How much equity should I ask for?

AAnonymous ·December 31, 2014 ·3 answers

I’m currently heading up sales, marketing and business development at a small software company in Canada. I report to the CEO and been with this company for just over 4 months. We make enterprise grade on-premise software for a niche market. It’s powerful, expensive, takes 8-12 months to implement and only really applicable to a small number of large prospects.

Due to the challenges of our existing market, I’ve approached my boss (who is also 100% owner of the company) with an idea to create a SaaS/app based application for the broader, more accesible SMB market of the vertical we are currently in. There are other competitors in this space, but they’re growing fast and there’s no reason to think we couldn’t grab a slice of the pie.

He thought it was an amazing idea and said it was something he was interested in doing for a long time, but he didn’t think the culture was right at our current company to build it. So he proposed another idea: “you figure out how much it’s going to cost to get it built by an outsourced development company, put together a solid business plan, and me and you will do this outside of the main business. You can be the CEO and if we get traction we’ll bring on other investors to help it grow.”

So basically he’s agreed to provide seed money (6 figures worth) to get this off the ground. So it’s basically 100% his financal equity, and 100% my sweat equity to guide the development, then do what I do best, sell and market the app to gain traction.

I’m obviously very keen to do this, but I’m wondering what percentage of equity, if any, do I deserve/should ask for? I mean, I’m taking no risk. I’m going to continue to do my current job until this takes off and he’s going to continue to pay me a salary at my current company. I can’t afford to work for free, so if/when this requires a true full time effort I’ll still need my salary to make it work, even if not yet supported by revenues.

Am I out of line to ask for anything? My thinking was maybe 10-20% considering he’s taking all the financial risk.

What does SA think?

3 answers from the community

AAnonymous· Jan 1, 2015

You should think about vesting based on gradual objectives. Make plans for 3 or 5 years, with annual thresholds for equity. As the sales/market/operation guy, you will have a major impact on the company success.If you have a salary, it would be fair to have 0% equity below minimal success. And maybe up to 80% if you make it a billion dollar company in three years, because the initial capital would represent peanuts in such a success.

Since the principle is fair, you will see very quickly if both of you agree about the value of your work and talent compared to initial seed money when you will define objectives and key figures for such vesting plan.

AAnonymous· Jan 1, 2015

That's a great idea. I could get say 5% when we hit our minimum agreed threshold to run the company full time then get additional vesting at 5% increments for every million in revenue up to 50%. If I could get the company to $9M in annual recurring revenue I'd be 50% owner. That's a huge number, but not completely outside the realm of possibility.

And I assume if we were to take on additional investment it would create a whole new agreement with new terms.

Thanks for your help.

AAnonymous· Jan 2, 2015

Your second post make me realize something you should take into account in the negotiation. If I were the money guy, I couldn't accept objectives based only on revenue. This revenue must be profitable and sustainable. The reason is simple: in a tech startup, a talented but shameless sales guy can bring in lots of bad customers which will kill profitability, because each one of them will need special product customization. This results in a service company, not a product company, and profitability is absolutely not the same when revenue grows.

That's why the key point is "profitable revenue growth". And the vision about what should be a long term sustainable company must be shared both by you and your financing partner. This is also in your own interest: why having large shares in a company if it is not profitable ? You must be deeply aware of that before signing.

How much equity should I ask for?

3 answers from the community

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