An acquaintance has contacted me about getting involved in a startup company. My task would primarily be mobile app development.

The guy who contacted me is on the tech side of the company; the owner has a marketing/business background. It's just the two of them at the moment. As there is currently no capital in the company (it's an llc), the agreement would be one in which I take an equity share. They are looking for investors, but it's seeming that nobody wants to invest until there's some revenue - this means finishing up some work with the app and I guess some server side work. Hopefully then they can get some money.

I think they have a good idea, and they both have enough experience and are professional enough for this project to be successful. I'm interested in getting involved.. I'm just not sure how to go about things with agreements and such so that I don't get screwed over in the long run. Any help????

There's lots of things to think about.

You need to think about what you could be making in another job and how long you expect to go without money. Can your personal finances survive that? Do you have a personality that can handle that risk? If so, are you getting an equity stake big enough to counteract that risk? Even if you guys jump the first big hurdle (getting funding and getting paid regularly) there are still lots of ways for the company to fail and your equity to be worth nothing. On top of that each funding stage (and there could be 3 or 4 or 5 or ...) is going to dilute your share of the company. If you're joining at a stage where your payment is pure equity you need to get a decent chunk.

Getting investment isn't that easy. You need to be able to show a real product with real potential. A good idea or a little prototype app isn't going to cut it in most circumstances. Even once you've made enough progress to get funding it can be a couple of months finding the right investors, finding the right terms, and finishing up all the legal crap.

You also really need to trust and respect the guys you're going to be working for. There are a whole lot of decisions that are going to be made that will make or break the company and they're ultimately going to have the final say. Also, one benefit of a startup is that you'll be learning a lot about business and technology (because you need to be able to work on/help in every area). If the guys you're working with are good than that learning can be extremely valuable.

I think its also important that you set deadlines to re-evaluate your situation and make sure everyone else knows those deadlines too. There was a period of time when I wasn't getting paid at the startup I work for and I made it clear to my family, and co-workers how long I was willing/able to work without pay. And if we didn't have funding or a solid lock on funding by that date I'd be looking for a job somewhere else. This isn't about being a hardass or a negotiating ploy or anything like that. You can do it nicely and professionally.

In your case I think I'd want a contract that laid out how much equity I was getting, how it vests, what my salary would be once funding comes in, and a clear understanding from the founders about the state of the product and how far from funding they expect to be (and make sure that sounds reasonable to you).

If that all sounds ok I think you should also figure out when your next major decision point is. If they say it'll be 6 months before funding - you should seriously re-evaluate at the 3 month point what progress has been made and where you guys stand with funding.

Basically, you're making a big investment in this company. Every day that you work there you're investing the salary that you could have made somewhere else. And like any investment you need to watch it and make sure it still makes sense. This is also one reason that you need to respect and trust your co-workers. In this situation you need a lot more (and different) information than a standard employee-employer relationship.

Edit: Three more things I thought about:

One, you should be at least interested in the idea of the business and ideally very excited by what they're trying to do.

Two, I've been around a bunch of other tech startups and I've come to the conclusion that I would never join a startup that had a CTO without a solid background and who I could respect. Some companies still make it with a poor CTO (or in some cases no CTO) but life there is definitely more miserable for a developer and your chance of failure is much higher. If your acquaintance in this case is just a guy you graduated college with last year - I'd be more inclined to pass.

Three, I kind of lost track of your specific case while writing this post - so some of it doesn't really apply in your situation. Sorry about that.

great post

Thanks! That is very helpful. The major thing I'm trying to figure out right now is how much equity I should ask for.

For what it's worth, I have 6 years of professional post-college work experience as an (mostly software) engineer in embedded technologies at a major corporation. I quit my job about a year ago after going through some major burn out, and have been playing poker as my sole source of income, which I ever only intended as a stopgap solution. So it's a great time for me to do something like this.

The CTO has similar engineering experience - he worked for my previous employer, but before my time. He has many years on me, including experience at a startup. I have never worked with him so I can't fully gauge his technical ability, but he definitely seems very capable. He is someone I see myself getting along with well on a work project.

The CEO has a high level executive position at a marketing firm, an MBA, and a background that includes B2B sales.

