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WEB/DIGITAL what's fair in equity sharing?

yveskleinsky

Bronze Contributor
Speedway Pass
Jul 26, 2007
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Hi everyone,

I have been working with a computer guy in hopes of turning some of my ideas into websites. He is willing to work for equity shares, however, I don't know what would be a fair proposition. I also don't know that much about web advertising and to what extent he could effectively help me launch my idea. Has anyone launched a site using equity shares for co-founders? Does anyone have tips on how to effectively launch a site with web advertising? Should I look for bloggers? Man, you would think I'm like 90 years old with how little I know about e-commerce! Any guidance here would be helpful!
 

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kimberland

Bronze Contributor
Jul 25, 2007
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What I do is put a dollar figure on the value added by the partner
and compare it to the value of the company (after the value is added).

However, the first thing you should be asking is...
should you be offering equity at all?

I like to offer cash for a short term involvement
(i.e. any one time tasks)
and equity for a longer term partnership
(because that's what this is).

Don't have cash for the short term folks?
Then try to partner up with someone longer term who has it.

I've blogged for people on purely equity deals.
Most are structured so I get a percent of advertising
based on the traffic my individual posts pull
(and no, I've never seen a dime from it).

: )
 

nomadjanet

Contributor
Aug 28, 2007
310
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Kimber hits it on the head. What is the value of the service or product the "partner" is providing? A person that is providing a smaller value would be less of a partner and should have less say in decision making. Is your business going to take up your time in the future? Will it take up future time of your "partner"? If you have any type of partnership you need a partnership agreement. This is very important spell it all out before there is an issue and the possibility of an issue is reduced.
 

cantwait2

Silver Contributor
Speedway Pass
Aug 15, 2007
79
506
130
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Hi Guys,

I would never sell my equity, you should sell your soul before your equity...just kidding but I'm sure you get the point.

Once you've sold it you will never get it back. E-businesses aren't worth a tin of shit when they start so you are giving your equity away for next to nothing.

I would rather work every night of the week at McD's to save the money to pay the developer for what you need...or ask family to borrow the money if you back yourself on the idea.

Equity is all you have when it comes to a company and the time to sell it is when you have some real value IMHO.

Good luck all the same :D
 

Russ H

Gold Contributor
Read Millionaire Fastlane
Speedway Pass
Jul 25, 2007
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Cantwait-

Hmm . . . you've got me confused here.

If your stock distribution plan adds shares as you (the "owner" put in time/capital, then your percentage of the ownership of your entity goes up with the value of the entity.

You also structure the equity share so that you have a buy out option, for the value of services rendered, plus some fair interest rate over time.

I'm assuming you've done a few equity shares? Were you burned? I read your story (great, BTW), but don't remember reading about any equity burn ups. Sorry if I'm forgetting this (just tell me to reread if that's the case!) :smx4:

If you got burned, why didn't you just restructure the equity distribution the next time if things didn't work out the first time?

Sorry for the dumb questions. Perhaps I'm just misreading your post. :banana:

-Russ H.
 

cantwait2

Silver Contributor
Speedway Pass
Aug 15, 2007
79
506
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Hey Russ,

Maybe it's me who miss-read...I just read it as there was a proposed trade - work for equity. I didn't realise "equity shares" meant something different. If it does then hey I'm probably not the one to comment as I wouldn't know how they work.

It seems weird though that the developer or whoever is being given the equity shares would agree to a buy out option...to me that seems like they have a lose:lose offer.

If the company goes well, there shares are brought out and they get a crappy interest rate payment.

If the company flops, then they get nothing...

Always keen to learn so am keen to know more about how "equity shares" work. :)

P.S No haven't been burned, I own 100% of the companies I run and I must say I like it like that :D
 

Russ H

Gold Contributor
Read Millionaire Fastlane
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Jul 25, 2007
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cantwait-

Every corporate entity we have has shares.

If we seed $50K of capital into the start up, we start out with, say, 100,000 shares, each worth $.50 each. (50 cents x 100,000 shares = $50,000)

So if someone wants to work w/us and we offer shares, here's what we'd do to make it a win-win:

Suppose their work is normally worth $10,000.

We offer them 30,000 shares (@ 50¢ each, that's $15,000).

Once we incorporate their work into our business, the business is now worth $50,000 (our capital) + $10,000 (their work) = $60,000

So while we just gave them 30,000 shares, we also now issue 20,000 shares to ourselves (the $10,000 in value we just got from their work).

Our buy-out would be $15,000 at, say, 20% interest per year.

That's $15,000 if we buy them out right after they finish the work.

Or, we could buy them out for $18,000 after 12 months.

Or $21,600 after 24 months.

If they had enough other stuff going on so that they could afford to do the work for us to begin with, this works out to be a pretty good deal for them.

The downside (for them): If we go belly up, it sucks.

So their success is tied to ours.

All the more reason that they would want their work to be top-notch (perhaps even worth more than a typical $10K job that they do for someone else).

* * *

And as our company grows, and we invest our own time into it, we document the hours we put in at, say, $100/hr, in shares of the company.

So if I put in 2000 hours of work, I have 2000 hrs x $100/hr = $200,000 in equity shares (400,000 shares at 50¢ each).

So as the company grows, the principals (that's me, and my wife and any other equal partners) increase the value of the company-and outstanding shares-- based on the # of hours we put in.

So if we go public, or (more likely), bring in an outside investor, the $$ we take in directly correlates to the 50¢ per share value we set at the beginning.

BIG DISCLAIMER TIME:

We looked into doing this a few years ago, and decided instead to buy some cheaper stuff outright.

So while we worked out the idea in detail, and bounced it off our financial advisors at the time, we never implemented it.

