Dear enthusiastic entrepreneur,

I would like first and foremost to wish you well on your endeavor.
Starting a business is no small feat and you will certainly need all
the help you can get to bring your idea to life. That being said,
let’s talk about money.

You will require money if you plan on developing software. If you’ve
considered finding and asking a developer for his or her time in
exchange for sweat equity, I’m going to strongly advise you against
it. Not only are these requests often derided, they are often
insulting to the developer. Worse yet, they make you appear an amateur
with little understanding of how the technology field and development
works.

In the words of the Joker, “If you’re good at something, never do it
for free.” All the engineers I trust to execute a project swiftly,
professionally and with quality, especially under startup conditions,
will not touch an upfront equity deal with a 10-foot pole. They
understand not only the value of their abilities, but that they could
just as easily band together and make their own startup. A common
trait among these engineers is an understanding of their own
entrepreneurial value. Investing time in your goals, when they could
be developing their own, comes across as a high opportunity cost with
an extremely unlikely payoff. As great as you think your idea may be,
90% of startups still fail.

If you’ve ever tried to secure external business funding, whether it
be angel or venture based, then you know that there’s most likely
weeks of negotiation coupled with presentations, milestones and the
unmistakable feeling that you’re in a fish bowl being watched. This
shouldn’t come as a surprise since you’re asking someone for a large
sum of money. The lender wants to see mitigated risk as well as
receive some ownership for their money. Equity to a developer works
the same way, except it’s often approached as hiring an employee
instead of bringing on an investor. Be prepared with your business
plan, term sheet, and probably a beer. An “I’m giving you the
opportunity to get in on the ground floor” attitude is going to make
you the target of contempt.

So when is equity OK? It will vary depending on the unique situation
of the developer, but a good rule of thumb would be to not offer it
until AFTER you’ve developed a successful working relationship in
which you have demonstrated your ability to execute your business
plan. Your stock options are worth zero until you successfully exit
and, even then, only if the strike price is better than market value.
Proof of execution is what matters today, not ideas. It’s not that
somebody is working for free, it’s that they’re working for a better
long-term payoff. A payoff which you must prove is likely to happen.
Also, just like an investment, the more risk that’s on the table at
the time of the offer, the more of your company you should be prepared
to part with. If you offer a fractional percentage, don’t expect a
call back.

It’s going to be a rough road, as it is with all startups, and I wish
you the best of luck in your venture.

-Chris