[LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

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[LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
Hi Guys and Gals,

This is my first time asking on this group. I've followed some of the threads with interest. I hope I can pick your brains here. 

Background:
I have been offered to fill a critical position in a relatively new start-up (6 months old). They currently have 3 main shareholders (30% equity each; one of them is an incubator) and 2 minor investors (5% each). Everyone has contributed some money into the company. Currently, I was told the amount is around USD$130,000.

One of the shareholders, say Person A, is heavily involved with the operations and managing a team of outsourced staff to create an app. Person A is paid a nominal salary say $1500 a month to cover for living costs.

6 months now, they released the beta version of the app. It was well received with around 3000 downloads in the first two months without any marketing budget. The engagement was good and they have completed 12 transactions based on manual selection. They are now raising seed funding from angel investors. However, the team/ shareholders were told there is no 'secret sauce' or algorithm that made their app even better or unique compared to current brick-and-mortar institutions or start-up players. Comments from those investors include "It is not disruptive", and "there is no difference to a typical application built by an ordinary software company."

The shareholders believed to make it more interesting and investable to potential investors, they need to create an algorithm or the 'black box' --> with the impact being that the methodology and type of engagement with customers via the app will become more scientific, data-driven and targeted, culminating to more credible profit margin.

Now, I have been asked to join to create this 'black box'. I told them if I were to be involved, it would be more likely as a co-founder since I have to begin from scratch and I am creating a product of value. They have no data architecture, systems, process yet and everything is guess work. I will be responsible in creating and validating the algorithm to make their application and whole process more robust. 

They asked what I expected. I offered them a fair 20-25% (I said in addition that I won't expect equal share since they have put in their money, but my sweat equity should not be too far off from theirs - the top 3 shareholders) in addition to the monthly wage equal to Person A, to cover my living costs, just to be fair and equal with him. (I could have asked for more but I want to be fair) My condition is that once they get first funding, my wage will be increased to $6k a month (which I think is not too extortionate. This amount is less than half of my last salary!

The shareholders came back the following week and offered me the monthly wage but instead of equity, they offered me ESOP (worth 5.6% of total shares, vested over 5 years). So, essentially, I can BUY (gosh, I have to buy my own shares!) the option up to around 1.12% maximum per annum! They think that giving me equity as shareholders is a bit risky for them, plus giving me ESOP is better for me since I won't be responsible for any liability should something wrong happened to the company.

I would like to hear your thoughts on this and share some examples where perhaps, some of you might have been in a similar situation? What would be my best options to consider without being short-changed. I have had more than 10 years of experience in relevant fields with top global institutions (last position senior VP with Director's level of pay) with an Oxford PhD. So my background is credible and they know this. What more with this critical position, they know that my contribution will effectively make their company to be investible for future investors. Without this algorithm, there is no hope in chance to get further funding.

Thanks for your time in advance.

Yours,
Teddy







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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
If you are creating their USP you should get equity.
It sounds there are too many directors involved already and they have failed to create a startup worth funding.

They would better start from scratch, slimmer. 
Consider building a USP in your own startup.
USP is the only thing that will get you growth and consistent clients/customers.

Right now, they don’t have ANYTHING. They were just told by the investors.

If a tweak the product would be that easy they would do it themselves. You are bringing the only value they don’t have.

Marcus



On 25 Jul 2017, at 18:13, Teddy <[hidden email]> wrote:

Hi Guys and Gals,

This is my first time asking on this group. I've followed some of the threads with interest. I hope I can pick your brains here. 

Background:
I have been offered to fill a critical position in a relatively new start-up (6 months old). They currently have 3 main shareholders (30% equity each; one of them is an incubator) and 2 minor investors (5% each). Everyone has contributed some money into the company. Currently, I was told the amount is around USD$130,000.

One of the shareholders, say Person A, is heavily involved with the operations and managing a team of outsourced staff to create an app. Person A is paid a nominal salary say $1500 a month to cover for living costs.

