I am doing a little market research to see what people currently pay for an MVP (or if they pay anything at all).
I don't mean "tell me a specific $ amount". But rather, I am curious to know whether most people pay "something", or instead find ways of getting it built by a cofounder or partner at no cost.
If someone came up to you and said "I love building MVP's and helping startups get going from a tech perspective - so as an early-stage CTO". Then would you say...
1. "great, I will give you X% equity but cannot pay you a fee. lets get started". or
2. "great, I have a small budget, lets talk fees (and maybe a smaller bit of equity)"
There is no right or wrong answer and it may well be a bit of both. I just want to get a discussion going because at the moment it seems to me that finding a tech cofounder/CTO is one of the main hurdles faced by startups.
As a technical guy I would say that one of the big problems is that many people come to us with some crazy ideas and expect that we do all the work and win money "in case" have a success where the other person just stay at home waiting and maybe eventually do something. When you don't believe in a project you are making for a new idea, you charge because you know probably wont succeed.
If you want the best product divide the company with the technical person on equally part and show exactly what you intend to do so is clear that both will put the same amount of hours and weekends in the project. My opinion.
I run a software company that aims at helping smart passionate people change the world. We do get asked sometimes to build the MVP for equity. This is a difficult option and I think the mistake most people make when pitching this option to me is, they do not treat it like they would if they were pitching for money (Seed, VC etc).
I often don't see the benefit and plan to 1. recover costs (time spent in design, architecture and development), 2. return 3. what will THEY do to get this generating money, 4. A plan for scaling the MVP to meet user demands (who pays).
My advice, if you want a tech partner and are serious in Equity split, treat with the same effort you would a VC. Show the value it could bring, not just in money, maybe new clients and bigger team.
some great responses on here - thanks Dady, Srinivas and Thiago.
I think it is fair to argue that if there is no fee available and equity is the only answer, that in many cases the developer should get "at least" 50% equity. And not just developers but others like a sales cofounder too.
Imagine a scenario where a gardener comes up with an amazing idea. He admits that he has no sales or marketing or technical or legal or finanical skills. But he shows the idea to a sales guy and a developer and they both believe it is the next Facebook.
I believe in this example it is fair that the guy with the idea should be happy with just 10% of the business. And the developer and sales guy take 90% between them.
But sadly many ideas people believe they should keep 80% and give 10% each to the other two people. And IMHO this is the big problem - the massive divide in how much an ideas person thinks others who can build/run his idea are worth!
If the tech is working for equity (and is reasonably good) appreciate they could have a desk or contract job instead of writing your MVP. Lets assume a 100k a year salary. If they work for a year, they have just put 100k investment (minus a ton of overtime) into your project. Let us not mention they are also paying their own bills, so add another 25k+ per year to their indirect investment.
When done the MVP, that equity is probably not worth anything. It is going to take a few years to build a sizable customer base (assuming success) before the equity has value. If it takes 3 years to make the equity worth something, the 'dime a dozen' tech guy is now 375k invested into the startup. That is a bit more than a dime. How much is that equity now worth in comparison?
Personally, when someone offers equity only, it makes me cringe. If the idea is 'reasonably' good then investment to get it to market asap IMHO should be a priority. No money to start, to me, implies someone is not doing their job or is blinded by greed. Why should a tech want to take on the risk of success/failure, when the startup owner cannot or has not tried to find basic investment to float the idea nor is willing to trade some of their own equity for capital?
As for the $10 an hour developer, its a route one could go to get an MVP out the door. I would however consider it a throw away investment at best. At $10 an hour, one should not assume they are getting quality, nor that it was cheaper than paying a more expensive developer. The MVP will likely have so much technical debt that the moment it is released and needs to scale or be modified, it should be rewritten. If one is just testing the waters with the MVP, it may be good enough.
I would always try to get the MVP built for pure equity, that way your co-founder's motivations are 100% aligned with yours. With that being said, it's not always easy to find someone who loves your startup as much as you do. I ended up building my own on a platform like Bubble which saved me thousands of dollars and equity, plus I think I gained a new perspective while having to go through the process of planning out and doing the actual building.
TL;DR - Yes. You're much more likely to get a functional product if you do.
Disclosure: I provide a service that specifically helps non-technical founders build software products.
Unfortunately, it’s pretty difficult to find a technical cofounder to work only for equity. More than anything else, I would say that your proposal and pitch have to, very clearly, be superior and display more potential than the 500 other pitches and requests the engineer has received. Furthermore, engineers typically work 40 to 50 hours and spend most of that time writing code. By bringing a technical co-founder on board, you’re asking them to commit 20 more hours and pretty much give up their social life. For free. This is rarely sustainable.
