You already said it: "He isn't interested in salary as much as equity."

If this developer is any bit worth his salt, he is worth the equity. A smaller piece of a bigger pie is far more valuable than a big piece of a small (or worthless) pie.

Profit sharing is a red flag to me that just sounds "Cheap," unless you guys are making tons and tons of profit already.

I don't know where you're based, but In Silicon Valley, a good developer can easily fetch $300-500k (base + bonus + yearly equity). UC Berkeley's average starting salary for NCGs majoring in EECS or Computer Science is $108k.

Salary is something a good developer can easily get; why your startup (possibly unstable) rather than another more established company?

If as the other person said, he walks and you're company is crippled, give him equity.

Happy to chat more.

As a venture capatalist I believe the key people in any start up should be incentived with equity. As someone mentioned below the equity in itself has no value as 100% of nothing is nothing. If he is good enough he will add more value to you and your partner than the equity you provide. Also if the equity is sufficient, which you should cliff vest over at least a 4 year period, he will be fully incentivized to stay and help build a sustainable profitable asset of value.

It is time for a very frank conversation with your developer.

Explain what you just outlined, that you and your partner are not interested in giving up equity in the company. Explain that you are open to exploring other incentive programs with him.

Unless there was an understanding earlier that your developer would be gifted equity, you have no obligation to provide such.

On the other hand, consider the worst-case scenario: what if he opts to walk away. What are you prepared to do and how will your company adjust?

I'm happy to discuss further. I've helped a number of small businesses and startups tackle difficult questions.
-Shaun

Start with an honest and transparent conversation between the three of you. Bringing someone in-house F/T when they've been working remotely P/T changes the relationship dynamic, so it's important to emphasize honesty, respect and approachability on all sides from the get go.

If there's an impasse around anything financial, explore other options that your developer might consider to be equally as important – both in the short and long term. Telecommuting, flex hours, additional health benefits for their family are just a few options. Longer term, if you see potential in them as a tech lead or CTO, paying for outside technical or leadership courses may be exactly what they need to feel you're making an investment in them.

I'm happy to jump on a call to talk further, and help you create a plan.

If you have the flexibility to structure his incentive plan based on what motivates him, I think this is best for the growth of your company. Perhaps, equity based on meeting specific targets first. Agree, that a good developer is worth it, and if it increases the size of the total pie...may be worth considering.

I cofounded a startup that was able to raise a mid-seven figure Series A round of funding. What I learned is that when that kind of money is raised, service providers wanting a piece of it start circling like sharks. In this case, if you're only paying this developer in cash, I'd put him into the service provider category, which is why I believe my experience is relevant to your question.

We ended up paying big salaries and consulting fees. We didn't share much equity. This created serious misalignment between the motivations of our service providers and our company.

In our case, our development team was an offshore one, with an overly aggressive salesman hovering in our office, slipping invoices under my door for work we didn't request. They saw a pool of money sitting there and were doing everything they could do extract as much of it, as quickly as they could. I realize this may be an extreme example, however you might be surprised at how quickly this may happen when sharks smell money in the water.

One lesson I learned is it's much easier (and fun!) to reach the company's goals when the motivations of everyone are synchronized. It's much harder, if not impossible, when some stakeholders are motivated by short term gains and others by the longer term payout.

Especially if you're a small team, you want everyone in this together, moving toward and motivated by the same goals. Even if the developer feels like he's being fairly compensated now, my sense is that resentment may grow as the equity value of the company far eclipses what he's being paid, especially if he can draw a direct correlation between his work and value created.

So if you're not interested in giving away equity and that what motivates this particular developer, I'd suggest either -

-Getting comfortable with giving away equity

or

-Finding another developer

Happy to discuss further on a call, having lived it and learned this lesson the hard way ;)

If this is your only developer, you should be open to giving away some equity to him. It doesn't have to be more than 5%, and could be considerably less.

Much of this depends on the specifics of your situation: what does your company do, what is your current revenue and burn rate, what are your goals for the company, etc.

I have been through this myself in many scenarios (boot strap, post-series A fundraise, doing-it-myself, and on and on). I've also advised other companies going through these questions. There is no simple answer across the board, it all depends on your situation.

Let me know if you'd like to chat more.