Laws may have changed in the interim-- so before anyone does this, check the legality of the whole shebang with a good corporate atty.
While the above stuff makes complete sense to me, I'm not sure if I explained it well.

Does it make sense?

-Russ H.
 

cantwait2

Silver Contributor
Speedway Pass
Aug 15, 2007
79
506
130
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Hey Russ, good explanation.

I must say though that it doesn't make any sense to me at all...and that's not because of your explanation, it's the principle of it.

Here's why it doesn't make sense to me...(forgive my spelling it sucks :) )

As I see it, for it to be of interest to the developer in this case, there would have to be a nice buy back premium and a healthy interest rate as you described. But once that's the case assuming you can make a go of this idea, a year or two down the track when you are in a position to buy back the equity you would be up for nearly double the price.

In my opinion you would be far better to negotiate the best rate by shopping around (through this equity arrangement I am almost certain he will be charging a healthy rate as no real cash is changing hands) then source the funds from alternate sources.

- short term loan
- friends
- second job

In the grand scheme of things $10,000 isn't the hardest sum to source if you are confident there will be a return on the investment.

The other aspect that I struggle with is the percieved company value.

Your post has an underlying premise that a private company is worth the sum of it's share value, I can't see how that is nessersarily the case I would believe it's worth what you can sell it for or more losely market value.

You could put 10,000 hours and $100,000 into your business and issue youself shares until you are swimming in them but that doesn't mean it reflects any real value in your company. It may, by market standards be worth $10,000.

So from the developers point of view if you chose not to buy him out, you could effectively issue yourself shares untill you had eventually diluted the shares he owns down to nothing.

This is just how I see it...as I said this type of arrangement is new to me. Any equity transactions that I have even been aware of have always been on a %.
 

Inphinity

Contributor
Read Millionaire Fastlane
Aug 20, 2007
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Auckland, NZ
I can give you a viewpoint from the other side of the equation, and how I have occaisonally done things as a webdeveloper and IT consultant for startups that rely almost entirely on a web/technology presence. And I don't know if this is something others tend to do, but usually I will only work with people I like so makes it much easier. basically, if they are trying to get things off the ground, I will discuss two options with them depending what fits their circumstances. I will either do the work at market rates, payable on completion, or I will do the work at a significantly reduced rate 9maybe 25% of market rates) with an agreement on an addiitonal payment based on performance of whatever it is I have done for them say 6 motnhs or 12 months down the track. This payment usually would be around or slightly above the market rate for the work depending on circumstances. But, it means that if they can't get the funds to begin with, they can get things up and running at a heavily reduced rate, and if their idea succeeds then ending up paying a bit over market value is probably not going to make a difference. Whereas if their idea fails, I expect no further payment and they haven't lost as much as they could. It's quite difficult for me to explain in writing, and not sure if it's really relevant - thouh this sort of work for shares would seem very odd.

Maybe it will be more clear with a scenario. Bob asks for some sort of web application for his new business idea. market value to build to his requiremetns would be $2400. If Bob is someone I'd work with, I will offer to him that I'll do the work for an initial price of $600, and we will define some sort of parameters as to "success". Maybe in Bobs case he targets 500 customers in 6 months. If the site/app achieves this, and works correctly, Bob would pay an additional $2400. I end up being paid 125% of market value for my work, and I gain and am happy. Bob's idea has worked and the site/app has made him profit, and he is happy too. If, say, he's only ended up with 20 customers in 6 months, I'll waive the outstanding fee. Probably no clearer, probably an unusual way of doing things, but I find it helps people get off the ground without such a big web startup cost and gives me a more vested interest in helping them get things running - which also means I gain expereience in promotional work. We both win.
 

Diane Kennedy

Bronze Contributor
Aug 31, 2007
795
209
49
Inphinity:

As an owner, I would like your model a lot. You are helping save cash flow at the beginning and getting paid extra for taking the risk.

I'm not personally crazy about giving away equity. A partner in a business venture ends up being in your life as much, or maybe more, than a spouse does. Picking a partner based on their ability to do one task well would be like marrying someone who just does....well, maybe I need to leave that analogy alone.

Just my 2 cents - I don't ever make someone a partner when I could hire them. Forget not having enough money right now, there are work arounds (like Inphinity's plan). Being a partner is a big deal and even though it might seem a cheap way to get something done now, you're making a much bigger, long range decision by making them a partner.
 

nomadjanet

Contributor
Aug 28, 2007
310
54
26
TX
I like Russ explanation of equity sharing; I have never seen it explained so clearly & simply. I also struggle with the question of perceived value to the vendor/partner and selling away my equity. We once had a client with a situation that ended up being a real win for him and good for us also. We were plumbing a restaurant remodel back in the day when we still did work for GC. The GC ran out on the owner with his money and left all the Sub's without payment. The owner stepped up with an agreement; I will pay you 30% upfront and sign a lien contract with you to pay the remaining money within 6 months of completion. In the mean time I will give you 100% of your contract in gift certificates for my restaurant. The only caveat being you cannot sell them. You can give them away or use them yourself but if we find out you are selling them we will revoke them. At this point we were 80% complete with the job and had only received a 25% draw so we had little to lose, if we did not agree we would not get paid and if we did agree we would get our 30% plus the promise of more in the future. We accepted the offer and received the coupons. The restaurant owner was wildly successful; all the sub's gave out the coupons to clients, friends and family. They brought guests of their own, word spread like wildfire about the restaurant. The owner paid us back in full within 3 months not 6 months and we had the goodwill of hundreds of employees, clients & vendors from giving out the freebies. Although we got no equity in the bargain we all felt like owners of the restaurant with a vested interest in their success so we could get paid. :) This owner was a genius at figuring out the right answer to what could have been a devastating problem.
Janet
 

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