8 problems with developing an app for equity

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, and mobile apps. I've worked with startups that never went anywhere, and businesses that have had exits or grown into large successes.

I see this question regularly from developers. A friend of a friend finds out they do programming and they have an idea — but they don't have any cash, so they'd 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, after years of saying no, 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's the deal — this is what comes to fruition the 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 a lot of confidence that the product will do great, but doesn't have the cash to pay a developer. Eddie 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, has thought of an app or software product that could help others. If you're not in the industry, 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: No money for marketing

Entrepreneurial Eddie doesn't have money to hire a developer — and most likely doesn't have money to adequately do sales and marketing when it's done. He also has an overly optimistic view of what it's going to take to market, sell, and make it a success.

Problem #3: Dave doesn't know the industry

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: Dave takes all the risk

Developer Dave is going to take on all the risk. What does Eddie have to lose, having someone build a product with no outlay of cash and no skin in the game? All Eddie has really committed to is having Dave spend months of work on his app.

Problem #5: Eddie is already over-valuing his idea

In Eddie's mind it's going to be huge, when in reality most businesses fail. Due to Eddie's optimism, he's going to want 60–70% of the business and only offer the developer a minority stake. Worse, Eddie has a couple friends — Marketing Mary and Sales Steve — also involved, so Eddie takes 55% and you three each get 15%. But trust him, Steve and Mary know their stuff. Is this sounding like a class project yet? Can you feel it? One person doing all the work and everyone else wants credit for it?

This is the mindset of most folks who don't 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 where 4 buddies pool together cash for their app's v1. Then once the app 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 family. Everyone likes the IDEA of being an entrepreneur, but most people do not have what it takes to get out there, pick up the phone, close the deals, and bust their ass — 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.

Problem #6: Is Eddie all in?

Does Eddie expect this app to get made while he moonlights as a software entrepreneur on 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 isn't willing to make that commitment — he can take a hike.

Problem #7: Eddie is naive about "done"

Eddie has never made a software product. He thinks Dave can spend 3 months, make his app, and off they go to find the pot of gold. No. Once the app is done — if Eddie can actually make sales and get users on the platform — they're going to have feedback. They'll want changes, things to improve, more features 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 everyone is equal at 25%, Dave should estimate what his work is worth. If Dave spends 5 hours a weeknight and 20 hours over the weekend hammering out this app over 3 months — what's the value of that? 300 hours at his 9-5 rate? Say that total is $15,000. Dave is going to put $15,000 of his own time and energy into building this app. Eddie, Mary, and Steve have not committed to anything. What will they commit? If that's what it takes Dave to develop, maybe Eddie, Mary, and Steve should each take out a loan for $15,000 and put it into the business as a marketing budget. Once the app is done, Dave still needs to do maintenance and new features, and the others need to spring into gear. I guarantee one or more flakes out. Outline the contingency for if/when that happens. They shouldn't get to walk with their 15k, but maybe they can leave early with 0 equity and get half their money back. If they all bail, Dave gets what's left to get paid for his work.

Make a concrete marketing and sales plan. Outline what everyone is doing while Dave develops, and once the app is complete. Is Marketing Mary working on a website, inbound content, setting up ConvertKit, designing Google ads? Is Steve building a prospecting database and calling customers NOW to get them interested? The sales cycle for some products can take 3–6 months — any reason Steve can't start now? Everyone should have milestones while Dave is developing. If people are making excuses and not meeting their goals, act early.

Draft what the business looks like in 1, 3, 5 years. Where will you need to make hires as revenue grows? Who else quits their job, and when? Does Dave get to hire other developers at some point? 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 have a falling out and split — what happens? Who owns it?

Dave's safety net. Since Dave is putting in a ton of work upfront, it's 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 owns 30% and Eddie owns 70%. Dave should negotiate that the value of his initial effort is $15,000, and that if the partnership doesn't work out, Dave keeps ownership of the product unless Eddie pays him $15,000. Once Dave is paid $15,000 over the course of business operations, the product is owned by the business. The $15,000 doesn't give Eddie a way to pay him and kick him out — it's just to make Eddie whole for his initial time investment, paid out of business profits, after which ownership is released to the business. You could also do a tiered approach where Dave starts with 100% ownership and a percentage moves to Steve as paid customers come on board — forcing Steve to earn his share by bringing in paying customers.

Problem #8: "I need feature X before I can sell it"

You'll 100% hear this. Entrepreneur Eddie loves to talk about the additional features the product needs before he can spring into action and sell it. People find reasons to delay, when in reality you should be working on a reasonable minimum viable product and just getting it out in the world. Eddie will keep putting it back on Dave, delaying and delaying — unless, of course, Dave truly doesn't know what he's doing and the product legitimately needs fixing before people use it.

When I started Boast, the sole goal was collecting video testimonials. At the time that's all it did — no frills, it collected a line of text and video testimonials. Internally we'd discuss how cool it would be to have feature X or 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, we'll have proven we made something useful and can invest another round of development. We took care of the small obvious things, but no big investments were made until we found some product-market fit and started getting paid.

What risk does Eddie have?

I've been harsh on Eddie — it's not that all Eddies are the same or completely without risk. It's quite possible Eddie is the man and developer Dave commits to a product he can't deliver. I've seen plenty of overly optimistic developers who think they can build a full-stack SaaS app start to finish and fall flat. This is the risk Eddie has to protect against. What if they come to an agreement, but 3, 6, 9, 12 months later Eddie is still waiting on delivery and it's clear Dave can't hack it? That contingency needs accounting for too. In a partnership like this, maybe Eddie can split at any time — 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 anyway, so no harm.

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 that the world isn't ready for it, and it takes someone else doing it years later for the concept to succeed. People are so afraid someone is going to hear their idea, steal it, and start their own business with it. It just doesn't happen. Even the example everyone points to — Facebook (The Social Network) — launched in 2004, while Friendster was available in 2003 and MySpace in 2003. It wasn't the idea so much as Mark's 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 niche industry like optimizing the supply chain of fruit juice; it's unlikely that when Dave hears the idea he'll be more passionate about it than something else he's 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's a lot of work to market and sell — so much more than anyone expects. I had a rule that I just didn't do partnerships: if you want me to build you an app, cool, I'll tell you what it'll take. After years with that stance, I finally caved and gave it a shot. It was a good idea, not too much work, and I'd 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 strong monetization strategy, and the effort on the non-developer side was too great to get the ball rolling. It stayed live for a couple of years and limped along, then we agreed to shut it down. 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. I wasn't willing to do everyone's job on the school project.

Would I do a partnership 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 when, if you had an idea, the cash, and it was within my skill set, I was on board. But now I've had enough success and worked on enough projects that the $$$ isn't the driving factor. I want to work on fun, innovative things, with cool people, that also pays. These days 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.