Compensation · Private equity

How to tackle folks here who want you to "work for free" now and "get compensated later"?

Anonymous

December 15th, 2015

I have been getting requests followed by interviews, where I can easily deduce that the founders and their co-founder(s) want me to work for free now to build an MVP but expect me to say "remember my effort" so that when things start flying / some funding comes in, compensate me then with equity or money.

Does that sound absurd to others here as well or is that something I expect from most of the folks here?

I am willing to work on a MVP, put in the required hours if not full time, but not for free. I understand that cash may not be there pre-funding, but at least offer a 5% equity (if all works out), even if you are approaching me as an employee and NOT as a co-founder.

Karen Leventhal

December 16th, 2015

This conversation highlights the cultural gap between non technical and technical founders. As a non technical founder, I would say this: you should at least get equity if you are putting in the work upfront, and protect yourself with a contract that says as much.  It's been posited that non technical founders should just raise the money. Here is the rub:  angel investors and prestigious incubators will not give you investment if you have a paid technical co founder. It's considered an illegitimate business model in those circles. Unless your technical partner is working largely for sweat equity, they will not consider it a viable partnership and you will not get funding that way. So the non tech founders are often simply followed the demands of the perceived financiers, but those don't correspond with the demands of technical professionals. Banks do not give loans to tech businesses, typically because you have no physical collateral. That leaves you with family and friends funding.   Jeff Bezos started Amazon with the life savings that his parents gave him. Airbnb founders sold commerative cereal boxes at the Democratic National Convention. But if you are expecting to be paid, then you also should expect a lesser amount of equity, which is often not the expectation. And sets up resentment from the get go, if you an equal business partner, then the sacrifice should ideally be equal.  But Aleksandra is correct that equity means you are some sort of business partner and that kind of relationship requires oodles of trust, which start up simply don't have time to develop. So then you have to hammer out a partnership contract which creates crystal clear expectations, and takes into account the risks of a start up. Are you willing to work for free in the gap between organic growth and/or series A?  Many people want to be an equity partner in a start up but don't want to make the sacrifices it requires.  I will give an unpopular opinion, but I have read Slicing the Pie, and perhaps I did not understand it,  but it doesn't seem to jibe with the realities of running a business. Business owners do not get paid by the hour. They get paid by the outcome. So, if as a non technical founder, my sales strategy takes more time than anticipated to show results, I work the extra hours until I figure out how to make it work.  My job is to create an outcome. I'm not an hourly employee.I own the thing.  When I started this hunt for a technical partner, other non technical founders told me it would the hardest thing I would ever have to do. Since I had raised and managed millions of dollars in other fields, I thought they were exaggerating. But they were right, this has been, without a doubt, the most challenging thing I have encountered in my professional career.  I'm not sure why, as Stephen said, the market is so inefficient in this regard, but I find these cultural communication gaps seem insurmountable at times. I think it's starts with realism about what resources do and do not exist and empathy and goodwill towards people involved in the process. 

Tom Jay

December 16th, 2015

This community is about finding founders.

As a technical founder I would not expect to get paid until funding occurs.

If they want you to build an MVP and get paid later you need to get stock but that is where the issues are.

I work for stock all the time, I have done very well. I am confident enough in my skills and have been around long enough where I feel that I can weed out the noise.

If you work with someone on this basis you must feel comfortable with them but most important you must be a partner, this does not mean 1% of the company, it means 50 / 50 or what ever the proper split would be based on other founders.

The technical side is NOT the most important, there are lots of apps on the market that no one has heard of.

Marketing is critical, having a team that can get funding is critical, anyone can make a product, some can make good ones but it takes a "TEAM" to make an exceptional product, market the product, get the first 100,000 users and then be able to get investment or paying customers to keep the lights on.

If your expecting a startup that is found on this forum to pay you for work then I don't think this is the correct place. This is where co-founders meet not where you find paid consultants.

Good luck.

