fan of providing equity for one-time tasks -- that's simply not scalable.

I prefer to provide equity for things that I wouldn't be able to achieve otherwise. For example, a partner who had connections within the industry; someone who has previous experience in the industry; someone who has access to capital or resources; etc.

Now, if you were to provide the equity as part of hiring him for CTO position, that makes more sense. Assuming he would be better for the CTO position than anyone else you could find. Then he is providing a long-term benefit to the company. Though I would still structure the equity offering on a vesting schedule over one to four years to ensure that he's providing that long-term value for the equity.

Not to belabor the point, but are you sure this guy is a good fit for CTO? I see too many people willing to partner with technical friends because it's easier than actually searching for the best candidate. Then, when they find that their friend isn't the best person for the job, they are screwed on two fronts -- they gave their friend both responsibility *and* equity, putting them in a very difficult position.

This is the same reason I tell real estate investors not to partner with contractors. If you have to fire the person as the contractor, you're doubly screwed -- you have to pay ANOTHER contractor *plus* you still have to give the contractor/partner a percentage of the profits. Lose/lose for the investor.
 

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Fixed scope, lump sum for the update.

If he proves himself, then talk about the future. Don't over promise for him to under deliver.
 
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TreyAllDay

TreyAllDay

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@JScott

Well you've given me a LOT to think about lol. I really appreciate the feedback! This is really a tough choice. There's 2 sides of it

1) I do believe he's technically adequate, at least for initial scaling. I've proven there is a need for the service and am losing time and opportunity every day on it. However, I still have a lot to learn and assume this won't be my "final" version anyways, so obtaining someone with his experience and attitude that I know and trust, at a reasonable rate would be difficult. I could double up and pay him $10,000 for example and not give him the equity, but he's just not interested in the money, I think he'll be more motivated if he has some skin in the game. And he has experience

2) Giving away equity is dangerous. If things don't work out, as they sometimes don't, I'd have to buy him out I suppose? But really, at 7.5% what is the danger there? He might have claim to 7.5% of net profit? What does equity really entitle people to anyways?


@ZCP I think you have a point. Think I just need to find the balance of keeping him satisfied on the lump sum cost and then make him prove himself for the equity. Question is... can I dangle that carrot in front of his face without "promising" anything.
 

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JScott

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2) Giving away equity is dangerous. If things don't work out, as they sometimes don't, I'd have to buy him out I suppose? But really, at 7.5% what is the danger there? He might have claim to 7.5% of net profit? What does equity really entitle people to anyways?
What does equity entitle people to? It really depends on your Operating Agreement and/or Shareholder Agreements. It most likely entitles him to 7.5% of any distributions made by the company and/or 7.5% of the net income if the company is sold and/or 7.5% of the net income from IP/licensing/etc.

As for buying out that 7.5%, what does the Operating Agreement say about that? Can you do that unilaterally (I wouldn't accept equity with those terms)? What is the value of the equity pegged at? Do you need any appraisal of the company? Do you need to have a verified offer from a buyer?

If you think the company has serious potential, I would highly recommend getting an attorney involved before you start handing out equity...especially if your plan is to potentially buy back the equity at your discretion (it doesn't typically work that way).
 
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TreyAllDay

TreyAllDay

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What does equity entitle people to? It really depends on your Operating Agreement and/or Shareholder Agreements. It most likely entitles him to 7.5% of any distributions made by the company and/or 7.5% of the net income if the company is sold and/or 7.5% of the net income from IP/licensing/etc.

As for buying out that 7.5%, what does the Operating Agreement say about that? Can you do that unilaterally (I wouldn't accept equity with those terms)? What is the value of the equity pegged at? Do you need any appraisal of the company? Do you need to have a verified offer from a buyer?

If you think the company has serious potential, I would highly recommend getting an attorney involved before you start handing out equity...especially if your plan is to potentially buy back the equity at your discretion (it doesn't typically work that way).
Thanks man. Can't express how helpful this is!

I'll likely consult my attorney on this. To be honest - I don't know if it has potential, I just know I have seen signs that there is a big need but it's still a huge gamble for me to invest my own time, or to pay $25,000+ to have it re-coded by someone else. If he'll take the upfront cash plus opportunity for equity if we reincorporate after hitting X sales, I get to run the experiment cost-effectively, and my risk is I am giving away a small piece of equity to a new business with almost no sales. Seems like much less of a risk.

Thank you for your help!
 

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