Providing employees with the ability to earn equity in a startup is nothing new. Most early stage startups have some form of equity compensation plan either in the form or shares or options.
What is more unusual however, is extending that same offer to freelance developers or contractors. In fact, beyond startups offering equity to advisers and consultants its almost impossible to find examples where this is the case.
The only two concrete examples I could find don’t fit the typical model either:
Gigster a freelance platform has a convoluted plan where they have created a Venture Fund that invests in startups that are also their clients. They then distribute equity in the fund to freelancers on their platform.
The second example is much more common. It’s where startups try and get freelancers to work for free by offering them equity in their company. Typically these are first time founders who “have an idea”. As a result you can imagine that these offers don’t go far.
What I am doing is much more closely aligned with the traditional model of providing equity. I have a team of Freelance Developers who I pay AND am now offering an “Employee Option Plan” to allow them to earn equity in Task Pigeon.
To provide more detail on this concept I will break down the remainder of this post into two sections:
Why I am offering equity in Task Pigeon to freelance developers
The mechanics of how I am doing this
Why Provide Equity To Freelance Developers
I’m going to start by outlining two important points. Firstly, there was no requirement for me to provide equity in Task Pigeon to the Freelance Developers I work with. Secondly, they didn’t ask for equity in Task Pigeon, rather I wanted to offer it to them.
In any business, and especially a startup, people are a critical asset. In fact I would say your team is just as important (if not more important) than the underlying idea you have.
If you have a strong team who believe in you and your idea then you can move fast, respond to the market and have confidence in what you are doing. This is especially important if you are a non-technical founder like I am.
When I first started Task Pigeon I found a great developer in Canada who got us to MVP and through the next few months after. Unfortunately, he wasn’t able to commit long term to Task Pigeon and I had to move on.
This ended up being a blessing in disguise. The new team I have been working with over the last 5 months have been fantastic. I’m not going to bore you with all of the tiny details on how we work but they have gone above and beyond in everything they do.
It doesn’t feel like a traditional client/customer relationship. We do operate as a team and I can see through their actions and our conversations that they want to see Task Pigeon succeed like I do.
Seeing the effort they put in and the belief they have in Task Pigeon made me want to ensure that they could benefit in any future potential upside.
With a traditional client/contractor relationship it is hard to do this beyond just giving a bonus payment. While that may be more valuable in the short term my goal is to build Task Pigeon into a vary large and very valuable company. Equity in my mind is therefore the best way to ensure they are rewarded when we succeed.
Essentially my reason for providing equity to the Freelance Developers boils down to 4 things:
We operate as a team and the relationship doesn’t feel like a transaction you would normally see between clients/contractors.
They are passionate about Task Pigeon and are excited to see it succeed/when we achieve new milestones.
They believe in long term relationships and go above and beyond when working on Task Pigeon.
I want to ensure that when Task Pigeon succeeds the effort they put in today is rewarded with the potential to share in the upside.
The Mechanics of Providing Equity To Freelancers
I‘m not a lawyer or accountant. I do however believe I have a good understanding of the process/requirements/implications of offering an option plan to the team I work with. You should however not rely on what I write below as advice or a blueprint to copy. As always get your own independent legal/tax advice from a qualified professional.
Broadly speaking offering an Option Plan to Freelancers or Contractors has a very similar process to that of employees. The Australian Government provides a number of great resources including draft Employee Option Plans and Employee Option Offer Letters which formed the base of the agreement I put together.
One key area of difference I changed had to do with the vesting schedule. A typical vesting schedule typically sees the options/shares vest to the employee over a 4 year period, with a 1 year cliff.
What this essentially means is that until the person has been employed for 1 year no options or shares will have vested to them. On the 1 year anniversary they will typically see 25% of the options or shares then vest. Following that the remainder will vest on a monthly or quarterly basis over the next 36 months.
This model would not fit my situation. While I would love to work with my team forever I am a bootstrapped startup. I may not be able to employ them for that first full 12 month period (even if I wanted to). I could simply run out of money to keep developing the platform.
As a result I decided to offer a monthly vesting schedule. Not only that I front-loaded the first month with additional options in recognition of the work they have put in to date. This removes the “cliff” from the vesting schedule and also ensures that my freelance developers will benefit from Task Pigeon even if I can’t hire them forever.
The schedule breaks down as follows:
|MONTH:||OPTIONS TO VEST:||MONTH:||OPTIONS TO VEST:||MONTH:||OPTIONS TO VEST:||MONTH:||OPTIONS TO VEST:|
|Month 1:||3,750||Month 13:||1,000||Month 25:||1,000||Month 37:||1,000|
|Month 2:||1,000||Month 14:||1,000||Month 26:||1,000||Month 38:||1,000|
|Month 3:||1,000||Month 15:||1,000||Month 27:||1,000||Month 39:||1,000|
|Month 4:||1,000||Month 16:||1,000||Month 28:||1,000||Month 40:||1,000|
|Month 5:||1,000||Month 17:||1,000||Month 29:||1,000||Month 41:||1,000|
|Month 6:||1,000||Month 18:||1,000||Month 30:||1,000||Month 42:||1,000|
|Month 7:||1,000||Month 19:||1,000||Month 31:||1,000||Month 43:||1,000|
|Month 8:||1,000||Month 20:||1,000||Month 32:||1,000||Month 44:||1,000|
|Month 9:||1,000||Month 21:||1,000||Month 33:||1,000||Month 45:||1,000|
|Month 10:||1,000||Month 22:||1,000||Month 34:||1,000||Month 46:||1,000|
|Month 11:||1,000||Month 23:||1,000||Month 35:||1,000||Month 47:||1,000|
|Month 12:||1,000||Month 24:||1,000||Month 36:||1,000||Month 48:||1,000|
This totals to 50,750 options in Task Pigeon for each Freelance Developer / Contractor. This equates to 0.50% equity for each freelance developer or 1.5% of Task Pigeon in total (based on total issued capital in Task Pigeon to date).
Obviously there is no exact science to the number of shares/options you offer to employees, advisors or contractors. I did however arrive at the number by reviewing what is typically provided to employees at early stage startups. I also considered the fact that the vesting schedule I was providing to them was more advantageous to them that usual given it allows options to vest from month 1.
In addition to the “Employee Option Plan” and “Employee Option Offer Letter” (which can also be used for Contractors) the only other documents I needed was a supplementary contractor agreement and a copy of the standard Upwork User Agreement.
I added these in to reconfirm our that it is a contractor relationship even though the standard documents refer to it as an “Employee Option Plan” and also to retain a copy of the Upwork User Agreement as a reference should the need ever arise. The offer has been made to my team and should be signed off by months end (all things going to plan).
Also published on Medium.