If you can help on that front please get in touch!

I can – https://www.1form.com.au/

There are two guys behind it, +1 developer (not on staff) and I think they designed it themselves :) but it’s working for them.

Adam you said “they’ve valued their ‘idea’ at £260k”

Is that a problem?

It’s easy to scoff at an “idea” being worth anything, but thankfully not everyone thinks like that, because that’s how most products and some of the most valuable companies in the world are born, as an “idea”.

My view is that many ideas have value, in some cases significant value, that’s why patents and the term “intellectual property” exist. How an idea is developed determines whether the full value of the idea is realised.

People who do not value ideas really shouldn’t even entertain the prospect of working for equity, they should just spend their life working for wages.

Adam, Kat, or anyone else reading this – have you ever actually worked for equity?
Do you speak from experience?

So are developers.

I’m approached all the time with these types of offers, and my approach is very similar to Kat’s – even if I 100% believe in the project, the maximum I would ever go in a ‘profit = reward’ model is 25% of the development cost. I’d always want 75% paid for development, but leave 25% open to risk. This 25% I do not put into the cashflow, and I do not plan on that payment, but see it more as an insentivised bonus when the project is a success. That’s because I’m going to to a good job anyway, and the success of the project is far more influenced by the idea in the first place (out of my control), and the promotion and marketing spend (out of my control).

This is a far compromise and the foundations of a good relationship between development team and entrepreneur. It shows a shared respect, and I believe is the best for both parties, with the client getting the best value for their investment.

An idea on it’s own isn’t worth much – development time for any successful application these days would run into months. Let’s assume the development cost is £30k, even if the entrepreneur offers 10%, and we make the assumption they are putting 30k also into promotion and advertising, they’ve valued their ‘idea’ at £260k.

For most web startups, the application IS the business – and if an ‘ideas man’ can’t afford to fund their idea, then anyone that’s prepared to do it for equity isn’t going to be good enough to make it a success anyway – no one wins.

If you’re a developer or a designer and you’re on an equity deal, presumably you want to see a pay day, and you don’t want to work in the business for the next 10 years and get paid by way of dividends.

However, companies can be worth a LOT of money before they show a profit, Just look at Facebook, they could have sold for $1Billion before they made a profit. If you were an developer or designer on that and they sold for $1billion, I’m sure just 1% equity would have compensated you for your efforts :)

I know Facebook is an extreme example, but take a more down to earth example like trademe.co.nz, they sold for over NZ$700 million a few years ago. Again, 1% would have made it all worthwhile.

Just as a matter of interest, you say “I think most developers have been burned by these projects where they put in 100+ hours and get nothing out of it.” – has this happened to you? Is that why you wrote the post?

Have you, or anyone else who has commented worked on a project in return for equity?

Just how common is that scenario?

Also, if you are getting paid your hourly full rate, or the fixed amount you quote, and no one has asked you to work for free, do you have to completely believe in the idea to do a good job?

Regards,

Johan

sorry that I wrote such a long story, but the world need both enthusiastic developers as well as paying customers.

I like the idea of a combination of wages and equity; it makes the person feel involved, but also makes you their priority. A bit of now and later. But maybe it’s just personal preference.

BTW, while I always think having a designer from the beginning is so very helpful in wireframing and user interface, I have recently joined a project where they had done wireframes and the development called playnice.ly and it has been an absolute joy to work on.

I like your exit plan question… to be honest, exit plans are not my forté! Good luck with your project!

Also agreed; a year long plan is scary too. But at the same time I like to know that they’ve planned to work on this project for the long haul.

You really need the promoter to make a commitment, like putting a great job on line before you will work for FREE (future rewards only).

Nice article! Bookmarked.
Arun

I’ve thought about offering equity to a developer (and pay the UX designer cash), but frankly I thought that suggestion would be met with scorn from most decent developers, so I was heartened that you even mentioned it. However, when I got to item 13 found that you didn’t really explore the question in any depth.

I’m a little puzzled by your comment that you would be shouldering all the risk, this implies that (a) you really don’t have any faith in the business and don’t actually expect to get anything out of it, and (b) the client isn’t actually working on/in the business or is being paid by someone else (meaning that the client is also taking a risk by ploughing their own time and money into the business – clients don’t live on fresh air either :) )

If you are risk averse then you should work for wages. If you have an entrepreneurial spirit then cut a good equity deal that’s going to make you serious money if the business is a success, but don’t expect both.

A word of warning – “profit” can easily be kept at zero of thereabouts for years, even if the business is pulling in good revenue. So whatever you do don’t do an equity deal which simply gives you a share of the “profit”.

If you were really serious about working for equity, there’s an important question you should ask your future business partner – “What’s your exit plan?”

I actually think the opposite. If someone wants to plan and build for a year long release, then run for the hills. If someone is ok with building and releasing as they go, for sure let’s launch in 3 weeks. Then we’ll get some feedback and make the app better.