Equity-Only CTO and Equity-Only Developers
I had a recent email dialog with the founder of a company looking for a CTO for their startup. We had several emails back and forth where he provided basic details on the concept. And I tried to evaluate the idea and figure out:
I would think that if you are trying to attract people on an equity-only basis you wouldn’t want to get too far into the conversation without raising the issue. Otherwise, you’ll end up spending time with people who are not going to be interested. And I personally thought the reaction above about me seemingly wanting a huge salary, no risk and a cut at the profits sounds a bit over the top when all I said is that the level of commitment would mean that I would need some cash compensation.
There are cases where I will do equity-only deals. Normally it’s when I’m in an advisory role – a few hours per month. In a few cases it’s where I’m a co-founder of the business. For me to do either of these, I certainly need to really believe in the idea and it has to be something that won’t consume all of my time. And let’s be honest, most employees, advisors, etc. who start with small equity percentages don’t end up making very much from startups. Likely the effective hourly rate as an equity-only CTO Advisor is pretty low.
Once things get into more significant time commitments, i.e., a part-time CTO role, I need to work on some combination of cash and equity. And certainly, if you are looking for Development, you can theoretically find equity-only developers and get things done, but that won’t be me trying to do that. Consider what Ryan Waggoner tells us How to Find a Technical Cofounder:
I would caution any founder that finding and being successful with equity-only developers is tough. It can be done, but it’s hard. Here are a few perspectives on it:
Building a sweat equity team
Thirty more articles related to this:
- What did the founder really need here? Was it a Startup Founder Developer Gap? Was it a case of needing Homework? Did they really need a Startup CTO or Developer or both? Did they have a Weak Development Team? And do I fit as a Part-Time CTO, Technology Advisor, CTO Founder, Acting CTO?
- Understand where they were in terms of being able to pay or was this equity-only (sweat equity only).
Thank you for your time Tony, I understand everyone wants a huge salary, no risk and a cut of the profits.For some reason there’s a stigma around cash vs. equity conversation and it seems to offend some founders that people have limits for what they will do on an equity-only basis.
I would think that if you are trying to attract people on an equity-only basis you wouldn’t want to get too far into the conversation without raising the issue. Otherwise, you’ll end up spending time with people who are not going to be interested. And I personally thought the reaction above about me seemingly wanting a huge salary, no risk and a cut at the profits sounds a bit over the top when all I said is that the level of commitment would mean that I would need some cash compensation.
There are cases where I will do equity-only deals. Normally it’s when I’m in an advisory role – a few hours per month. In a few cases it’s where I’m a co-founder of the business. For me to do either of these, I certainly need to really believe in the idea and it has to be something that won’t consume all of my time. And let’s be honest, most employees, advisors, etc. who start with small equity percentages don’t end up making very much from startups. Likely the effective hourly rate as an equity-only CTO Advisor is pretty low.
Once things get into more significant time commitments, i.e., a part-time CTO role, I need to work on some combination of cash and equity. And certainly, if you are looking for Development, you can theoretically find equity-only developers and get things done, but that won’t be me trying to do that. Consider what Ryan Waggoner tells us How to Find a Technical Cofounder:
When I was doing freelance development, I had about one pitch per week for an equity-only opportunity. I fell for a couple, learned my lesson, but now I never accept these kinds of deals, even though a lot of the ideas and even teams seem solid. There are usually several reasons, but mostly it comes down to them not offering enough equity. These “startups” are almost always mostly-non-technical founders offering 1-2% premoney for a “lead developer” position. In my view, the very fact that they feel that the technical development of a web startup is only worth a couple percent speaks volumes.That’s a pretty common experience. Unless you are a co-founder of the startup, a developer is probably not going to do all that well working on sweat equity alone. For me, that means that I would be burning bridges and losing relationships with developers that I brought on that way. Of course, if you are a good developer looking for equity-only positions in very interesting startups, please drop me a note. Bottom line, if there’s significant development, you need capital or a founder needs to go source the equity-only developers.
