Should I Develop an App for Equity? Should I be a development co-founder? Should I program an app for a portion of a business? ALL ANSWERED.
I have been designing and developing software for over 20 years. I’ve done desktop apps, web apps, mobile apps, and I’ve worked with startups that have never gone anywhere, and businesses that have had exits or have grown on to be large successes.
I see this question regularly from developers. A friend of a friend found out they do programming and they have an idea — but, they don’t have any cash so they would like the developer to create their app for equity in the business. This is scenario specific, but 99.99% of the time do not accept this deal. I’ve only done it once, and it was after years of saying no to it and then finally getting an offer that felt like the right choice. As I expected, it eventually turned out how I figured it would.
Here is the deal, this is what comes to fruition majority of the time. Let’s say we have entrepreneurial Eddie with an idea for a software product. Eddie usually has some connections in the industry and has a lot of confidence that the product will do great, but doesn’t have the cash to pay a developer. Eddie then gets introduced to developer Dave, and is interested in having Dave create his app for equity in the business.
- Problem #1: Everyone has an idea. Everyone out there at some point in time has thought of an app or software product that could help others. If you’re not in the industry then you might only have 1 or 2 of these ever, but I’m in the industry and have an idea a week. Ideas are everywhere and they are worth zero.
- Problem #2: Entrepreneurial Eddie doesn’t have money to hire a developer, he most likely doesn’t have money to adequately do sales and marketing when it is done. He also has an overly optimistic view of what it’s going to take to market and sell it and make it a success.
- Problem #3: Developer Dave doesn’t know anything about Eddie’s business, his customers, and clients and is probably lukewarm at best on the entire problem domain. The fact that Dave doesn’t know the industry makes it hard for him to effectively evaluate the idea.
- Problem #4: Developer Dave is going to be taking on all the risk. What does Eddie have to lose having someone build a product with no outlay of cash or no skin in the game? All Eddie has really committed to was having Dave spend months of work on his app.
- Problem #5: Eddie is already over valuing his idea and future business. In Eddie’s mind it is going to be huge, when in reality most businesses fail. Due to Eddie’s optimism he is going to want 60% – 70% of the business and only offer the developer a minority stake. What could be even worse is that Eddie has a couple friends, Marketing Mary and Sales Steve that are also involved, so Eddie is going to take 55% and you 3 are going to each get 15%. But trust him, Steve and Mary know their stuff, they are a good edition to the team. Is this sounding like a class project yet? Can you feel it? 1 person is doing all the work and everyone else wants credit for it?
This is the mindset of most folks who do not have a history of successful software products and businesses. I’ve seen it over and over, so much that I don’t even work with small business startups anymore. If you are a sole individual without SIGNIFICANT cash to inject into your new business I will not even consider getting involved in your idea. I’ve worked on projects in the past where 4 buddies pool together some cash for their apps v1. Then once the application is complete and the rubber meets the road and they have to market and sell it — everyone gets mysteriously too busy at work or with other family engagements. Everyone likes the IDEA of being an entrepreneur but most people do not have what it takes to get out there, to pick up the phone, to close the deals, and bust their ass to be a success in their new business. Not when they already have a cushy 9-5 job; once the product is done they have to be willing to leave their job and go all in on the business.
- Problem #6: Is Eddie all in? Does Eddie expect this app to get made and plan to moonlight as a software entrepreneur on the nights and weekends? Or has he committed to leaving his job, and doing whatever it takes to make the sales to put food on the table. If Eddie has no money to pay Dave, and is not willing to make that commitment — he can take a hike.
- Problem #7: Eddie is naive, he has never made a software product. He thinks Dave can spend 3 months, make his app and now the app is done and off to find the pot of gold. No, once the app is done, if Eddie is able to actually make sales and get users on the platform they are going to have feedback. They’ll want changes, things will need to be improved, more features added for an enterprise client. Even after the app is made, Dave will still be busting his ass as much as Eddie.
How can you structure the deal to make the risk worth it?
Every situation will be unique, but here are some things to consider when trying to create an appropriate co-founder partnership.
Roles, responsibilities, and value to the business.
- If Eddie, Mary, and Steve want Dave to build their app, and let’s say in this scenario everyone is equal at 25%. Dave should estimate how much his work is worth. If Dave is spending 5 hours a weeknight, and 20 hours over the weekend hammering out this app over 3 months; what is the value of that? 300 hours at the rate he makes from him 9-5? Maybe more, maybe less? Let’s just say that total is $15,000. Dave is going to spend $15,000 of his own time and energy into building this app. Eddie, Mary, and Steve have not done or committed to anything. What will they commit? If that’s what it will take Dave to develop, then maybe Eddie, Mary, and Steve should each get a loan out for $15,000 and put it into the business for a marketing budget? Once the app is done, Dave is still going to need maintenance and new features and Eddie, Mary, and Steve need to spring into gear. I guarantee 1 or more flake out. Outline the contingency if/when that happens. They shouldn’t get to walk with their 15k, but maybe they can leave early on with 0 equity and get their half their money back. If they all bail, Dave gets the 15k or what is left to get paid for his work.
- Make a concrete marketing and sales plan. Outline the expectations of everyone while Dave is developing what is everyone else doing during that time, and what are they doing once the application is complete? Is Marketing Mary working on a website, content for an inbound marketing strategy, setting up ConvertKit, designing Google ads? Is Steve creating a prospecting database, calling on customers NOW to talk to them about the product and get them interested? The sales cycle for some products can easily take 3 – 6 months, any reason Steve can’t start now? Get to work, everyone should have milestones while Dave is developing. If people are bitching out, not meeting them their goals, making excuses – act early.
