Equity · MVP Development

Equity + Small Fee: Does the value outweigh the cost?

Chizoba A.

February 9th, 2017

A software development company I've had a somewhat rapport with wants to be part of my team. They are offering to develop my project from scratch: Native app (wireframing, software maintenance, testing, etc), Digital Marketing (can do this myself) & to present me to VC's in their country. They are asking for:


- 30% of equity

- 5K

- Exclusive Contract to my startup


They want me to make a decision soon & I prefer to take my time, as I'm always looking at the long term goal (vent them more if we are the right fit to work together). Any advice would be helpful on their offer & if it a reasonable deal. This decision will determine where I do now & go from here

Sridhar Rajagopal

February 9th, 2017

Seems extremely high ... without knowing too much additional details.


Ask yourself this - value the work without the equity - how much would it cost to develop the app. In fact, you could ask them to cost it for you without equity.


Are they going to continue to be your development partner and continue to develop your software? For how long?


Which country are they in? What kind of VC contacts do they have? Are they superficial contacts, or personal ones?


Development is very iterative - you start off with a minimum viable product - some say minimum lovable product, and have to keep iterating from there based on user feedback and usage.


If you were to hire full time engineers, you would typically pay market rate, plus 0.5 - 1% equity. C roles would require a lot more equity, but also bring a lot more to the table. And then comes the question of vesting. Typically, you would like to have a vesting schedule that is 1 year cliff and vesting over, say 4 years.


If you are paying someone in equity, you would typically vest it when the project/milestones are met, but you would also prorate it based on time and effort. For example, you could offer at the rate of 2% vested over 4 years, and then compute how much equity that would translate to for the time and effort they put in now.


Something like the above would be more reasonable, imho.


Hope that helps you with your decision as you consider all factors.


-Sridhar

Gray Holland founder / director at UX-FLO

February 9th, 2017

As long as you don't have a development you own 100% of nothing (unfortunately).


Split cash and equity is a great deal, because it shows that BOTH of you have Skin and Cash in the game... The about of equity and ratio to cash is the "negotiation"


For me 30% is a bit high, but I don't know what you are doing or how difficult it is to develop. But if they are signing up for such efforts at 30% they ARE your DEV team and they are exclusive, because they are developing into the future as partners (meaning they don't get paid until the product is making money)....


Just my thoughts



Timothy Sun

February 9th, 2017

There are a lot of factors that go into your decision. I would say 30% equity upfront or vesting? How much money and time have you put into your startup. Do you have any of the skills or know of someone who who has the skills? What country is it that they are pitching it to?


I mean....personally 30% seems brutal...but it obviously depends.

Karen Adams

February 10th, 2017

There's some great advice in here already. Def ensure, if you go ahead, to have all IP rights transferred into the company by the dev team.

Don't be rushed into a deal. This is often a red flag- both sides should thoroughly examine the opportunity, product strategy, route to market, investment roadmap and monetisation of this strategy. If you have all of this prepared, you can better assess and negotiate this or other deals.