6 months now, they released the beta version of the app. It was well received with around 3000 downloads in the first two months without any marketing budget. The engagement was good and they have completed 12 transactions based on manual selection. They are now raising seed funding from angel investors. However, the team/ shareholders were told there is no 'secret sauce' or algorithm that made their app even better or unique compared to current brick-and-mortar institutions or start-up players. Comments from those investors include "It is not disruptive", and "there is no difference to a typical application built by an ordinary software company."

The shareholders believed to make it more interesting and investable to potential investors, they need to create an algorithm or the 'black box' --> with the impact being that the methodology and type of engagement with customers via the app will become more scientific, data-driven and targeted, culminating to more credible profit margin.

Now, I have been asked to join to create this 'black box'. I told them if I were to be involved, it would be more likely as a co-founder since I have to begin from scratch and I am creating a product of value. They have no data architecture, systems, process yet and everything is guess work. I will be responsible in creating and validating the algorithm to make their application and whole process more robust. 

They asked what I expected. I offered them a fair 20-25% (I said in addition that I won't expect equal share since they have put in their money, but my sweat equity should not be too far off from theirs - the top 3 shareholders) in addition to the monthly wage equal to Person A, to cover my living costs, just to be fair and equal with him. (I could have asked for more but I want to be fair) My condition is that once they get first funding, my wage will be increased to $6k a month (which I think is not too extortionate. This amount is less than half of my last salary!

The shareholders came back the following week and offered me the monthly wage but instead of equity, they offered me ESOP (worth 5.6% of total shares, vested over 5 years). So, essentially, I can BUY (gosh, I have to buy my own shares!) the option up to around 1.12% maximum per annum! They think that giving me equity as shareholders is a bit risky for them, plus giving me ESOP is better for me since I won't be responsible for any liability should something wrong happened to the company.

I would like to hear your thoughts on this and share some examples where perhaps, some of you might have been in a similar situation? What would be my best options to consider without being short-changed. I have had more than 10 years of experience in relevant fields with top global institutions (last position senior VP with Director's level of pay) with an Oxford PhD. So my background is credible and they know this. What more with this critical position, they know that my contribution will effectively make their company to be investible for future investors. Without this algorithm, there is no hope in chance to get further funding.

Thanks for your time in advance.

Yours,
Teddy







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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
In reply to this post by Ajit
Hi Teddy,

If you are getting on boarded to create the most critical part of their product there is no reason why you shouldn't have the equity. Your ask is pretty justified. For them as a precaution  they can put vesting restrictions on the equity but your milestone for vesting shouldn't be time bound. It should be based on product milestones - as you complete concrete product phases which can be used by them even of you drop off at the stage, an equivalent amount of equity should be vested to you.

I hope this helps. If you want to discuss further, you can write to me at [hidden email]

Best,
Neel

On 25 Jul 2017 18:13, "Teddy" <[hidden email]> wrote:
Hi Guys and Gals,

This is my first time asking on this group. I've followed some of the threads with interest. I hope I can pick your brains here. 

Background:
I have been offered to fill a critical position in a relatively new start-up (6 months old). They currently have 3 main shareholders (30% equity each; one of them is an incubator) and 2 minor investors (5% each). Everyone has contributed some money into the company. Currently, I was told the amount is around USD$130,000.

One of the shareholders, say Person A, is heavily involved with the operations and managing a team of outsourced staff to create an app. Person A is paid a nominal salary say $1500 a month to cover for living costs.

6 months now, they released the beta version of the app. It was well received with around 3000 downloads in the first two months without any marketing budget. The engagement was good and they have completed 12 transactions based on manual selection. They are now raising seed funding from angel investors. However, the team/ shareholders were told there is no 'secret sauce' or algorithm that made their app even better or unique compared to current brick-and-mortar institutions or start-up players. Comments from those investors include "It is not disruptive", and "there is no difference to a typical application built by an ordinary software company."

