Recently I’ve come across a few people, online and offline, who’ve raised the idea of new startups outsourcing development to freelancers or agencies, and paying them in equity. For some reason, a lot of people, especially in the student enterprise community, think this is a good idea. I think this is a really dumb idea, and that’s not just because as a developer I’m biased towards people actually paying programmers. My opinion is that if someone receives equity and not cash, they should be considered a co-founder, someone expected to stay for the long haul; paying freelancers with equity is a lose-lose proposition for both sides. How so?
Why is it a lose for freelancers or agencies? Because you’re basically asking them to invest in your startup. The business model of your typical web agency/”body shop” is simple; sell the employees’ time at a profit. Therefore, they need a steady pipeline of work, otherwise they’re paying people for nothing. Likewise for a solo freelancer, though the need to maintain a pipeline of work is more important (and more difficult), since they need to eat and pay the rent.
This model is not suited to making risky moves. But if an agency or freelancer is working for equity, that’s what they’re doing; they’re essentially making a seed investment of whatever is the cash value of their billable hours. It’s going to take a long time for them to see a return on their investment; these are not professional angels or VCs with a few million to invest in a portfolio and several years to wait for an exit. And that’s assuming your startup is any good, which is a big assumption.
I’m going to be honest; when I hear the combination of can’t find a developer and doesn’t have any money my brain quickly does a pattern match, and the output is NOT awesome hustler with a great startup idea. Almost invariably I’m dealing with some “ideas guy”, who’s likely already recruited 4 or 5 of his business student friends, one to focus on finance, one to focus on “strategy”, one to focus on “branding”, etc. There will never be a salesman or anyone with other practical startup skills, such as online marketing or design.
The weird thing is that whenever I meet a bona fide hustler, someone I’d actually want to work with, they almost always:
a) have a track record of hustlin’, and so have money to spend or the ability to get hold of it, somehow; and
b) they’ve tried to teach themselves programming (even if that’s just mashing together WordPress plugins until they’ve built what they need), or they’ve trawled outsourcing sites, or they’ve cultivated coder friends and persuaded them to work with them, or – you get the picture.
IE, a good sign of a business guy/gal you want to work with is that they don’t desperately need a developer. Someone who pines helplessly about the difficulty of finding programmers lacks the problem-solving approach necessary for building a startup. A true hustler, when faced with an obstacle, follows the advice of Hannibal of Carthage: “find a way, or make one”. I bet Hannibal did not spend time handing out business cards at conferences, hoping to find a “Rome Conquering Expert” that would work for free. No. He just marched some fucking elephants across the Alps.
Anyway, after reading that, you might say “but I’ve found a developer who’s willing to spend 3 months building my app for a 10% stake, I don’t care that I’m screwing him over, mwahhahhah”. OK, let’s say you’re my best friend, the developer is my worst enemy, and I have no ethics. My advice to you would still be not to do it. It’s still a loss for you.
Why? Several reasons. The obvious one is you’re giving away a chunk of equity to someone who’ll only be around for a few months. What happens after they finish your app, leave, and you then realise you need to make a bunch of changes for version 2.0? Find another developer and give away yet more equity? Before long you’ll have given away control of your company.
In my opinion there are four groups of people who should get equity:
- founders (a big chunk)
- investors (a big chunk)
- employees (a small chunk)
- advisors/mentors/etc (a small chunk)
Basically, people with a long-term commitment to the success of your startup. Random freelancers and agencies have no such commitment, and so should be paid in cash.
The other reason is that paying with equity gives the freelancer little motivation to actually finish the project. The cold truth of most freelance arrangements is that since the freelancer is desperate to get paid, the client holds most of the power; if the client is sleazy they can leverage this with tactics like ratcheting, refusing to pay until extra work is done. (See here for examples). Sucks for the freelancer, but good for the client, who has some guarantee that the developer will finish the job. But if you’re a client that’s paying with equity, suddenly you’ve become powerless, and the freelancer/agency will quickly stop caring about a project with no payday in sight.
I know of one entrepreneur, someone fairly well-known in the UK startup community, who gave away a huge chunk of his new company to a web agency to build his website. Long story short, they dropped the ball, strung him along for several months, and in the end he had to buy back their stake in the company, after having wasted almost a year. Not what you want to happen to you.
In conclusion: if you need a developer, you should either bring on a co-founder/CTO, and pay them with equity, OR hire a freelancer, and pay them in cash.
(There are two exceptions. One is if you’re paying in a combination of cash and equity, though make sure you’re getting enough of a cash discount to make it worthwhile. The other is if it’s a “charity raffle” situation; ie, the developer is really helping you for the Warm Fuzzy Feeling ™, and the equity is just given as a bonus (raffle tickets)).
(Also I found this: http://lawyerist.com/freelancing-startup-equity/, which is a counter-point to my argument, though I think lawyers are in a different position to developers; their time commitment is a lot less).