They've already put a lot of legwork into this project, but they are both separately employed full-time (there shouldn't be any issues due to conflict of interests). I am the only one who can commit a lot of time at the moment.

I just really have no idea how to figure out how to establish what I should expect to acquire in terms of company equity. Income is another issue of course, but my stake in the company is of more immediate concern.

If nobody is investing money, and you will be the only one investing significant time, it certainly sounds like you should be getting the majority of the equity.

From your post it doesn't sound like that's likely.

Yup. Idea men are a dime a dozen.

Ok, well they've done a bit more than conceived the idea - some of the tech work, market analysis, written up strategy documents and proposals, contacts with investors, presentations - all that sort of stuff... I think if and when investor money comes, the logistics in terms of time availability may change.

Obviously I'm not planning on committing myself full-time to a project for a lengthy period of time while others involved do nothing and expect the majority of the equity... The point is, their current time availability is limited while mine is not nearly as limited. This does not necessarily mean that I will invest more time than them.

My interest in getting involved is also about other things... I have no desire to go back to work at a big 9 to 5 corporation, but I may have to at some point. Considering I've been unemployed for almost a year (just playing poker), I need something to help fill in the gaps and put on a resume should I need it.

Furthermore, I have some of my own ideas for mobile apps that I've wanted to write for some time - I think these have some real potential to produce meaningful income. But I just haven't taken the time to learn iOS or Android to a very strong level of proficiency. So this gives me a learning opportunity, and hopefully I will be more motivated to work on some of my own ideas.

The fact that they're not working full-time on this seems like a pretty huge red-flag to me. It seems like it would also be a big red-flag for investors but I have no real idea either way.

If you're working full-time on this while they aren't, and if they haven't invested their own money I think its totally fair for you to ask for 1/3 of the equity. They would have had to have done a lot of stuff already for me to think anything less than that is fair. My understanding (obviously based off of a fairly low sample size) is that market analysis, strategy, proposals, and presentations aren't worth much for getting investment these days. Every startup that I've seen that has gotten seed funding has at least a working product with some customers and has actually demonstrated that they have something people want.

As far as the learning opportunity it seems like you'd be better off following up on your own ideas and learning while you went there. Either way you're not getting paid and don't have a lot of help, but at least that way you're in full control of what you're doing.

I'd think strongly about the go-to market strategy of the company. The people who run the company can be great, your coding can be high quality, and the product can ultimately fail because you get to market with a product that just isn't that valuable.

I've got a fairly big database of start-ups that I've developed for studying two markets, and if you're in the right market you can have a really high success rate(75%-85%) if you're entering with what would be classified as a disruptive strategy. On the other hand if you're entering with low capital your chance of success goes down.

I'd recommend reading Brad Feld's Venture deals for more information on the funding and deal making process and anything by Thomas Thurston for start-up strategy.

Market Analysis - Now there's a nice vague term that may or may not mean much.

Strategy documents and proposals - again, idea men.

Contacts with investors - Again, vague.

Presentations - again, ideas.

You *think* the logistics will change when the money comes. That suggests you haven't seen any strategy documents, proposals, or presentations that detail that. That's a huge red flag.

You should be getting the same pitch the cash investors get, since you're a sweat equity investor.

I just wanted to add that I don't think you should ask for more than 1/3 of the equity. If you want more or think you deserve more than that you should just pass on the idea. The fact that these other guys are not full-time means that their equity is their only real motivation.

No, I've seen some of it (including a presentation with a bunch of figures projecting growth, competitor research, etc), some screenshots, etc. It's clear that a lot of thought's gone into it. And the sales pitch is good. There are some basic things that I am critical of, and I'll have to discuss these with them. Yes, it appears clear from the presentations I've seen that logistics will change once investor money comes. I will need to discuss that with them in further detail.

I've still gotta get a signed NDA back to them before they send the rest of their business plan, but what I've seen so far looks good and very professional. We'll be discussing the project and agreements in more detail this week.

Yes, and they've realized essentially the same thing. But a product that is capable of producing some revenue is not a huge obstacle to overcome. The idea is that they should get some investor money once this milestone is reached.

Thanks for these! I'll definitely check em out.