I am a developer and own a web/mobile development agency. I had some success with startup as the technical co-founder. I get pitched few times a week by people saying they have a great startup idea, and if they develop it they will give me some equity. How do I tell them if you cannot manage few thousand dollars for developing a product they shouldn't be entrepreneuring and go get a real job - without sounding like a jerk. I am okay if people ask me if I can develop it for a lower fee and some equity. I really get agitated when people ask for free work. How do I convice them they should pay. Most people who ask for free work can afford to pay.
"I appreciate your interest in my work. I'm currently busy with clients that are paying my full rate. Maybe later on when you have more traction and funding we can come back to this. Looking forward to seeing what you accomplish!"
Your answer can be found in your question. You had success as a cofounder but this is very different from people saying that if they develop their idea they will give you equity. The difference is the "if". It is a contingency based on their ability to be successful which requires you to assume the business risk they are taking on as entrepreneurs. When you are a willing cofounder, you are signifying your willingness to take on the same risk as the other cofounders but without the contingency.
Whenever someone asks me to work on contingency and I don't want to, I respectfully explain to them I not willing to assume the same business risk they are taking on as entrepreneurs, or business executives when the business is more established.
However, there have been times when I've been on the fence about it. In these cases - and, there are few - I bill them like I would any regular client but we have a side agreement which allows them to pay a portion and me the option to convert the remainder into equity at a later date and under certain conditions. I am rarely willing to make this convertible portion into more than the profit portion of sales so if all goes to hell I am out only this portion but can still cover my expenses. And, I only do with people/businesses that have the cash to pay. No credit is extended; they pay upfront.
Regardless of your appetite for risk, placing the discussion in the realm of business risk allows you to have a frank and open discussion with your potential client without coming across as a negative.
I would make sure to have a "one sheet" for your pricing already created. If you're okay with a discount rate and equity then have that as an option. When you pivot to discussing compensation it becomes as easy as " for compensation for this projects here's a link to our page/PDF for startups. As we outline there we take pride in our work and like to pay our staff on time so we don't work for just equity but do have special rates for startups who designate a portion of equity."
Michael answered this question well here.
I'll add that at least once weekly I, too, have some hare-brained techie figure I must want to be their commission-based sales & marketing business partner for their unproven idea. Even had a couple come through Clarity.
I have to admit I'm not that nice about it, so I'm probably not the person you want to listen to. It's a massive indicator, though, that the person asking is totally inexperienced in business. Anyone who thinks a startup will be a success because their idea is so great clearly hasn't done anything before.
Plus they never seem to realize we already have our own ideas, our own priorities, that we're fully invested in. We don't have time for wild goose chases!
You can gently educate them if you want. "I appreciate your request," you can tell them. "I've been doing this a long time and if you're interested I can give you some feedback on what you're asking."
20 years ago I had a teacher who was a doctor of math. He taught me for three years. One day, a student asked a question, and the doctor stood there, palpitating and looking like his head was about to explode. With a wide-eyed glare, he told the student: "You don't know what you're asking! There are so many assumptions built into your question you don't even know are there."
That's how I feel when a newbie with an idea asks me to be their bizdev arm for free. You should probably start from a different point. If they're open to the feedback, tell them about the assumptions they've unwittingly built into their request, and educate them on why a paid approach works better for everyone.
Actually, the reason I think one should not work for no cash is a different one. Working for equity only is the equivalent of investment in the startup, and there is nothing wrong with it in principle, if you can afford it. For years I worked for equity only, and accumulated a nice investment portfolio (as a business consultant rather than a developer - but the principle still holds). The main issue I have encountered was that many startups do not feel the pain when giving an equity, and often will not prioritize their work with you. That means that in addition for not getting paid cash, you also waste a lot of time.
My model at the moment is to charge 30-50% cash and the rest in equity. That help me build my startup portfolio, normally not to expensive, cash-wise, for the startup,and still they feel it enough to want to help me with my work as quickly as possible.