Anselm Waterfield Working with and looking for Software Businesses with growth in mind

December 15th, 2015

Working for free perhaps isn't the issue; rather thinking about the value of your time and translating that into some "perceived value" and comparing that against the "perceived value" and the risk associated with what's on offer in the future. Setting out a clear expectation and writing it down early will also be important, this proves alignment of understanding and will make for a smoother ride ahead. I have found a useful tool that provides a framework for this here http://slicingpie.com/grunt-fund-cheat-sheet/. All the best A

Tim Kilroy Analytics - LTV - Boosting Profits - Digital Marketing

December 16th, 2015

I get the outrage - and it IS fair that consultants get paid. Often you are dealing with a founder who has no resources, so they have to beg, borrow and promise. They aren't trying to screw you, but often the entrepreneur is trying to make the impossible, possible - and finding delayed compensation is a tool to help you achieve the impossible.

Don't be outraged that someone asks you to do labor or for expertise without immediate compensation - just make it clear in your early discussions that you need to be compensated in cash. If you would entertain getting compensated in equity, then don't be surprised if the founder jumps all over that - equity is a currency that they have and value highly - and they can spend it on you and get what they need in order to make that equity worth more, what a fantastic win.

But their goal is not to extort anything from you, but rather to pay you with what is most valuable to them - a part of their dream. Don't look askance at that - dreams are most powerful when shared. But if you don't want to, or can't work for equity, then make it clear and move on. No harm, no foul.

And here is a prospecting tip for consultants/programmers/designers/etc. - startups pay like crap. You aren't going to get market value for your services because they typically lack cash. So, if that is your concern, rev up your sales game and target bigger fish. Startups use low cash compensation and shared opportunity as their currency. Don't be offended - it isn't because they don't want to pay you - most often, they can't.

Shobhit Verma

December 16th, 2015

Aleks, You may have had really bad experiences but I think your last statement is a but too harsh. I think you could have simply stated that as a freelance developer, you are not in the business of taking risk and hence prefer to work on well funded projects which can pay you market rates. That is completely understandable as you are free to make the choices of creating your risk/reward adjusted asset portfolio.

However, let us remember that there is a difference between running a business and entrepreneurship.
HBS professor Howard Stevenson defines  
"Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled."
I personally think of entrepreneurship as solving a series of chicken and egg problems using whatever "hacks" you can, until you either have a chicken or an egg and then you are a funded/bootstrapped business where you don't have to ask anyone to take the risk anymore. Development in exchange for equity is one such hack and believe me - there are people who want good opportunities to take such risks with their free time. However, just like money - you should only risk what you can afford to lose. Depending on savings, pedegree, qualifications and desire etc. not everyone can and not everyone should work full time for free on ideas that haven't been vetted by the market, but some people can and they do it all the time. 
I think the main problem was that "future promises" are not the same as equity vesting agreements. Indeed "Capitalism is not achieved on the back bone of free work.", but let's remember equity is not free either.

Rob G

December 18th, 2015

Never say never.  Thankfully different folks have different risk profiles.  This site is called "Founder Dating"  - it's all about early stage startups and "finding co-founders".  It seems a bit hypocritical to spend time here on FD and take a stance of "don't talk to me unless you can pay me money".   That's not what the early stage ecosystem is about.  I am heads down on my own startup, but i carve out time to help others because it's good for the startup ecosystem.   I like working with smart, passionate people who are building interesting businesses. I don't to if for the money.   You can't let it get in the way of paying the bills, but if everyone involved with early-stage startups required that they be "paid" in cash/marketable securities we wouldn't have startups.  If you are a service provider and you expect to make a living in the startup world you'd better stick with funded startups and don't get too far out over your skis.  Build relationships in the angel, VC community and startup legal community and source business that way.  I'm sure there are some advisors here on FD who are here to build early-stage relationships and provide some services to help get promising startups 'fundable' so they have first shot when the money starts flowing.  Of course you can't just jump in on a hand shake - set realistic expectations and put it in writing.  If you agree to be compensated in equity then you had better understand how to evaluate early stage companies and founders and how to assess risk - because there's plenty of it.  That might behove you to build relationships with others that have complimentary skills to yours so you can better vet opportunities.  
On a side note, expecting early stage founders to go out and raise money to pay salaries/bill rates or go out of business is short sighted.  If you must get paid then don't work with early stage startups.  If you don't want to be compensated in equity then don't work with startups.  Startups are risky. if you are risk intolerant don't work with startups. Early stage startups aren't about money, they are about passion.   And don't forget, what comes around goes around. 