The shareholders believed to make it more interesting and investable to potential investors, they need to create an algorithm or the 'black box' --> with the impact being that the methodology and type of engagement with customers via the app will become more scientific, data-driven and targeted, culminating to more credible profit margin.

Now, I have been asked to join to create this 'black box'. I told them if I were to be involved, it would be more likely as a co-founder since I have to begin from scratch and I am creating a product of value. They have no data architecture, systems, process yet and everything is guess work. I will be responsible in creating and validating the algorithm to make their application and whole process more robust. 

They asked what I expected. I offered them a fair 20-25% (I said in addition that I won't expect equal share since they have put in their money, but my sweat equity should not be too far off from theirs - the top 3 shareholders) in addition to the monthly wage equal to Person A, to cover my living costs, just to be fair and equal with him. (I could have asked for more but I want to be fair) My condition is that once they get first funding, my wage will be increased to $6k a month (which I think is not too extortionate. This amount is less than half of my last salary!

The shareholders came back the following week and offered me the monthly wage but instead of equity, they offered me ESOP (worth 5.6% of total shares, vested over 5 years). So, essentially, I can BUY (gosh, I have to buy my own shares!) the option up to around 1.12% maximum per annum! They think that giving me equity as shareholders is a bit risky for them, plus giving me ESOP is better for me since I won't be responsible for any liability should something wrong happened to the company.

I would like to hear your thoughts on this and share some examples where perhaps, some of you might have been in a similar situation? What would be my best options to consider without being short-changed. I have had more than 10 years of experience in relevant fields with top global institutions (last position senior VP with Director's level of pay) with an Oxford PhD. So my background is credible and they know this. What more with this critical position, they know that my contribution will effectively make their company to be investible for future investors. Without this algorithm, there is no hope in chance to get further funding.

Thanks for your time in advance.

Yours,
Teddy







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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
In reply to this post by Ajit
On 25 Jul 2017, at 18:13, Teddy <[hidden email]> wrote:

>>Without this algorithm, there is no hope in chance to get further funding.

I am sure I would just walk away. I mean, why would you even entertain the discussion. Everybody thinks that their utterly ordinary app with a database is the next big thing. 

It seems to me you could probably create your algorithm based app for yourself. Even if you do create this for them they won't value your contribution. They may not even understand it.

Angus





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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
In reply to this post by Ajit
If you're not being taken seriously in sweat equity negotiations, just work externally and licence the technology to the firm. They can always buy you out later if they make a decent offer. 

Andrew 



On 25 Jul 2017 19:21, "Angus Fox" <[hidden email]> wrote:
On 25 Jul 2017, at 18:13, Teddy <[hidden email]> wrote:

>>Without this algorithm, there is no hope in chance to get further funding.

I am sure I would just walk away. I mean, why would you even entertain the discussion. Everybody thinks that their utterly ordinary app with a database is the next big thing. 

It seems to me you could probably create your algorithm based app for yourself. Even if you do create this for them they won't value your contribution. They may not even understand it.

Angus





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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
In reply to this post by Ajit
Thanks, Marcus. 
I have thought of creating a startup that has this USP as an alternative option. It wasn't easy to tell them that they haven't got 'ANYTHING' but somehow I managed to subtly and politely tell them that, although maybe not loud enough because they still think I deserve those ESOP peanuts. I do like your last sentence which I will use next time I meet them. Cheers! :)

Thanks, Angus. Yes, it seems to me that way. There is not a single person in the team right now with the skills-set and basic understanding how to create this black box. I do feel that my worth is not so valuable in their eyes. I could create a startup and build this algorithm but not sure how to align it with their interests. One of their key strengths is that the incubator has successfully done a series A round for one of their startups with $60m valuation. Their network of investors are pretty impressive and they can also tap in to the consumer market segments that their other startups have a presence in. I would think getting on their side would be beneficial in the long run.

