Michael wants to give a programmer equity for building a script. Evan warns that equity is like a marriage and recommends vesting deals tied to milestones instead, or a profit-share agreement limited to that specific product. This keeps the programmer from gaining decision-making power or selling shares to competitors.
Chapters
Hi, I'm Evan Carmichael. Welcome to another edition of Ask Evan. In today's episode, I'm going to answer a question from one of my forum readers, Michael, who's asking about giving equity away to start his business up. So he is creating a new web-based business and needs to get a programmer on board to create a script for him and he wants to give a piece of the company away in exchange for creating that script and is wondering how to do it, what's involved, my advice, etc. So, Michael, I'd be really concerned about giving away a piece of equity to somebody you don't know. It's really, really hard. It's like getting married. Having a good partnership is like having a good wife, and it's something that you are in for a long period of time, so you want to make sure you get the right person who will be an ongoing contributing success factor to your business. If you're concerned about not being able to pay him because you don't have money, then you might want to work out another arrangement, and I'll talk about that quickly. If you really wanted to do the equity side, then you would need a lawyer, you need to set up a corporation, you need to have shares, you need to figure out how much you're going to give him. I always try to make those equity deals kind of opt-in, so you, you earn in your equity as you produce results. So, you know, there's a script that he has to create for you, then once the script is created, he gets 5% of the business. And if it delivers the results that you're hoping for, then he gets another 5% or whatever it is. You have to make sure that there's kind of milestones in there so he doesn't just have equity in your business and you have a shareholder who doesn't do anything for your company as you grow. But my preferred way to do this, if you can't afford to pay him upfront, would be to have some kind of profit share for that one product line. So your company may end up doing a lot of other things as well, and now you have this, this one person owning a piece of it without doing any other work ongoing. If you could do a profit share for this one product, so make them believe in your abilities to market this new web startup, and say for 5 years or 10 years or lifetime, whatever it is, you're gonna give him 20% or 50% or whatever it is of the profits from that product, then that's a lot easier to be able to do. They don't have any decision-making power in the business. They don't have any minority shareholder rights that you have to worry about. You don't have to worry about them selling their share to your competitor who can, you know, snoop in on what you're doing. And they don't have any decision-making power, which you might have to worry about if you have somebody who doesn't really know what they're doing with business. So that would be my preferred route, is some kind of profit share plan only for that one product line. For X number of years. And the amount that they get is maybe in relation to how much value they're gonna be able to add and potentially if there's gonna be any ongoing component to it. So do they have to update that script? You know, if you're a web-based business and you're not a programmer yourself, you may need somebody as part of that experience ongoing to be able to help you continue to add to your product line. So I hope that helps. If you have any questions, please leave a comment below. And for everybody else, I'd love to hear what you have to think about it if you wanna leave a comment under the video. And I always appreciate thumbs up if you want to give them. Helps me make more of these videos, and I always get energized when I see that somebody's left a thumbs up in the video. So thank you for that so much, and hopefully I'll see you in the next episode.