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

December 16th, 2015

If a prospective technical founder insists they should get more than 50% because there would be no product without that tech contribution, I would advise them to run a thought experiment before making a decision either way. The thought experiment is this: If this tech co-founder is hit by a bus tomorrow, would I throw in the towel because the ONLY tech person I could hire who is capable of making my product is now dead? Or would I redouble my efforts and find another equally talented tech person. If the former is true your venture is not just risky, it is exceedingly risky. You should factor in key person insurance into your planning. Very few ventures have people who are truly irreplaceable, indeed I've never personally seen one in 25+ years of startups. If you could find an alternative tech co-founder, their argument that there would be no product without them is specious. It might be true that there won't be a product without some technical founder, but it doesn't have to be them! So, now you come back to what is their market value vs. someone else's. For a starting point, look at what their market salary rate and bonus would be.

Shobhit Verma

December 15th, 2015

This happens way too often than one would think. Even from former CEOs of multi million $ companies and  seemingly well connected folks who are on boards of several companies.
There are some genuine people out there who are not trying to take advantage of the developers, but the signal to noise ratio is so low that to be efficient with time, most of my friends say "no", unless there is something else concrete that you are getting out of that exercise (favor to a friend, learning a new market/technology, non-public data :)  )

Steven T.A. Carter

December 15th, 2015

This is an interesting topic. I have an idea, I need a tech guy to help me, but I'd never dream of not making it worthwhile. If I had the cash, I'd just pay a contractor to build it. They get paid their rate, I get my product. If I don't have the cash, then I'd be prepared to give significant equity and explain what I am bringing to to the table other than the idea (marketing, sales and operational experience). I tend to agree that you shouldn't work for free on a promise. At least a significant chunk of equity in a signed contract has a potential to be worth something. A future promise of some payment of some kind isn't real at all. 

Aleksandra Czajka Freelance Senior Software Engineer, Developer, Web Developer, Programmer - Full Stack

December 16th, 2015

Educate them....in an email. Don't waste your time with interviews.

I get about 5 requests like this a day now. From FD, LinkedIN, AngelList and others. I used to reply to them, but now I simply don't have the time. However, I am a consultant 100% of my time working through my single-operated LLC. So, I do need to find projects. My first communication with someone that reaches out to me is asking them whether they are thinking of a paid contract or pure equity. If it's pure equity. I tell them that first, it won't work for me because I need to get paid for my work, and, second, it doesn't work for them because the only reason they're doing that is because they don't have any money and not because it's good for their business. They don't want to take the risk to raise money for their idea... but they're asking me to take the risk with my own time = money? That is really disrespectful and you should educate them on that.

Now, the first time you write that, they will reply. Oh, they'll reply. With something like 1. Oh, you got us all wrong, we are 100% confident our idea will pan out, 2. You tech type are all the same - you don't get the idea behind risk and don't see what a great opportunity this is, 3. I don't have the money, what do I propose I do? 4. But we had a guy that was doing the same thing he just had to <go do something>.

Your responses should be, 1. Just because you want your business to win, doesn't mean it will. And, it has less chances of winning when the backbone of your product isn't being paid and can walk at any moment. 2. If you're any different than us tech types, why don't you drop what you're doing and come work for free for me? I'll pay you, just a year or two from now. 3. This is not my problem. You decided to start a company without a plan and now your last resort is to not pay your employees. Why are you looking to me to solve your business plan? 4. Just because you found one fool, doesn't mean we all are.

The most important advice is this, figure out in the first communication whether they're going to pay you. If you don't, any other communication is a waste of your time. Having multiple interviews just to find out they're not going to pay you is way too far into the process. Find out in the first email. Second, don't even think about doing deals like these. There's so much wrong with this. Just the fact that these guys obviously don't believe in their product, because if they did, they would raise money and take the risk themselves. Rather than monkey around, change the concepts of capitalism and chance on someone for free.