Thanks, Neel. 
Yes I thought of using product milestones. What do you think would be a good starting % for equity for the first milestone reached? What's the max? I would think getting as much equity before the first round of funding (i.e., pre-series A) would be better, wouldn't it? That's because, I think, not only would I get more in-the-money paper gain but also, future investors might not like the fact that their shares be diluted because of my reaching future milestones. Unless,... they create specially ring-fenced equity just for me, similar to ESOP but without those options. I will think of a few other possible scenarios and email you. Cheers! 

Thanks, Andrew. 
One of them did mention, albeit a light touch, the possibility of doing this work on a project basis. Basically they will pay me as a consultant but I won't get any equity or ESOP (it seems to me they are so sure they will get their pre-series A funding that they would rather hold on to their equity). We haven't got that far with the idea of licensing although that came across my mind. How does licensing usually work? I do like the idea that they would buy out. Although I am not quite sure if investors (and current shareholders) would like this arrangement as it would mean they are investing in the current company that has neither 'anything' nor an IP, right? 

Apologies in advance if my next response will be in 6 hours' time or so since I am on the other side of the globe with different time zone. And it's early morning time now.

Thanks a bunch guys.

Kind regards,
Teddy T

On 26 Jul 2017, at 01:30, Andrew Lockley <[hidden email]> wrote:

If you're not being taken seriously in sweat equity negotiations, just work externally and licence the technology to the firm. They can always buy you out later if they make a decent offer. 

Andrew 



On 25 Jul 2017 19:21, "Angus Fox" <[hidden email]> wrote:
On 25 Jul 2017, at 18:13, Teddy <[hidden email]> wrote:

>>Without this algorithm, there is no hope in chance to get further funding.

I am sure I would just walk away. I mean, why would you even entertain the discussion. Everybody thinks that their utterly ordinary app with a database is the next big thing. 

It seems to me you could probably create your algorithm based app for yourself. Even if you do create this for them they won't value your contribution. They may not even understand it.

Angus





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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
In reply to this post by Ajit
If the project can easily be split into your IP and their execution, then it's just a matter of them paying you an annual or volume-based license. The amount would depend on many factors, such as 
*how easy it is to copy or reverse engineer
*whether you have IP protection 
*whether the licence is exclusive, and therefore whether any other likely customers exist 

Many startup founders read success stories, and fall into the trap of thinking industry outliers are the norm. That can make them propose extremely unrealistic deals, as they are not factoring in how early/risky their business is. 

As you've pointed out, a cash deal might be attractive. You get the money; you don't have to deal with their egos; and there's no risk of you getting shafted, when they (or their investors) decide to generously award themselves a huge tranche of shares for doing nothing (leaving you with a costly court case to get your equity back).

Andrew 


On 25 Jul 2017 21:31, "Teddy" <[hidden email]> wrote:
Thanks, Marcus. 
I have thought of creating a startup that has this USP as an alternative option. It wasn't easy to tell them that they haven't got 'ANYTHING' but somehow I managed to subtly and politely tell them that, although maybe not loud enough because they still think I deserve those ESOP peanuts. I do like your last sentence which I will use next time I meet them. Cheers! :)

Thanks, Angus. Yes, it seems to me that way. There is not a single person in the team right now with the skills-set and basic understanding how to create this black box. I do feel that my worth is not so valuable in their eyes. I could create a startup and build this algorithm but not sure how to align it with their interests. One of their key strengths is that the incubator has successfully done a series A round for one of their startups with $60m valuation. Their network of investors are pretty impressive and they can also tap in to the consumer market segments that their other startups have a presence in. I would think getting on their side would be beneficial in the long run.

