Be a sport and pay! No not with equity!

If you startup idea involves coding, ideally you should have a co founder or an employee who can code, if you can not. [tweetherder]Outsourcing at the earliest stage is sub-optimal [/tweetherder](unless of course you have a support system to guide you through it). If you are first-time entrepreneur with a business background and not much of corpus to spend (read, non-Stanford, non-Harvard, non-LBS, non-investment bankers!), the easiest currency is equity.

Signing equity for work deals is fairly simple and gives a great kick to your ego. Here are the steps:

Step 1 : Write an amazing copy of why you are the next Google, even though you cannot code.

Step 2 : Copy the job descriptions of top 3 jobs that appear on google search for your area of interest

Step 3: Post in all startup forums, HN and such, asking for a developer or a shop who can show “co-founder” level of commitment for your ‘on fire’ stock!

Step 4: Wait for a sucker to bite.

While it does sound like you are incentiv-izing  tricking the dev shop into a deal that has no downside for you, you’re indeed taking your startup to a state where no investor would touch it. Why is it neither courteous nor prudent to ask for work in return for equity?

1. You are a product startup and your vendor is in the services business. Both decisions are by choice. You are asking a vendor to bet on a product business model which they have no control over. Is it fair? They have already made their choice clear by starting a services company.

2. [tweetherder]Working for equity is not a demonstration of commitment[/tweetherder]. I’ve seen this several times. Entrepreneurs say that they test the commitment of a long term partner by asking them to share the destiny. That’s a cofounder conversation and not one you’d have with a vendor. Why should a vendor care about your startup. You are a project in his pipeline and not anymore consequential to his/her scheme of things. [tweetherder]Get over the “I am building something cool. Are you in?” trance![/tweetherder]

3. You are neither a VC nor a lawyer. Your vendor too is neither of them. Imagine two deal makers with little to no financial deal making expertise, drafting a contract with far-reaching implications. Would you rather spend the contract drafting money on the product (by paying the developer) or would you hire a lawyer to draft a shareholder agreement?

4. [tweetherder]Most business ideas don’t need custom software development till they have to scale[/tweetherder]. Run a small business that validates your model with less or no tech and use that money to pay your software development bills. You gain the vendor’s respect and you’d waste less (as you’d have done customer development)

If you do get curious dev shops that work with startups for the love of it (and hence take equity), by all means take their offer. But be sure that you are paying with a long term currency with uncertain value, to solve a short term cash problem with certain value. Even raising debt is a better way to compensate a developer than offering equity.

[tweetherder]Being a startup is no excuse to renege payment commitments[/tweetherder]. Yes, startups fail. No, that  does not allow you to walk away from a contract wherein you owe money to a developer. Equity deals and startup work in general are viewed with skepticism by the developer community because startups often confuse the market’s tolerance to a startups failure with a vendor’s tolerance to bad debt.

Be a good sport!

 

  • Another issue with payments-as-equity is that the number is generally too low. 1-2% is almost like the industry standard, and for the first few people on the team, it is nearly insulting.

    • admin

      I guess this is the cost of being in an emerging startup ecosystem. With exits, the low percentages would become meaningful. We are a generation away from that though!

  • Ravi

    I have seen almost all startupers talk about equity while signing up with other co-founders. Practically paying with equity is literal joke, unless the start-up has generated traction through reasonable user base or revenue.

  • Ravi

    I have seen almost all start-upers talk about equity while signing up with other co-founders. Practically paying with equity is literal joke, unless the start-up has generated traction through reasonable user base or revenue.