What I said here is exactly what I tell the startups. And if all they are willing to give is equity, I tell them I see nothing wrong with that, but that I am not the right person for them.
A number of solid insights here already, but I would add that setting time frame parameters on your agreement will help no matter what the compensation looks like.
That is, if you think the project has promise and the folks running the company seem to have their act together, tell them you’re willing to modify your standard compensation model for three, six or 12 months, after which you’ll reassess the situation.
That gives you flexibility to renew the terms, change your requirements or walk within a relatively short time frame, which helps clarify your potential long-term risk as well.
Meanwhile, they’ll understand that you’re not signing off on a blank check/stock certificate.
Good luck and please let me know if you need more assistance.
That's an easy one, you say "no." While I am sympathetic to cash preservation and bootstrapping in the early days, we have no obligation to provide free or even discounted work to anyone. Startups can develop their own site or if they consider it a priority find a service within their budget to make it work. This is not being mean or selfish but a good steward of your own business. You have to take care of your business too. Every startup believes in their business but truthfully not all make it. It's not fair to offer equity unless independent of the ask you would have invested in the business, for your time and services. Tell them no, and offer to provide a quote when they have the budget and don't feel guilty. We all have a limited supply of funds and time and have to make tough decisions about how to spend them.
Asking other people to give us their products and labor for free ISN'T normal. So when someone asks us to give up our time or property for their benefit, we really must push back – even if only with a raised eyebrow.
Sure, in charity cases, we might be generous. And there might be a few startups where the risk / reward analysis justifies sweating out a contribution for the sake of equity alone. But wantrepreneurs are a dime a dozen. Something like 90% of them fail. So the bar needs to be high.
You understand this already. But do the panhandler CEO a favor and explain the situation to him as well.
Just because someone fancies himself an entrepreneur doesn't mean his daydreams are a credit card with an infinite limit. Would he tell his landlord to accept equity instead of last month's rent? Would he wave away the waiter at the restaurant, saying, "Congratulations! You own 0.1% of my latest startup fantasy"? Would he approach a used car salesman and volunteer to pay with stock in a mirage?
No self-styled entrepreneur would dare do any of those things. He'd feel sheepish to the point of paralysis. Yet, illogically, many wantrapreneurs feel that it's somehow appropriate not just to ask but to EXPECT web designers, app developers, and the like to give up their own projects and work for them for free – i.e. for a 90% chance of the equity being worthless.
Once you sit the person down and explain these facts, they'll usually understand.
People don't value what they don't pay for or work for or make sacrifices for. If the entrepreneur is eating out at restaurants, watching TV in the evening, or taking Saturday off, then he has no right to expect you to go unpaid while he's luxuriating in indolence. Let him make his own sandwiches for a month and divert his free time into an evening or weekend job and pay you that way. Then he'll understand what it means to ask someone else to work for nothing.
If the entrepreneur really can't afford to pay you, then BARTER is the fair way to proceed. Not with equity. His startup idea is probably a mirage; and, statistically speaking, is likely to flop. Find something he owns or can provide that you can benefit from. Make a swap. Or if you're just too busy to work on another unpaid project, tell him.
You "convince them they should pay" by publishing your 'no equity-only' policy on your agency's website!
I did a version of this several years ago, when I was the head of operations for a digital agency. Sales leads kept saying they wanted to "partner" on mobile apps (that is, no cash up front). I updated our website to reflect a minimum price for app development. Overnight, our sales prospects were much better-qualified.
From what you've described, try something like this: "We provide development services for clients who budget at least $X for a prototype. We consider accepting a mix of cash and equity for 1-2 projects each year. We receive dozens of proposals each month; if you can't afford 100% cash, please indicate the terms you have in mind when you complete our client application."
Want help customizing a solution for your agency's situation? I'm glad to do a call to help. Good luck!