Thanks, Neel. 
Yes I thought of using product milestones. What do you think would be a good starting % for equity for the first milestone reached? What's the max? I would think getting as much equity before the first round of funding (i.e., pre-series A) would be better, wouldn't it? That's because, I think, not only would I get more in-the-money paper gain but also, future investors might not like the fact that their shares be diluted because of my reaching future milestones. Unless,... they create specially ring-fenced equity just for me, similar to ESOP but without those options. I will think of a few other possible scenarios and email you. Cheers! 

Thanks, Andrew. 
One of them did mention, albeit a light touch, the possibility of doing this work on a project basis. Basically they will pay me as a consultant but I won't get any equity or ESOP (it seems to me they are so sure they will get their pre-series A funding that they would rather hold on to their equity). We haven't got that far with the idea of licensing although that came across my mind. How does licensing usually work? I do like the idea that they would buy out. Although I am not quite sure if investors (and current shareholders) would like this arrangement as it would mean they are investing in the current company that has neither 'anything' nor an IP, right? 

Apologies in advance if my next response will be in 6 hours' time or so since I am on the other side of the globe with different time zone. And it's early morning time now.

Thanks a bunch guys.

Kind regards,
Teddy T

On 26 Jul 2017, at 01:30, Andrew Lockley <[hidden email]> wrote:

If you're not being taken seriously in sweat equity negotiations, just work externally and licence the technology to the firm. They can always buy you out later if they make a decent offer. 

Andrew 



On 25 Jul 2017 19:21, "Angus Fox" <[hidden email]> wrote:
On 25 Jul 2017, at 18:13, Teddy <[hidden email]> wrote:

>>Without this algorithm, there is no hope in chance to get further funding.

I am sure I would just walk away. I mean, why would you even entertain the discussion. Everybody thinks that their utterly ordinary app with a database is the next big thing. 

It seems to me you could probably create your algorithm based app for yourself. Even if you do create this for them they won't value your contribution. They may not even understand it.

Angus





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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
In reply to this post by Ajit
Teddy,

We did and do partnerships very similar to the model that you presented, with the equity (with a certain vesting schedule as Neel mentioned but equity none the less) being many times the main part of the deal - though to be honest, in those cases we either bring some funding as well or bring a significant technological advantage to the table. I think you fit nicely in the second case, because as Marcus phrased it - "they don't have anything yet" and you are the only one at the moment who can change that.

From my experience their challenge is to accept the fact that the amount of money they have invested so far has not delivered what they have hope and they now must spend the only currency they have left- shares. That is not an easy thing to accept, especially when lacking the technological understanding of that "black box" they want you to build. Think about it this way- suppose you would have met them in the beginning, but with the understanding they have now, do you think they would offer you %5.6? I believe they would have offered you much more.

With that said, I do think that 20% is on the higher side at this point as the concept is validated (to a degree). My suggestion would be to try and work with them on 12%-15% deal, equity, spread over 3 yrs, dist quarterly (you will have tax implications) with specific milestone accelerations for Alpha, Beta and Launch.There are various mechanisms to make this happen, depending on where the company is registered, where you are, type of product development etc.

If you'd like to discuss further contact me at [hidden email].

Uri


Uri Avissar
Seraph Consulting Inc.
+972-526763957
Skype: uavissar

On Tue, Jul 25, 2017 at 11:31 PM, Teddy <[hidden email]> wrote:
Thanks, Marcus. 
I have thought of creating a startup that has this USP as an alternative option. It wasn't easy to tell them that they haven't got 'ANYTHING' but somehow I managed to subtly and politely tell them that, although maybe not loud enough because they still think I deserve those ESOP peanuts. I do like your last sentence which I will use next time I meet them. Cheers! :)

Thanks, Angus. Yes, it seems to me that way. There is not a single person in the team right now with the skills-set and basic understanding how to create this black box. I do feel that my worth is not so valuable in their eyes. I could create a startup and build this algorithm but not sure how to align it with their interests. One of their key strengths is that the incubator has successfully done a series A round for one of their startups with $60m valuation. Their network of investors are pretty impressive and they can also tap in to the consumer market segments that their other startups have a presence in. I would think getting on their side would be beneficial in the long run.