Having said that, I would argue that you probably don’t want a technical cofounder to build an MVP. There are a couple of reasons why -
So what should a non-technical founder do? If you’ve demonstrated that there is a real need for your product AND you’re prepared to spend several years trying to build a business then I would take the plunge and spend some money to hire a firm to help you build the product. Feel free to reach out to me at here or on linkedIn if you have any questions or would like to chat further.
I've made some assumptions in my answer to this question:1. You're in the idea / validation phase2. You're trying to build a software product
That is a really interesting response Zak.
Many people think developers are ten a penny, so there is often a tendancy to see that we have no value. Non-techie people can sometimes not really appreciate the years of training, experience and skills that a good CTO can bring. So not just a coder with 12 months experience, but someone who is capable of sitting at the very top as a Technical Director and providing as much management and big-picture ability to shape the startup as any of the other directors provide in their own fields. And as much experience as any money-person can offer too!
It seems that many non-techie founders see a person with a pocket full of money (VC's, etc) as being the gods that will make everything in a startup happen. But perhaps (just a discussion starter, don't shout if I am wrong), they need to start seeing potential CTO cofounders as the gods that will make or break their startup.
TL;DR: if you can afford it, I would avoid trying to find a technical co-founder prior to an MVP.
I am paying for the MVP and am very happy with that choice. As others have mentioned, having a co-founder is like having a spouse. If something goes wrong, the company may not survive. I've seen a few startups fall apart because of a bad relationship between co-founders, and I've heard that this is a common problem. If you have a bad programmer, you can just fire them.
Another issue is that non-technical people generally do not know how to evaluate a technical co-founder. Someone who might sound pretty fancy to a layperson could very well end up being mediocre. Over the past two years, I've learned a lot more about how to evaluate technical skills, but I still don't feel like I would be able to evaluate a technical co-founder as well as I would like. So I'm very happy that I stuck with paid developers and didn't try to find someone to work for equity, as that could have been very messy if it wasn't the right person.
As far as your question of how much equity to give, to me it depends on how replaceable the technical co-founder is. If I can hire someone on Upwork for $10/hour to do the work, I'm not willing to part with much equity. If the person is a true expert who is willing to devote lots of their time and expertise to the project and be up in the middle of the night if something breaks down, that is worth a lot more. How much more (25%, 50%, 75%) really depends on the effort the person is willing to put in relative to how much effort and money I've put in.
I totally agree with @Shanthi Rajan. Just as in every other situation where people have choices, technical talent operate in a free market. Never forget that you are competing for their time, energy, and commitment.
As a techie constantly approached with ideas, usually with no market research or product market fit validation (the core startup tasks that a business co-founder is responsible for), why the Hell would I join someone who didn't do their own job? Ideas are a dime a dozen. Believe me. I've heard them all.
As for building a technical product being something that any schmuck can do for $10/hr in the developing world... oh, really? So does the "engineer" you're contracting with know enough to instrument your app so you can measure usage, especially conversion rates? Does he or she tell you how much of the market you leave on the table because the web app is likely not compatible with a wide array of browser versions? There's a whole host of considerations that only come with *experience actually building and maintaining product with for-real companies* that preclude the engineer in question from charging $10/hr. I'm not talking about scale or technical debt. I'm talking about the core ways you're going to prove product market fit, figure out what features to build, and know when to pivot. Core startup stuff. Just because your initial vision of a web app is feature complete doesn't mean anything. How do you even know if that initial vision fits the market?
I've done it every way form 100% equity to percentage and to cash-only and what I learned so far - cash-only and cash+small equity are the most beneficial for both parties. I will try to explain pros an cons from the viewpoint of CTO/co-founder/contractor:
- equity only - I would consider this deal as very risky investment and I will only invest my time in projects that have good potential and I have control over significant portion of the business. This is least favorable to me as it require lots of due diligence and evaluating potential of the other owners and I've been wrong before. I will also cut losses at first signs of trouble and never look back.
- cash + equity - this is most common deal and it works reasonably well. It motivates other cofounder to start delivering value and generating cash and on my side I have potential of bigger payback. However, I do my due diligence in this situation as well and ratio between cash and equity will vary based on the outcome - for risky projects I ask for more cash and for promising ones I can take less cash and more equity.
- cash-only - I consider this option as something that I do on the side. It has no long term value and no motivation for me to stay with the business if I have better alternative. I usually treat it as a consulting gig and when I lose interest I wrap it up and jump on another project.
I think that cash+equity is the most reasonable arrangement benefiting both sides and in most cases I will turn down any equity-only offers and usually work part-time on cash-only projects.
I hope that helps.