- Draft what the business will look like in 1, 3, 5 years. Where will you most likely need to make hires as you start to get revenue. Who else quits their jobs when, does Dave get to hire other developers at some point? Do you hire more sales? Where do you scale?
- Outline what it looks like if someone wants out, how is the business valuation determined? If it’s a two person partnership and you guys have a falling out and hate each other and split – what happens? Who owns it?
- Dave’s safety net – since Dave is putting in a ton of work upfront, it might be a good idea to have it in writing that Dave owns the product until X, Y, or Z contingency is met. For example, maybe Dave agrees to owning 30% and Eddie owns 70%. Dave should negotiate that the value of his initial effort is $15,000 and Eddie isn’t bringing anything tangible early on; that if the partnership doesn’t work out and Dave wants out that he gets to keep ownership of the product unless Eddie pays him $15,000. Once Dave is paid $15,000 during the course of their business operations then the product is owned by the BUSINESS. The $15,000 does not give Eddie a way to pay him that and kick him out of the business. That’s just paid to make Eddie whole for his initial time investment at some point in the future when the business succeeds – that gets paid to Dave out of business profits and then ownership is released to the business. These are just some ideas to protect yourself. You could also have some tiered approach where Dave starts with 100% ownership and X% of ownership moves to Steve as paid customers come on board – forcing Steve to act on his portion to bring paying customers on board to earn his % back over a certain number of months.
- Problem #8: I need feature X before I can sell it. You’ll 100% hear this BS. Entrepreneur Eddie will love to talk about the additional features the product needs before he can spring into action and sell it. People to find reasons to delay, when in reality you should be working on a reasonable minimum viable product and just get it out there in the world. Eddie will keep trying to put it back on Dave, delaying, delaying. Unless, of course, Dave truly doesn’t know what he is doing and the product stinks and legitimately needs to be fixed before people use it.
When I started Boast – the sole goal was for collecting video testimonials. At the time, that’s all it did, it wasn’t fancy, it was no frills, it collected a line of text and video testimonials. Internally we would have discussions about how cool it would be to have feature X, or if you could do Y! I said unless we can sell this as it is, with the features we thought were good enough when we agreed to make the thing then it’s not an idea worth pursuing. It’s good as is – let’s sell it as is — if and when we get to $100,000 ARR then we’ll have proven that we made something useful and can proceed to invest another round of development effort into the product. We obviously took care of the small issues, adding simple obvious things we missed, but no big investments were made until we found some product marketing fit and started getting paid.
What Risk does Eddie have? I’ve been harsh on Eddie – It’s not that Eddie is completely without risk and that all Eddie’s are the same. It’s quite possible that Eddie is the man and that Developer Dave commits to a product where he can’t deliver. I’ve also seen plenty of overly optimistic developers who think they have what it takes to make a full stack SaaS app from start to finish and fall flat on their faces. This is the risk Eddie has to protect. What if they come to an agreement but 3, 6, 9, 12 months later Eddie is still waiting on delivery and it becomes evident Dave can’t hack it? This contingency also needs to be accounted for; if it’s a partnership like this maybe Eddie can split at anytime — without code ownership — and pursue partnering with someone else; but, Dave should then be allowed to do whatever he wants with that code. It was deemed junk by Eddie anyways so there really shouldn’t be any harm in that.
- Problem 1 Revisited: Remember that experienced professionals don’t put a ton of value in your idea. It’s rare that someone really comes up with a truly unique and innovative idea and even if they do, it’s often the case the world is not yet ready for it, and it might take someone else doing it years later for the concept to really succeed. People are so afraid that someone is going to hear their idea, steal it, and start their own business with it. It’s just not the case, it just doesn’t happen. Even with the example everyone points to: Facebook (The Social Network movie) which launched in 2004, Friendster was available in 2003, and MySpace 2003. It wasn’t the idea so much as Marks vision for the implementation and roll-out. That same idea in front of a thousand different developers would have never gone where Facebook went. Also, Eddie is probably in some specific niche industry like optimizing the supply chain of fruit juice; it’s just unlikely that when Dave hears the idea he is going to be more passionate about that idea than something else he is working on — what makes the idea appealing to Dave is that Eddie and the team bring enough to the table to make it succeed. The Winklevoss twins didn’t bring anything to the table.
My failed collaboration
I’ve been hired and paid to develop many apps. Once it’s done it is a lot of work to market and sell, so much more work than anyone expects. I had a rule that I just didn’t do partnerships, if you want me to build you an app that’s cool I’ll chat with you and tell you what it’s going to take to get it made. After years with that stance, I finally caved in and gave it a shot. It was a good idea, it wasn’t too much work, and I had known the person for years and they had a strong work history.
It just never went anywhere; we built it, it was done, it worked. But it never got an injection of capital to do the necessary marketing, it didn’t have a very strong monetization strategy, and the effort on the non-developer side was too great to get the ball rolling. It stayed live and running for a couple years and limped along, and then we eventually just agreed to shut it down. There were no hard feelings, it just didn’t work out — and I wasn’t passionate enough about it to jump in and take over every aspect of the business to push it all forward. I wasn’t willing to do everyones job on the school project.
Would I do a partnership or collaboration in the future?
My default to partnering is no. Actually my default to taking on any software project is no. 🙂
There was certainly a time in my life; if you had an idea, the cash, and it was within my set of skills I was on board. But now, I’ve had enough success, worked on enough projects, where the $$$ isn’t the driving factor. I want to work on fun, innovative things, with cool people THAT also pays. Now I’m spending most of my effort on Boast and efforts that generate consistent, predictable, monthly recurring revenue and doing less and less software consulting.