Thanks, Neel. 
Yes I thought of using product milestones. What do you think would be a good starting % for equity for the first milestone reached? What's the max? I would think getting as much equity before the first round of funding (i.e., pre-series A) would be better, wouldn't it? That's because, I think, not only would I get more in-the-money paper gain but also, future investors might not like the fact that their shares be diluted because of my reaching future milestones. Unless,... they create specially ring-fenced equity just for me, similar to ESOP but without those options. I will think of a few other possible scenarios and email you. Cheers! 

Thanks, Andrew. 
One of them did mention, albeit a light touch, the possibility of doing this work on a project basis. Basically they will pay me as a consultant but I won't get any equity or ESOP (it seems to me they are so sure they will get their pre-series A funding that they would rather hold on to their equity). We haven't got that far with the idea of licensing although that came across my mind. How does licensing usually work? I do like the idea that they would buy out. Although I am not quite sure if investors (and current shareholders) would like this arrangement as it would mean they are investing in the current company that has neither 'anything' nor an IP, right? 

Apologies in advance if my next response will be in 6 hours' time or so since I am on the other side of the globe with different time zone. And it's early morning time now.

Thanks a bunch guys.

Kind regards,
Teddy T

On 26 Jul 2017, at 01:30, Andrew Lockley <[hidden email]> wrote:

If you're not being taken seriously in sweat equity negotiations, just work externally and licence the technology to the firm. They can always buy you out later if they make a decent offer. 

Andrew 



On 25 Jul 2017 19:21, "Angus Fox" <[hidden email]> wrote:
On 25 Jul 2017, at 18:13, Teddy <[hidden email]> wrote:

>>Without this algorithm, there is no hope in chance to get further funding.

I am sure I would just walk away. I mean, why would you even entertain the discussion. Everybody thinks that their utterly ordinary app with a database is the next big thing. 

It seems to me you could probably create your algorithm based app for yourself. Even if you do create this for them they won't value your contribution. They may not even understand it.

Angus





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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
In reply to this post by Ajit
Hi Andrew,
Thanks for the reply. Yes, I will take your advice into consideration. Cheers, mate.

Hi Uri,
Great stuff, I will email you directly. Cheers too!

Teddy

On 26 July 2017 at 06:36, Uri Avissar <[hidden email]> wrote:
Teddy,

We did and do partnerships very similar to the model that you presented, with the equity (with a certain vesting schedule as Neel mentioned but equity none the less) being many times the main part of the deal - though to be honest, in those cases we either bring some funding as well or bring a significant technological advantage to the table. I think you fit nicely in the second case, because as Marcus phrased it - "they don't have anything yet" and you are the only one at the moment who can change that.

From my experience their challenge is to accept the fact that the amount of money they have invested so far has not delivered what they have hope and they now must spend the only currency they have left- shares. That is not an easy thing to accept, especially when lacking the technological understanding of that "black box" they want you to build. Think about it this way- suppose you would have met them in the beginning, but with the understanding they have now, do you think they would offer you %5.6? I believe they would have offered you much more.

With that said, I do think that 20% is on the higher side at this point as the concept is validated (to a degree). My suggestion would be to try and work with them on 12%-15% deal, equity, spread over 3 yrs, dist quarterly (you will have tax implications) with specific milestone accelerations for Alpha, Beta and Launch.There are various mechanisms to make this happen, depending on where the company is registered, where you are, type of product development etc.

If you'd like to discuss further contact me at [hidden email].

