Things aren't as bad as they seem.
1. He is actually helping my wife get a job so that we can sustain ourselves. I don't want to take a salary to maximize my stake, he won't say no if I ask.
2. He will be working in another job to fund this. I agree I don't have a good answer from him on him being part time
3. Yup, we are discussing this and will be coming to a specific number and putting it into legalese.
Essentially, it is the amount of risk I am taking compared to the reward that's raising the alarm bells for me. Let me know if you have any other concerns after I incorporate staunch's comment to this thread:
1. Involving your friend in your wife's employment is a huge no-no. It only makes you more dependent on him, and he certainly knows this. If he places your wife in a job, don't be surprised to see him leveraging this in the worst way possible if things don't work out as expected.
2. You are maximizing a stake that isn't yet worth anything, and may never be worth anything. 20% of $0 is $0, just as 25% of $0 is $0. Perhaps a better way to look at this: figure out how much this venture would need to be making before the total value of your compensation package (equity and any eventual salary) would exceed what you're already making now at your six-figure job. The number is probably much larger than you think it is.
3. If your compensation is stock granted outright for services, you should be aware that this may create undesirable tax consequences for you. You should speak with an experienced accountant about this.
4. The fact that your friend needs to continue working to fund the venture is a huge red flag. What if he loses his job? What if he has a medical emergency? What if his wife divorces him? If you're going to get in bed with an "investor", he should be putting in most if not all of the cash up front. Which begs the question: if your friend says he's prepared to invest $15,000/month for 10 months, is he capable of transferring $150,000 to the new company tomorrow? It doesn't sound like it.
Again, the risk you're concerned about is a result of the fact that you are pursuing a deal structure that makes no sense. I would highly recommend retaining competent legal counsel before you go any further.
Thank you for all the advice. We discussed this further and have been able to resolve the concerns above. Please let me know if there is a way to send you a token of appreciation.
Essentially, it is the amount of risk I am taking compared to the reward that's raising the alarm bells for me. Let me know if you have any other concerns after I incorporate staunch's comment to this thread:
http://news.ycombinator.com/item?id=2700484