I’ve talked with a couple entrepreneurs recently who are struggling with early partners. I’ll break this post into two parts – 1) this post describing the opportunities of equity and experience, and 2) the follow-up post next Tuesday regarding the traps of early partners with minimal startup experience. But first, the setting:
- Entrepreneur A hired a developer early on to build an alpha product with a promise to pay for services renders in a couple months. Post-work, they’ve parted ways, and the entrepreneur wants to pay off the developer and retain all code. The dev, however, wants some ownership of the company and code.
- Entrepreneur B is highly successful in a services business, and now wants to build a product addressing a pain in the current business. The entrepreneur planned to work with a developer to build the product as a test before any mass market approach. The entrepreneur wants to pay for the consulting services with no equity share, while the dev wants share for mass market opportunity.
Typically, experienced pros with early-stage startup experience (devs or business-oriented) tend to ask for money rather than equity. (I say that with lots of asterisks, though.) Experience shows that most startups fail rendering equity meaningless while even moderately successful startups yield modest disbursements to equity employees. Salary is the “sure thing”. David Cummings even refers to equity as “icing on the cake” with benefits and salary as the main financial compensation.
The flip side of this is what the entrepreneurs bring to the table that make the opportunity more enticing for pros to sacrifice salary in favor of equity. Here, expected opportunity outweighs the (risk) loss of immediate salary.
Okay. I’m going to stop here, and let you noodle on what you think the trap is for both entrepreneurs as they work with (have worked with) the devs. Till Tuesday!
What do you think the traps are? How would you handle either/ both situations if you were the entrepreneurs?