Uri


Uri Avissar
Seraph Consulting Inc.
<a href="tel:+972%2052-676-3957" value="+972526763957" target="_blank">+972-526763957
Skype: uavissar

On Tue, Jul 25, 2017 at 11:31 PM, Teddy <[hidden email]> wrote:
Thanks, Marcus. 
I have thought of creating a startup that has this USP as an alternative option. It wasn't easy to tell them that they haven't got 'ANYTHING' but somehow I managed to subtly and politely tell them that, although maybe not loud enough because they still think I deserve those ESOP peanuts. I do like your last sentence which I will use next time I meet them. Cheers! :)

Thanks, Angus. Yes, it seems to me that way. There is not a single person in the team right now with the skills-set and basic understanding how to create this black box. I do feel that my worth is not so valuable in their eyes. I could create a startup and build this algorithm but not sure how to align it with their interests. One of their key strengths is that the incubator has successfully done a series A round for one of their startups with $60m valuation. Their network of investors are pretty impressive and they can also tap in to the consumer market segments that their other startups have a presence in. I would think getting on their side would be beneficial in the long run.

Thanks, Neel. 
Yes I thought of using product milestones. What do you think would be a good starting % for equity for the first milestone reached? What's the max? I would think getting as much equity before the first round of funding (i.e., pre-series A) would be better, wouldn't it? That's because, I think, not only would I get more in-the-money paper gain but also, future investors might not like the fact that their shares be diluted because of my reaching future milestones. Unless,... they create specially ring-fenced equity just for me, similar to ESOP but without those options. I will think of a few other possible scenarios and email you. Cheers! 

Thanks, Andrew. 
One of them did mention, albeit a light touch, the possibility of doing this work on a project basis. Basically they will pay me as a consultant but I won't get any equity or ESOP (it seems to me they are so sure they will get their pre-series A funding that they would rather hold on to their equity). We haven't got that far with the idea of licensing although that came across my mind. How does licensing usually work? I do like the idea that they would buy out. Although I am not quite sure if investors (and current shareholders) would like this arrangement as it would mean they are investing in the current company that has neither 'anything' nor an IP, right? 

Apologies in advance if my next response will be in 6 hours' time or so since I am on the other side of the globe with different time zone. And it's early morning time now.

Thanks a bunch guys.

Kind regards,
Teddy T

On 26 Jul 2017, at 01:30, Andrew Lockley <[hidden email]> wrote:

If you're not being taken seriously in sweat equity negotiations, just work externally and licence the technology to the firm. They can always buy you out later if they make a decent offer. 

Andrew 



On 25 Jul 2017 19:21, "Angus Fox" <[hidden email]> wrote:
On 25 Jul 2017, at 18:13, Teddy <[hidden email]> wrote:

>>Without this algorithm, there is no hope in chance to get further funding.

I am sure I would just walk away. I mean, why would you even entertain the discussion. Everybody thinks that their utterly ordinary app with a database is the next big thing. 

It seems to me you could probably create your algorithm based app for yourself. Even if you do create this for them they won't value your contribution. They may not even understand it.

Angus





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Re: [LondonOpenCoffee] Share equity vs ESOP for a co-founder in a new startup

Ajit
In reply to this post by Ajit
Hello Teddy. 

Could you contact me on [hidden email]

I have an opportunity related question. 


Marcus

Sent from my mobile HQ

On 26 Jul 2017, at 19:27, Teddy <[hidden email]> wrote:

Hi Andrew,
Thanks for the reply. Yes, I will take your advice into consideration. Cheers, mate.

Hi Uri,
Great stuff, I will email you directly. Cheers too!

Teddy

On 26 July 2017 at 06:36, Uri Avissar <[hidden email]> wrote:
Teddy,

We did and do partnerships very similar to the model that you presented, with the equity (with a certain vesting schedule as Neel mentioned but equity none the less) being many times the main part of the deal - though to be honest, in those cases we either bring some funding as well or bring a significant technological advantage to the table. I think you fit nicely in the second case, because as Marcus phrased it - "they don't have anything yet" and you are the only one at the moment who can change that.