I would caution any founder that finding and being successful with equity-only developers is tough. It can be done, but it’s hard. Here are a few perspectives on it:
Building a sweat equity team
You simply need to network. Go to user groups. Go to tech (or other relevant industry) events. Refine your elevator pitch. Eventually you'll catch the ear, the vision, of someone who would like to jump on board, and has something you need in return.Brad Feld in Places to Find Developers in Exchange for Sweat Equity
While finding a developer to work for sweat equity is an option, I’d assert that you’d be better served by hunting for a technical co-founder that is passionate about creating the company you envision. In my experience, it’s naive to think you can just “get developers to build the product” although it does sometimes work. Most of the great software startups that I’ve been involved in have at least one technical co-founder (and many have more than one.)How To Find A Programmer To Build Your Startup Idea
Another option is sweat equity. It is important to realize that most people who are willing to work for sweat equity are not a) the best, b) in demand, and c) going to put their heart and soul into your project. Motivation to work for sweat equity is something else that founders tend to take for granted. Sweat equity is usually best applied in the case where you are working with someone you know who already trusts you and who you know will put up a solid effort. Sweat equity is also applicable for someone who is very interested in the subject that you are working on. What sweat equity is not good for is for people who you don’t know at all. You should avoid spending your time here and instead focus on finding a way to generate revenue or to attract investors so that you can afford to hire someone.Recruiting Startup Engineers
Engineers are humans, we have bills to pay, families to take care of, friends that we want to spend time with, and on occasion indulge in the latest tech gadget. Contrary to the way we carry ourselves we’re not robots (although I do enjoy being called a machine - but I’m not Summer Glau). So before you ask someone to even spend an hour of their time writing code or reviewing specs make sure you can pay them in some form (coffee, dinner, laptop, etc.), and if you can’t then you better start thinking of ways to raise enough funds to be able to pay them something. Don’t expect someone to work for nothing endlessly.Bottom line: I’m willing to have a conversation with most any founder, just don’t get offended when I suggest that capital is required for me to be involved.
Thirty more articles related to this:
- How To Calculate Sweat Equity- Get Venture: Venture Made Transparent, February 11, 2010
- How Much Equity a Technical Cofounder Should Get - Nathan Hurst, July 19, 2010
- When You Should Hire a Dev Shop (other than “never”)- Brad Hargreaves, March 7, 2010
- Make Sure Sweat Equity Vests- Get Venture: Venture Made Transparent, February 18, 2010
- Small Business Tip of the Week: Understand the Value of Sweat Equity- The StartUp Blog at PartnerUp, February 22, 2010
- Places to Find Developers in Exchange for Sweat Equity
- Top Startup Mistake 8: Misunderstanding Equity- Up and Running, February 5, 2010
- Why Andreessen Horowitz Invested in Foursquare- Ben's Blog, June 29, 2010
- Ten Tips for an Investment-Grade Business Plan- Startup Professionals Musings, April 22, 2010
- Ten Common Arrogance Traps for Startups- Startup Professionals Musings, January 24, 2010
- How To Find A Programmer To Build Your Startup Idea
- Eight Questions Every Startup Hopes You Won’t Ask- Startup Professionals Musings, August 20, 2010
- Bootstrapping a Lean Startup- Ash Maurya, March 23, 2010
- Founder Agreements – Vesting, Vesting and more Vesting- High Contrast, April 25, 2010
- Ten Tips for Business Traction to Attract Investors- Startup Professionals Musings, May 22, 2010
- How to bootstrap a Startup with less than $10k
- Finding a Technical Partner for Your Startup
- Think Your Start-up Is Venture Worthy? Think Again
- How to hire a programmer to make your ideas happen
- How Much Stock to Ask For When Joining a Startup- Startup Professionals Musings, June 20, 2010
- Guide to Evaluating Startup Ideas- Tony Wright dot com, May 27, 2010
- Eight Tips To Successfully Bootstrap Your Business
- Should Founders Be Allowed to Take Money off the Table?- Both Sides of the Table, September 2, 2009
- Guide to Finding a Technical Co-Founder | Vinicius Vacanti- Vinicius Vacanti, September 7, 2010
- Finding Your Co-Founders
- Software Startup Myths Debunked
- The 18 Mistakes That Kill Startups
- Guy Kawasaki’s 10 Questions to Ask Before You Join a Startup
- How to hire a programmer to make your ideas happen
- From Nothing To Something. How To Get There
4 comments:
Heh. You just described 9 out of the the last 10 potential iPhone/iPad *big ideas* that have come my way. And before that all the dotcom big ideas in he late 90s. IMO it's a pretty big red flag if the founder gets offended when I start asking tough questions. I generally end up doing the job for a (sometimes drastically) reduced rate when I want to learn the technology.
Matt - I think a lot of developers have gone through a trial or two of equity-only development. And good point on using these kinds of gigs to learn new technology. How you convince a developer should probably be another post.
Hi Tony,
Great blog post. I am co-founder of a startup and now in the CTO position. I think the real issue is the gap between founders and the rest of the team. You want your employees to feel ownership of the product or services your company offers. As a founder ownership is the same as equity, but as an employee it is not necessarily the same thing and that's ok.
Last year I setup a development center in India for my company and was amazed to see that there is also a big cultural difference with respect to how employees see cash vs equity based compensation.
Equity-only compensation works for a short amount of time - until the business starts hiring other people on salary. I prefer to see revenue-sharing compensation because it gets compensation closer to when the work is done.
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