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What is a typically % of equity to give a potential 1st employee?

I have started a company with a cofounder and we have an idea for a project management application somewhere in the realm of Basecamp but with a different focus.  I have worked at several web forms and internet companies in the past (AOL, and Monster).  We are trying to take the concept from ideas on paper with requirements to standing up a minimum viable product.

We are at a crossroad where we would like to bring on a technical person to do the development side of the work, and need to figure out how we would compensate him for future sweat equity.

Is there a ball park average of what % you would give that first employee?  We would be willing to give up equity for the right person but is there an average range for the first employee.  If we get a junior to Mid level developer we do not want to pay as much as a senior person.  If we found a “hot shit” senior developer we would obviously pay more.

What have some of you all done when bringing on the 1st real employee?

  • Since the developer is joining pre-product and pre-revenue, we’re really talking about a 3rd cofounder, not a regular employee.

    Why should the developer take an offer below market salary, without benefits, in exchange for equity that isn’t worth anything yet?

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    • He gets inside scoop into their idea, then he can accept the offer or bail.

      It’s all a gamble. We all know this.

      Reply

    • Can we get over this ego-driven (co)founder BS already? If the company has already been established before you join (regardless of what pay pkg you end up negotiating), then you are not a cofounder.

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    • I think the “What’s in it for them” part of the comment would be the ability to be part of a project that I am sure will have traction. We have implemented this product in a scaled down version at the last 5 companies, and this would now take this to the web.

      They could be part of an idea that they can help put the stamp on and build something. I am not really interested in having them run the product, and looking at them as the expert on coding, not the SME for the product.

      Reply

  • A first employee may have around 1%. It should be considered an incentive, because an employee is payed a regular salary based on her market value.

    If you don’t think this “employee” needs a normal wage and you intend to pay in equity, then you are not hiring: you are looking for your technical co-founder. Every startup needs a technical co-founder (except if you have already raised a few millions to hire a team of top level employees). A tech co-founder will typically have 25 to 60% equity, based on what other co-founders put on the table.

    Last but not least: beware of wannabe tech co-founders who would join for low equity. Those ones are probably not worth any equity. At a bare minimum, they are naive, and a startup doesn’t need a naive co-founder.

    Reply

    • Not sure I would ever give them anywhere near 25-60%. I am only looking for a tech person to help build the initial product. They will not have control of all tech decisions, they will not control the direction of the product, they will not run day to day operations.

      Now if we were to get an AMAZING person then we may be open to a larger percentage, but no where near that amount. For me a Tech co founder would have a large control over all technical direction, grow the tech team, help set direction of product, and that is NOT what I am looking for in this situation.

      Reply

      • When I talked about large equity for a tech co-founder, it is in the case of a tech startup. Not all startups are highly technical, and you may not need a strong tech co-founder. That’s ok. But you are talking about a project management application. I don’t know what is your product, but to my knowledge, this is a highly complex domain from a technical point of view.

        You also said you implemented a scaled down version in some companies and you want to put it on the web. Take much care: this kind of software is very difficult to scale. If you are organizing complex plannings, with lots of resources and constraints, you will need either a top of the top expert in algorithms, either a farm of CPU behemoths…

        Once again, I don’t know what you plan for your product. But if you start to scale with an exponentially CPU intensive product, you may discover you can’t because you didn’t have the right guy to put technical stuff together from day one.

        Anyway, if you are sure you will never have customers asking for planning optimization with constrained resource scheduling, it’s ok, you may just need a bunch of random coders, like if you were selling a social network or a web shop solution.

        Reply

  • Wowsers – I strongly disagree with the assumption that “tech co-founders will typically have 25% – 60% equity”.

    This is way too broad. I’ve done a few start-ups (most with VC funding) and never found this to be the case. It takes more than coders to build a successful business.

    Future hires (and co-founders for that matter) should be based on their contribution to projected revenue (Paul Graham writes on the subject – Google it).

    If you can’t project revenue – stop the hiring process and do your homework.

    Vesting also makes this a self-correcting issue. One way to cross-check a good tech hire is to see if it enhances your valuation with VC and institutional investors.

    If the answer is yes, you’ve made the right deal. If not, go back to the drawing board.

    Reply

  • 1] Whether you find a rockstar or not depends on how tenacious and persuasive you are among other things. (Note: Don’t confuse past performance or big company title with a rockstar. You will have to trust your gut for the rockstar.)

    2] Its just a business plan and an idea. You don’t talk about validation. Hopefully, you were able to convince someone to give you money. That proves you can convince people who can write cheque. That’s a great ability for a CEO since you will have to do that a lot, unless you are bootstrapping. Or maybe you have purchase orders.

    3] Once you find a rockstar, make him a co-founder and treat him like that. That’s how you would build a company.

    Reply

    • I totally agree with you about “gut feeling” that has always worked for me in the past, and I would rely heavily on that for this hire as well. We are bootstrapping this effort until we can get a first draft of the project, then we will go out and start to build initial customer base.

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  • Technically speaking I wouldn’t give any equity to a potential 1st employee, but I would give equity to your 1st employee 😉

    Find the right person and be fair. If they’re building the product then they are doing a lot more than coding. They’re architecting, planning, designing, building and deploying. That person will be an integral part of your team and deserves fair equity, which IMO is 50% if it’s just the two of you. Vest over 4 years to protect everyone.

    If you’re looking for a coder alone then outsource development to India or similar. If spec’ right this can be a great way to get your first product built.

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