Is it common for people to work for free in exchange for equity in a startup?


2

My business partner and I have an idea that requires some web development to be done to get to the first stage of proving that the concept works. We do not want to pay to do this, but rather have someone do it in exchange for some equity in the business.

If we can establish that the concept works, we will then go for funding.

Are we expecting too much?

Thanks

Equity

asked Oct 2 '12 at 00:51
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User19942
11 points
  • Just make sure every person you speak to about it, you have sign a confidentiality agreement. ;) – Mechaflash 7 years ago
  • You're really asking the developer to believe in your idea even more than you do: otherwise you'd simply take out a personal loan and pay him/her. – Mike 7 years ago

5 Answers


11

I am a developer and get offers like that on a weekly basis. I do not consider most of them. Reason: I have many ideas of my own I want to develop. You can have ideas on every corner and in all of the cases one cannot say if one is working or not.

Now, why should a developer work for free?

You need to give good reasons for that, because if one works for free, he sacrifices family time or time he would spent for his own projects. Or hitchhiking time. Or what else.

If you want to attract a developer, you should give more than 3% equity. He should have at least as much as the other founders.

This is a post on the "idea people" which has spread among the developer community:
http://37signals.com/svn/posts/2188-theres-no-room-for-the-idea-guy If you would try to attract me, I would like to know what you can bring into the startup. "I have connections" is not good enough, as you are not impressed when I would say "I have a computer". What would you do once the startup is running? How can you contribute in future, once the "idea phase" is over?

I once developed an app with an "idea guy" (everybody makes mistakes). The app was ready, but my partner was not able to do anything else than give me his ideas. But I would have needed support in marketing, speaking with the target group and so on. This is what he should have been done as he was actually part of our target group. I had to learn that the idea is worth nothing if you don't have partners.

That all being said:

With just what you wrote, you expect too much.

You need to put some more on the table: how would the future look like when there is funding?

Besides, I would not agree to your offer if there is not a reasonable equity.

answered Oct 2 '12 at 02:53
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Christian
3,590 points

4

Yes, you are expecting a lot. Sometimes it works, sometimes it fails miserably and bridges are burnt. Be very careful choosing your new partner, and choosing fair terms to work within.

Unfortunately, most developers worth anything will not work for free unless the idea and team is incredible. See my thoughts here for a bit of a rant: Expanding development team for a startup A few summarizing points:

  • Development is not cheap. Do as much testing/planning as you can before starting development and committing to a person/plan.
  • You risk giving up x% to someone who may disappear in 6 months. Make sure you don't give up too much equity and rely on them too much. Vest their equity (%x/yr) rather than all at once.
  • Developers tend to favor interesting work. Many start-ups are not interesting, but "X for Y" (ex: ebay for hot dog vendors) type projects. This causes them to get bored and leave once it's no longer fun.
  • Get everything in writing to protect both parties. It can really hurt when things go sour without a plan.

If you just want to prove a concept works, drop all the legal / complex financial arrangements and just pay them in cash. Once the concept is proven, you can work out proper arrangements after or take investment to do things properly.

answered Oct 2 '12 at 01:37
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Adrian Schneider
456 points

1

It's not uncommon. Basically you're recruiting a new co-founder. I'd say you should be prepared to give up a significant proportion of your equity (at least 30%) to get any sane person to do it, though.

answered Oct 2 '12 at 01:11
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Kizzx2
251 points

1

Do people work for equity? Yes. "Sweat equity" is pretty common, for co-founders and for later team members. People take risk by foregoing salary, and they earn a stake in the upside.

But will someone do what you want - build a proof of concept for some stake in a company that may or may not get funded? Well, that's going to depend on their view of the risk and the potential reward.

Here are some of the factors they'll likely weigh up when they look at you and listen to your offer:

  • Do you have a solid track record in getting funding for your ideas?
  • Is your idea based on domain knowledge that's backed up by your CVs?
  • Do you have a reasonable handle on the amount of work you're asking to get done?
  • Have you invested significant time or cash - do you have skin in the game?
  • Is there a clear rationale for you not just paying the going rate for a job well done?
When you hire a developer with cash, you're the buyer. But when you hire with equity, you're selling. So recognize that this isn't just a way of saving money for you, it's a pitch to your first investor.
answered Oct 4 '12 at 04:37
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Jeremy Parsons
5,187 points

0

In addition to the other points raised - realise that it's a sellers market for development at the moment. Not enough people to do the job.

So you're not just selling the exciting-startup vs boring-day-job - you're competing aginst the existing-startup-that-pays.

answered Oct 2 '12 at 18:06
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Adrian Howard
2,357 points

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