Hiring a Developer for Your Startup, Part I: Sweat Equity = Free Development?
It is your birthday. You just turned 24!
Your college buddy, Philbert (You met in a business class junior year. He smells a bit earthy, but he is wicked smart), has taken you out after work to celebrate a bit and to tell you about his new idea.
It is brilliant. Its like Tender and AirBnb had a baby named Uber who grew up and saved all of the whales. You just know it is it is going to make millions… no!… BILLIONS! Philbert, you, and a few choice craft beverages talk about it for hours. You have a stack on napkins with ideas… all of which are pure gold.
By the end of the night, you have both spit-shaked and swore a holy oath that you were going to go into business together to change the world.
The next few weeks is a flurry of activity. You have diagrams, spreadsheets, patent paperwork, your cousin, who is a part-time lawyer, is on retainer, and a big fat list of customers who are just dying to throw money at you. You are finally ready to build some software!! One question remains.
How do you build software?
You have another buddy, Natasha. She is a genius! She took four…eight? No twelve (!) computer programming courses in college and she just happens to be unemployed and working odd jobs building websites or something.
You take her to coffee one morning and she is stoked about your idea. Best thing since “the gram” she says. She is on board and is willing to give you 80 hours per week of her mad skillz in return for 25% of the company.
You and Philbert know that the success of the business lies in the hands of the developer and that you can’t do this without her so you sign some documents you found online and *poof* she is now an equity partner.
She gets to work.
The first 8 weeks go by and she is just a machine! Each week Natasha sends you videos and screenshots. Screens are popping up, business logic is being solidified (in something she calls an API or whatever). You are seeing your idea come to life by her talented hands and you just cannot be happier.
On week 10 she delivers the first demo that you get to play with. She tells you that there is no menu yet, but she gives you five different links that take you to the different screens she has built. Weird, but ok! You start playing with it. It kinda works, but it doesn’t seem nearly as smooth as the videos she was showing you. “No problem! This is just the first version,” you tell yourself.
Week 16… three demos later. Menu is finally there. You have nine pages now and you start sending a lot of emails with the bugs you are finding.
Week 18… Natasha responds to emails every day or two… the screens are still coming to you but the bug list is getting longer.
Week 20… You haven’t heard from her in four days. You decide to schedule a coffee and have a chat. You meet in the evening and find out that Natasha got a new website client that is paying her a top tier rate. Unfortunately that is taking all of her time, but she is working on your stuff as much as she can.
Week 24… Haven’t heard from Natasha in a week. You and Philbert are chatting one evening about how frustrating this process has become. Work is basically at a standstill. She says that the code is “80% complete” at this point, but you aren’t so sure… have you seen that bug list?!
Week 26… The phone rings. It is Natasha and she proceeds to tell you that the super client she got now wants to hire her full time and she just can’t work on the project anymore….
*sigh* Now what?
The Reality of Sweat Equity
Development is expensive, no question about it, so the idea of getting this valuable service for free is very enticing to new founders. The problem is… it very rarely works.
The above is an amalgamation of about a dozen similar stories I have heard over the years. To date, I have heard of one mostly successful story where a founder gave equity away for free development services.
Why is this so prone to failure? Lets break the story above down to dispel some myths.
Myth 1: The developer is ALL IN
The average web developer makes around $75,000 to $95,000 per year in the United States. It is not a secret to say that developers get paid well. They all know it. So this begs the question… why would a developer work for free?
The primary answer to this is that they are passionate about your idea. They understand it, they love it, and they are willing to contribute to it. This is great, and is a testament to the quality of your idea, but here is the cold hard truth… Passion does not pay the bills.
It is easy to believe that once a developer has agreed to help you build your app in exchange for equity that they are in for the long haul. They may even tell you that in the beginning. They may also believe it.
Natasha, from the story, is a classic example of this. She is not the antagonist here. She is a talented developer who was between jobs. Since she wasn’t earning much money anyway… why not work on a cool project and get some equity for her skills?
