Invester Gets Equity for Money to Pay Developer for MVP VS. Developer gets Equity for MVP
We started our business back in July 2009 with the intentions of building websites, consulting, internet marketing, etc. Now we have changed our focus to developing a SaaS solution for a problem/opportunity we feel very strongly about.
Originally one of the founders was a talented developer (20% owner), but things didn't work out--we couldn't keep him motivated and had to buy him out. The two remaining founders are not developers. We are to the point of starting development but are unsure of which direction to take.
We could:
- Take out a loan, etc. to pay for the development ourselves.
- Give another developer 2-5% equity for our MVP (we've already got this available--he is young, motivated, and talented).
- Take angel money from a local businessman (he has already expressed interest in giving us money to get started, but not sure how much equity he would want--he wants to be a silent partner and I trust him--the amount he is offering could get us through the MVP and first year of iterations).
Any advice? I would prefer to be further along before I entertained taking the angel money--this would help us determine how much equity to give up, but the cash would really get things going.
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2 quick questions: a) By "MVP", do you mean "Minimum Viable Product", i.e. small but functional prototype? b) Option 2, is that a market-rate salary plus 2-5% equity as a bonus for working hard & fast; or no salary but 2-5% equity for building the company's only product? – Jesper Mortensen 14 years ago
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Yes "Minimum Viable Product"...sorry I guess it can mean different things to different people. It would be the minimum product that solves the core problem that could be sold. 2-5% equity for the MVP (no salary). We could also raise money and contract the same developer. Both options are available. Thanks! – Csumme 14 years ago
3 Answers
If the MVP is really minimal, something that can be built in 2-4 weeks or so, then I guess the 2-5% ownership and no salary deal is not .. wrong. But I really question if it would stay at that level of effort, given the dynamics if the MVP begins to take off in the market. And I think it's a unfortunate way to structure things -- if the MVP gives say 3%, and the realization of the full project is 50x larger than the MVP, do you then offer the developer 150% of the company?
And if you end up trying to get many months of work for your few percent ownership, then that would be unethical IMHO -- ideas have little value, but execution has, i.e. the developers slice should be much much larger.
Getting angel money with just an idea is unusual. Not impossible by any means, but it has to be a pretty darn good idea. You could go this route, but I would advise checking out the angel beforehand. If he's an amateur, then you're in trouble if you let him inside. And without a product and some supplemental income, how many months of runway would his investment really buy you...
2 "business guys", 0 developers, and you've already had one developer on board but forced him out... This sounds unsettling IMHO.
Maybe:
- Advance your MVP yourself, without programming. Find a way. Fx. make full-screen UI mockups in Photoshop, and test these on prospective customers.
- If your MVP still shows traction, then start development. But offer the developer a much larger ownership, if you expect him to go without salary for many months, then he's a full co-founder with equal status and ownership % in the company. Use vesting to guard against picking the wrong guy.
The above advice is based on a gut feeling that says your idea isn't nearly as good as you think it is. This gut feeling has a high probability of being completely wrong -- after all, I have just a few lines of text from you to go on. Don't let it stop you; I'm just explaining why my initial advice centers around inexpensive testing of the MVP & getting some practical work done.
Edit: About the the potential trouble with an Angel who is not an experienced investor: Well, the 'soft' trouble can be having to deal with the angel himself; as he may have many bright ideas about how to run the business that he would like to see carried out. The 'hard' trouble can more be in the legal department, often small angel deals are made on a hand-me-down contract that someone copied from somewhere. Without good legal advice this can end up with onerous legal terms on right of first refusal for capital expansions, above market rate influence in the company management etc, which would be red flags for a future Venture Capitalist looking to invest. All of this can be handled with proper legal advice -- but entrepreneurs often skimp on legal advice for angel rounds, as the sum invested is small. Structured, professional early stage investors such as Y Combinator, Band of Angels etc are better in this regard. This is not a showstopper, it is just something to consider and counteract as best possible.
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Interesting perspective. I will disagree with you about the value of an idea. If an idea is inspiring enough to get a talented developer to invest a few hundred hours of his life, or if the idea is inspiring enough to get an investor to give you money then I would say that an idea is very valuable. Or if an idea can get you off your couch at night and working to change your life an idea can be priceless. We didn't force anyone out, he wanted us to buy him out--he wasn't passionate about the business, so we regretfully obliged him. – Csumme 14 years ago
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Ideas can get you started, but execution makes a business. I would love to give a large portion of equity to the right business-minded developer--one who wants to grow a business as much as our existing partners. We haven't found one yet, but am still hopeful. – Csumme 14 years ago
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Please expound on the "troubles" of taking on a silent partner/investor to raise capitol? Any advice would be appreciated. – Csumme 14 years ago
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"IMHO" your use of quotations around "business guys" and not around "developers" suggests that you value developers more than the other roles in a business. Keep in mind that our original partner who is a developer has the talent and skill to execute on any idea, but has not. He lacks the discipline of a "business guy" to follow through with an idea/dream (even his own). I wish I had 1/2 the skills that he has and I would build the MVP myself, but my skills are in other, equally valuable areas of our business. – Csumme 14 years ago
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To your point about advancing the MVP without programming--we have considered this, but the MVP is only a couple of hundred hours of programming away and we want to do both at the same time. Good advice though--we feel strongly about moving forward even with less than ideal circumstances. – Csumme 14 years ago
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Jasper, thank you for your advice and commitment to this site--I've seen that you are a very active participant. – Csumme 14 years ago
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@csumme: If I have hit a nerve or been abrasive, then I'm sorry, that was not my intention. Regarding quotation marks around "business guys", that was simply because business guy is not a job title in common use, but developer is. I'd consider myself more of a "business guy" than anything else. – Jesper Mortensen 14 years ago
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No nerves hit. Love the conversation. Thanks again for contributing. – Csumme 14 years ago
Take the angel money and start to build a company. Hire at least two developers and pay them something so that they don't have to worry about eating. Not much but enough that shows you value their contributions. Focus on your MVP and get to revenue quick.
It's important that you have the mindset that you want to build a real company in a frugal manner. Doing this will force you to hunt for viable business opportunities that tend to get pushed to the back burner when everyone is working for free.
The equity should be distributed fairly as well. It really sounds like you are relaunching this effort, so consider that when looking at equity distribution.
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The developers we have engaged at this point have full-time corporate jobs. We are only looking for a 10-15 hour a week commitment to make the MVP a reality (3 months). Once we get to revenue or to customer we fully expect to pivot and adapt with a fuller understanding and hopefully a business model. Once we have a semi-reasonable business model, we indent to engage either a full-time free-lance developer to push forward (we have some good ones in-mind, but they deserve more than we can afford right now). – Csumme 14 years ago
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As to distributing equity fairly, I agree. We hope that the developers we have engaged/ready to engage now will want to take more ownership of the business. We would love for one of them to take the opportunity to grab a large share (10-20%). Think of getting to the MVP as a trial-run to see if they really want to grow a business. Regardless, we can get to MVP without people quitting their day-jobs. Thanks! – Csumme 14 years ago
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It sounds like you have a pretty good plan. I would still take the angel money as a bridge loan to your A-round. That way, you don't have to set a price until you create something. – Jarie Bolander 14 years ago
Providing the "large share" 10-20% upfront with a vesting schedule should eliminate your concerns for having another not-so-motivated developer and provide ample motivation to a part-time developer.
