On Taking Equity
It can be hard finding a reliable development team. The competent ones are usually expensive, and "expensive" is the last thing you want to hear when you're managing cash down to the cent at your startup.
As a result, a lot of the new clients we talk to want to know if we might take equity in lieu of our hourly rate, or, in the more extreme cases, in lieu of anything at all.
Which sets up an awkward moment, because we have to tell them, "not a chance."
Sorry! I know it seems like a huge expense to pay us in cash instead of potential, but we promise, you'll be happier in the long run if you do.
1. You don't want us as your business partners
You don't even know us! Your other partners are probably good friends you'd trust with your life. We, on the other hand, are strangers. And strangers are not good shareholders.
Plus, unless you're a software consultant, chances are we don't know half what you do about your industry. True, we do add technical chops, but only temporarily. Once we've earned our equity you're stuck with us, and we're not sinking any more time into the project.
Which brings me to reason #2.
2. Cheap developers build cheap software
Making great software isn't something you can do when you're not heavily invested. When we work on a project that costs hundreds of dollars an hour, we're on the hook to make it worth hundreds of dollars an hour. An hourly rate forces us to take delivering on our promises very seriously.
On the other hand, things that cost nothing but time (which could be spent billing) carry almost no incentive to do it right. There's simply a desire to get it done. Which means that when we part ways, you'll be left with software that's considerably more costly to maintain than if you had paid someone to do it right the first time.
3. We don't believe in your idea (at least not like you do)
Entrepreneurs find it hard to believe they'll fail, and that makes working with them so damn fun. But it can be hard to understand why we aren't jumping on board wholeheartedly.
It's important to remember that we're not venture capitalists. The only experience we have in investing in other people's ideas is those other times we took equity. Guess how they ended?
4. A programmer isn't actually worth that much
So let's say we're just daft and your idea really is the next billion-dollar company. Let's say you're gonna take it public in two years. Your IPO will be worth about $2 billion.
Well, congratulations; you just overpaid dramatically. You could probably have scrounged together $10k for a minimum viable product and ended your obligations there, but instead you spent $20m on the same damn thing.
5. We can't afford to take equity for very long
Once we run out of runway on your project, we have to go back to making money. This is true of anyone who wants to take equity. We'd probably feel terrible about it, but ultimately we'd have to leave you high-and-dry. No one wants that.
This is an especially likely outcome because...
6. You're going to want a calendar
Much like taking a fee acts as a motivator for us, spending your own money creates internal motivation for you. When anything is askable, people inevitably want to add messaging to their app. And a calendar. Everyone seems to want messaging and a calendar.
You don't need messaging and you don't need a calendar. You may not realize that if you're not paying cash, but once all the extraneous junk has a real cost, your brain is instantaneously focused on getting the most important stuff done and leaving anything your customers aren't asking for til later. And that makes your software a better, more stable product.
Bottom line: you're the entrepreneur; we're the muscle
At the end of the day, this all boils down to one simple fact: you're the entrepreneur. We're consultants. Like you, we're very good at what we do, but our entire risk profile is different from yours. That's what makes us a great team, but it's also what makes us unlikely investors.
So skip the equity and get a head start. The absolute hardest sales pitches I've ever made are the "save money in the long run" ones, but I promise you, if you spend something small up front, you're going to be much, much better situated in a much shorter time.
You don't have to give someone $100k to get off the ground. Just pay someone competent however much it takes to get the most basic piece of your app into the hands of an investor or beta tester. Any MVP can be bought for $10k if you're ruthless enough about its features. Be disciplined, spend a little cash to get what you need, and abandon the idea that you can get a great product built for free. It's much cheaper in the long run to focus on building a rough draft.