Paying developers with equity: how to structure the deal
Equity is the most expensive currency you have. Spend it on work that is worth it, and put everything in writing.
Contractor, employee or co-founder: which deal are you making?
Name the relationship first, because the rules change with it. A freelance developer or an agency is paid for a defined piece of work. An early employee is paid for ongoing work, usually a salary plus options. A co-founder joins to own the outcome.
This guide covers the first two. Splitting the company with a co-founder is a different negotiation, which we cover in our guide to equity splits with a technical co-founder.
| Contractor or agency | Early employee | Technical co-founder | |
|---|---|---|---|
| What the equity pays for | A defined deliverable | Ongoing work, alongside a salary | Building and owning the company |
| Common instrument | Shares, or an unpaid fee later converted into shares | Options under an option plan | Founder shares with vesting |
| How the stake is sized | Value of the work divided by company value | Role, seniority, gap to market pay | Contribution, commitment, risk taken |
| Main risk | Paying for scope creep in equity | Options that never vest | A co-founder who leaves early |
| Who owns the code by default | The developer, until assigned in writing | Usually the employer (check local law) | The company, once founders assign it |
How much equity should you give a developer?
Divide the market value of the work by the company's value after the deal. With made-up numbers: if the work would cost €40,000 and the startup is valued at €800,000 beforehand, the developer gets 40,000 out of 840,000, about 4.8%. The maths is trivial. The valuation is the negotiation, because nobody knows what a pre-seed company is worth.
Two habits protect both sides. Release equity at milestones (MVP shipped, first paying customers) rather than all up front. And make the stake vest, so it is earned over time rather than handed over on day one.
4 years
The four-year clock suits someone who will stay. For an agency delivering a fixed scope, tying the stake to accepted milestones is simpler: equity is earned as each piece of work is signed off.
How is equity for services taxed?
Usually as income, at the value of what was received, but the timing and the exceptions are national. Three examples show how far apart the rules can be:
- United States. The IRS's Publication 525 says property received for services is generally included in income at fair market value in the year it is received. If the shares are subject to vesting, income arises as they vest, unless the recipient files a section 83(b) election, a written statement or Form 15620, no later than 30 days after the transfer.
- Italy. For registered innovative startups, certified incubators and innovative SMEs, Article 27(4) of Decree-Law 179/2012 excludes shares issued for work and services from the recipient's income when they are issued. The Revenue Agency's ruling 776/2021 reads this as deferring tax until the shares are sold, and only for highly qualified services. The status itself is explained in our guide to Italian innovative startup requirements.
- The EU as a whole. There is no common regime yet. On 18 March 2026 the European Commission proposed EU Inc, an optional company form that would include a common employee stock option scheme with harmonised deferred taxation. The Commission's page presents it as a proposal, not law.
Who owns the code a developer writes for equity?
Not automatically the startup. In the EU, the Software Directive (2009/24/EC) gives the employer the economic rights in a program written by an employee in the course of their duties, and a contractor is not an employee. In the US, the Copyright Office's Circular 30 lists nine kinds of commissioned work that can be made for hire by written agreement; software is not named among them.
The fix is the same everywhere: a written assignment of all rights in code, designs and documentation to the company, signed before the equity is issued. Investors will ask for it during due diligence. We go deeper in who owns the code in a software contract.
What should an equity-for-work agreement say?
Our eight-point checklist (questions for your lawyer, not a template)
Scope and sign-off
What gets delivered, by when, and how you both decide it is done. Without that, nobody knows when the equity has been earned.
Valuation method
The market price of the work, the company valuation, and who signs off on both.
Instrument and timing
Shares now, options, or an unpaid invoice converted at the next round: each changes when the developer becomes a shareholder.
Milestones and vesting
How much vests at each delivery, and what happens to unvested equity if the relationship ends.
IP assignment
All rights in code, designs and documentation move to the company, in writing.
Work after launch
Bug fixes, updates, app store reviews, hosting and backups: who does them and how they are paid.
Shareholder rights
Information rights, voting, and drag-along and tag-along clauses aligned with the other shareholders before you raise.
Exit
What happens if the developer stops, the startup pivots or the company closes.
What can go wrong when you pay in equity?
- Dilution surprises. Every shareholder's percentage shrinks when new money comes in. The developer should know that, and you should know that investors will ask who owns what and why; see our guide to the seed round, explained.
- Leverage cuts both ways. A developer paid in equity has little power to get paid on time, and you have little power to enforce deadlines. Milestones protect both of you.
- The passive shareholder. An agency that stays on the cap table years after the work ended still has to be informed, and sometimes asked to sign, at every financing.
- The inflated valuation. Pushing the valuation up to give away less equity sets expectations your first investor may not share.
Frequently asked questions
Can I pay a freelance developer only in equity?
Yes, if they accept the risk, but pure equity deals put all the risk on the developer. A mix of reduced cash and equity is easier to sustain and keeps both sides committed. Whatever the split, put scope, milestones and IP assignment in writing.
Do developers pay tax when they receive equity?
In most countries equity received for services counts as income at its value, but timing and exceptions differ. In the US, vesting shares are taxed as they vest unless an 83(b) election is filed within 30 days; in Italy, innovative startups benefit from a deferral until the shares are sold. Check with a local accountant.
Should a contractor's equity vest?
It should be earned, but not necessarily over four years. For a fixed-scope project, equity that vests as each milestone is accepted fits better than a long time-based schedule, which suits people who will stay.
If I pay in shares, is the code mine?
Only if the developer assigns it to the company in writing. EU law gives employers the economic rights in software written by employees, and US law treats only some commissioned works as made for hire. A signed assignment removes the doubt.
How is this different from giving equity to a technical co-founder?
Equity for work pays for a defined contribution, sized by its value. A technical co-founder joins to build and own the company, so the split depends on role, commitment and founder vesting rather than on the price of a deliverable.
Sources
- DL 18 ottobre 2012, n. 179, art. 27 (Normattiva) (19 October 2026)
- DL 24 gennaio 2015, n. 3, art. 4 (Normattiva) (19 October 2026)
- Agenzia delle Entrate, risposta n. 776 del 10 novembre 2021 (work for equity con una start up innovativa) (19 October 2026)
- Direttiva 2009/24/CE sulla tutela giuridica dei programmi per elaboratore (EUR-Lex) (19 October 2026)
- Y Combinator, Understanding startup stock options (2020) (19 October 2026)
- IRS, Publication 525 (2025): Taxable and Nontaxable Income (19 October 2026)
- U.S. Copyright Office, Circular 30: Works Made for Hire (19 October 2026)
- European Commission, EU Inc.: a new harmonised corporate legal regime (proposal, 18 March 2026) (19 October 2026)
Figures and definitions checked on the dates shown.