Just like Natasha, your developer might jump in with both feet, start to sling code, and you will start to see some real progress quickly… but that passion will, more often than not, fade over time. Why? Because development is hard.
Any developer worth their salt can get you 80% to the finish line. This is often the fun part… new screens, solving problems, creating.
The women are separated from the girls in the last 20%. This is the grind. The details, the bugs, the minutia. In sweat equity relationships this is often when the developer starts to disappear. They stop answering emails as often… they seem to get “busier” over time.
The reason for this is often because they need some money and the passion got lost somewhere around bug #172. While they may be okay working for free for a while, eventually rent is due, and the person writing those checks will ALWAYS get priority.
Myth 2: All developers are equal
Another reason a person in a highly paid field may work for free is they want experience. They are a bit wet around the ears, green, a noob if you will. If you are just coming out of college this person is often a buddy of yours or someone you meet through college. In other words, they are young too.
So… you probably wouldn’t want a guy right out of college to remove your appendix. So why would you want to give away a chunk of your company to a resident?
Again… development is hard, and if you build your app incorrectly, then what happens when you succeed and your app can’t scale? What happens if your payment processing software is built incorrectly and you get hacked? What happens when your servers melt down and your only developer is on vacation?
If you are working with a development company/agency then this problem can become even more pronounced. Often they will use their cheapest workers (i.e. newest or offshore) on the project and you end up with inferior code.
Myth 3: Development is the most critical piece to success.
This isn’t a reason why sweat equity often fails, but rather another common issue.
So the founders in the story are two intelligent guys. They have a great idea and they work hard to do the necessary research, setup a few pilots, and really build a good foundation for success. These point is, even guys that are making all the right decisions feel stuck as to how to go about getting their idea built. Furthermore, they believe that development is paramount to success and they give away too much of the company to achieve it.
The truth is… in the end, the success of a technical startup is 90% hustle and grit and 10% development.
I can build you the best app on the planet, but if you, the founder, do not do your part, it isn’t going anywhere. Ever.
Why is this important? Often those seeking a developer willing to work for equity will give away WAAAY too much of the company to get it. Development is a service, an important one to be sure, but you should never give away a big chunk of the company for any service.
From experts I have spoken to, if you are giving away equity for development, then the correct number is usually between 4 and 10 percent.
Sweat equity is a risky proposition. Most tech startups are essentially software companies and therefore development never truly ends… so the crux of the issue is the tension that is created when a developer thinks they are done and the founders don’t feel like they “got enough”. This rarely ends well…
So how do you solve this? You hire a professional (the next article in this series will discuss how to do that).
Of course your next question is… how do I afford that? This is always a hard question (and the subject of a ton of articles), but if you are truly serious and ready to commit three to ten years of your life to this idea, then this is just one of the hurdles you have to jump. No way around it.
Here are some potential ways to get the funds:
- Friends and family
- Savings and other resources
- Learning to consult in the industry you are aiming to change
- Get investors (not my first choice)
The other side of the coin
As you can tell, I am not a fan of sweat equity, but I can’t end this article without speaking to the people who are in the middle of this situation.
If you are already involved in a situation like Philbert’s, then here are some questions you and your dev need to sit down and have a serious discussion about:
- Are there deadlines (if not, get some)? What happens if deadlines are not met?
- What code language is being used? Can you find a replacement in the “proverbial bus” scenario?
- When is this contract over? In other words, what does the developer have to deliver for you to consider “worth” the X percentage you gave them?
- What about user support? Version 2, 3, 4??
- What is the scenario when the developer will switch to getting paid?
By having this discussion you are setting a standard in which the developer must meet. Often these relationships are very squishy, but squishiness is the fastest way to end in disaster.
If you are in this situation, then your software’s success will greatly depend on the relationship you build with your technical team. Engage early, often, and have the hard talks.
Hey! Thanks for reading. Just a quick note. If you liked this article, you may want to check out Part II from the series about the cost of developing your startup.