I am in the process of designing a mobile app and i'm at the stage where I need to finalise the cost with the developers. They have sent me a quote which I believe to be quite high, however they have asked me to only pay half of the full total as they will cover the other half in exchange for equity. How much equity should I give up? I want to keep it as low as possible. I am also prepared to pay more than half. Any advice would be much appreciated. Thanks.
I would have to say it depends on the potential size of your market, potential revenue that could be generated, how awesome your app idea is, how many successes the developers have had in the past, how much money you are willing to spend, how much money you think it's actually worth, what it would cost you to get the money elsewhere (vs trading for equity), your overall probability of success...
It depends. At this point your product/idea is worth $0, so it's worth what you think it's worth or what you can agree upon.
If you were bringing in a CTO / developer partner on 100% equity and he/she was handling the development and you were doing all of the sales, marketing, etc. then 50% would be the minimum. Since you are paying the developer for their time the % is probably somewhere between 50% and 0%.
But remember that you received a quote for version 1. A product/app, whatever is not ever finished after that first scope of outlined work. You will want to add features, modify features, incorporate customer feedback, expand upon it, make it better and find more ways of making money with it.
That will cost more money. So anticipate now how you will get that money, and how that will work out between you and your developer.
What might be a better strategy is look at their quote, determine what their hourly rate is and then agree upon 1/2 their rate for some % of the company. Maybe 25%, that way you continue to get a discount in the future?
Make sure you have exit strategies outlined if the partnership isn't working out.
Equity is a bad idea. You are creating wrong incentives for yourself by giving away equity for a non-critical player in your team (heck they are not even employees!).
If you still need help with finding a dev team that could help you with defining (ruthlessly) your MVP, give me a holler!
I run a dev agency discovery platform called ContractIQ. I see startups every day and your story is a familiar version and I would hope that you make the right decision!
Best of luck!
To answer this correctly it depends on many factors. Being a CTO partner in my first startup starting up 2 other businesses, there are many different development and partnership models. Not understanding if this is a garage start-up or a funded project, prevents me from providing specifics.
The % equity to sell in exchange for development is dependent on your market potential, development effort, and potential costs for achieving market share.
Estimating your market potential is difficult for new concepts vs better solution for existing concepts. If you can quantify it, this is a great start.
Consider your target above and how much capital and resources are required to achieve that number. You will need this to determine the cost to achieve success.
The development costs and percentage are dependent on your capability to architect and manage the solution.
You are in the preliminary effort. Initial development is worth about 5-10% depending on the ongoing support for updates and fixes. This is multiplied by the risk value.
The risk value is dependent your ability to succesfully achieve your goal.