From my experience their challenge is to accept the fact that the amount of money they have invested so far has not delivered what they have hope and they now must spend the only currency they have left- shares. That is not an easy thing to accept, especially when lacking the technological understanding of that "black box" they want you to build. Think about it this way- suppose you would have met them in the beginning, but with the understanding they have now, do you think they would offer you %5.6? I believe they would have offered you much more.

With that said, I do think that 20% is on the higher side at this point as the concept is validated (to a degree). My suggestion would be to try and work with them on 12%-15% deal, equity, spread over 3 yrs, dist quarterly (you will have tax implications) with specific milestone accelerations for Alpha, Beta and Launch.There are various mechanisms to make this happen, depending on where the company is registered, where you are, type of product development etc.

If you'd like to discuss further contact me at [hidden email].

Uri


Uri Avissar
Seraph Consulting Inc.
<a href="tel:+972%2052-676-3957" value="+972526763957" target="_blank">+972-526763957
Skype: uavissar

On Tue, Jul 25, 2017 at 11:31 PM, Teddy <[hidden email]> wrote:
Thanks, Marcus. 
I have thought of creating a startup that has this USP as an alternative option. It wasn't easy to tell them that they haven't got 'ANYTHING' but somehow I managed to subtly and politely tell them that, although maybe not loud enough because they still think I deserve those ESOP peanuts. I do like your last sentence which I will use next time I meet them. Cheers! :)

Thanks, Angus. Yes, it seems to me that way. There is not a single person in the team right now with the skills-set and basic understanding how to create this black box. I do feel that my worth is not so valuable in their eyes. I could create a startup and build this algorithm but not sure how to align it with their interests. One of their key strengths is that the incubator has successfully done a series A round for one of their startups with $60m valuation. Their network of investors are pretty impressive and they can also tap in to the consumer market segments that their other startups have a presence in. I would think getting on their side would be beneficial in the long run.

Thanks, Neel. 
Yes I thought of using product milestones. What do you think would be a good starting % for equity for the first milestone reached? What's the max? I would think getting as much equity before the first round of funding (i.e., pre-series A) would be better, wouldn't it? That's because, I think, not only would I get more in-the-money paper gain but also, future investors might not like the fact that their shares be diluted because of my reaching future milestones. Unless,... they create specially ring-fenced equity just for me, similar to ESOP but without those options. I will think of a few other possible scenarios and email you. Cheers! 

Thanks, Andrew. 
One of them did mention, albeit a light touch, the possibility of doing this work on a project basis. Basically they will pay me as a consultant but I won't get any equity or ESOP (it seems to me they are so sure they will get their pre-series A funding that they would rather hold on to their equity). We haven't got that far with the idea of licensing although that came across my mind. How does licensing usually work? I do like the idea that they would buy out. Although I am not quite sure if investors (and current shareholders) would like this arrangement as it would mean they are investing in the current company that has neither 'anything' nor an IP, right? 

Apologies in advance if my next response will be in 6 hours' time or so since I am on the other side of the globe with different time zone. And it's early morning time now.

Thanks a bunch guys.

Kind regards,
Teddy T

On 26 Jul 2017, at 01:30, Andrew Lockley <[hidden email]> wrote:

If you're not being taken seriously in sweat equity negotiations, just work externally and licence the technology to the firm. They can always buy you out later if they make a decent offer. 

Andrew 



On 25 Jul 2017 19:21, "Angus Fox" <[hidden email]> wrote:
On 25 Jul 2017, at 18:13, Teddy <[hidden email]> wrote:

>>Without this algorithm, there is no hope in chance to get further funding.

I am sure I would just walk away. I mean, why would you even entertain the discussion. Everybody thinks that their utterly ordinary app with a database is the next big thing. 

It seems to me you could probably create your algorithm based app for yourself. Even if you do create this for them they won't value your contribution. They may not even understand it.

Angus





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