McStartup

This is the second question from the series of questions I started to address yesterday with intellectual property concerns.  Today's topic is about compensating people when you have no money. It's a tricky subject, to say the least.

Matt writes:

Also, on a related note, I have no money––at least not enough to offer someone a salary. I am reluctant to hand over equity to a software engineer I don't know, but maybe the solution is this founder's stock plan you wrote about. Do you know how companies in similar situations face this problem?

Clearly it can be pretty difficult to get someone to do actual work for no money at all, and even more so if you do not have any prior relationship with that person.  You'll largely be looking at some kind of equity compensation for the work, which can be done using a founders stock plan, or a stock option plan, or an outright stock grant.  For the reasons I stated in my post about founders stock, I would avoid the outright grant.  If this person is going to come on board and have a significant stake in the company, I would lean to going the founder's stock route.  On the other hand, if this person is going to receive a smaller stake in the company, I would go the option route, as it would seem odd to have one founder with, say, 95% of the stock and the other with 5%.  Contact some custom development shops in your area so you can meet them in person, and also check around online for independent contractors.  This will give you a range.  I would stay away from overseas outsourcing, given your stated lack of existing technical expertise, even though the price might seem tempting.  Try posting a project on guru.com or other similar sites.

However, I have a few more things for you to think about.  You had mentioned that you were not technical, and this can lead to a situation where you overpay for the work being done.  Before you start searching for a technology partner to bring on board, do yourself a favor and talk to a few software development companies about developing your project.  This will give you a fair bit of feedback (the questions they ask you will be the same types of questions you'll want to ask to a prospective partner or employee), and will give you some idea on what the software component of your new company is worth.  There's no sense giving up 50% of your equity for a $3,000 project.  Likewise, you aren't going to give up 2% equity for a $500,000 project. 

Also, think about what is going to happen after you get some money, either through funding or sales.  Will you have accrued salaries to this person, which you will then pay in arrears?  If so, they should receive less equity than they would for forgoing salary completely.  Keep in mind that investors are very skeptical of agreement in which founders receive a big pile of money immediately after funding. 

Another way to structure things is to agree on a "salary" which will accrue, and which will give you a total value to work with in the future.  When you do raise some money, you can then convert this accrued salary into equity (perhaps at a discount given the timing), and pay them back that way.  Be aware that the employee may have tax consequences under this structure and you'll want to talk to a knowledgeable accountant before hand (regardless of what structure you puruse), just to make sure there are no surprise visits from the taxman. 

Finally, consider the option of going to get money.  If you can find someone who is technical and likes your idea, perhaps you can put together a business plan together and seek funding before they quit their existing job.  Personally, I have found you will move lightyears faster if everyone quits their day-job and jumps in head first (there's no motivation quite like trying to make money so you can eat), but I have seen it work where funding comes first.

Good luck!