“Hey! I have a great business idea. It’s a breakthrough. Help me build it. While I don’t have the cash now, I can give you equity in the deal. Let’s get started immediately!”
I hear a variation of this at least once a month, and I always say no.
There are 3 reasons why working for equity isn’t for me:
#1. Your “deal” isn’t really a good deal for me
I get it, you want good programmers to do the work, or a good team of programmers to do the work. That’s fully reasonable.
But generally, the equity deal is closer to 20% to the programmers, with the rest going to you or a “team” of advisers. So while we’re doing close to 100% of the work—we only get 20% of the business?
Even a 50/50 split should have a 50/50 split in workload, which is rarely the case.
No one cares about thoughts or ideas anymore, which is why most venture capitalist firms rarely sign NDAs. Your idea doesn’t matter, what matters is whether your idea is a sustainable business.
Next, it’s generally assumed that the person working for equity is invested 100% into the “life” of this idea. This is like a timeline (i.e., I will work for 6 months and build this specific part of the project, in exchange for 30% of the cost of the project) but this generally goes against what the founder is looking for.
Now in my situation, I did believe in the idea, founder, and experience. However, I made the mistake of signing this blank check of my time, which created the issues.
#2. I don’t think you’re a good entrepreneur
Prior business success, especially in a different field, doesn’t necessarily make you a good entrepreneur.
One of the top jobs the business owner or entrepreneur has is ensuring that the project or business has the proper funding to run the business. Having people work in exchange for little or no payment is not exactly ensuring the business has funding.
Already, before anything else, the funding of the business has failed.
That’s the biggest item that is seldom answered when I say something like, “okay, so I’m building, testing, and maintaining 100% of this application. What specifically are you bringing to the table?”
Basically, why are you going to share the wealth (or, why do you expect a majority of the wealth) off of my hard work? There is so much risk on my plate (hours of time spent I may never be paid or compensated for, less-than-ideal working conditions, and so on) and little to know risk on your end.
This is because (1) most startups fail (2) equity only has value if the business has value, and even when the business starts to gain value, the equity is generally not close to (3) better offers for our time and skillset.
In my own situation, I worked for a start up for a nominal fee and nominal equity. After tallying the hours spent (well over 5000 hours before I stopped counting) and the fees, I realized getting an entry level job @ $12 an hour for those hours worked would have paid me more overall.
This was one of those wake-up calls to change the course of that project, and realize the equity split was a trap for me. Even if the project had made money and sold at market rate, it likely would have taken me another 2 or 3 years before I even earned the opportunity cost back.
#3. You need to reconsider your idea
You’re ignoring the fact that most businesses fail.
You’re also ignoring the dangerous and self-destructive tendency to overvalue your ideas. We (I am just as guilty of this) have the tendency to walk into a room full of people who are more experienced than us, and try and dazzle them with our brilliant ideas.
In this realm, this translates to people who have a new app idea or website idea, and then come to someone like us (who has decades of experience in the realm) and spinning how quickly and easily it should be to get this to market.
I have a great piece of advice for people when they don’t understand their idea isn’t worth it: try and get one of your competitors to steal a smaller idea. It doesn’t have to be your big “make money” idea, but try and get a competitor to steal the smaller idea.
Call them, email them, let them know about this idea that would revolutionize their industry.
You will find one of two things:
- They will ignore you
- They are too busy working on the 8000+ other ideas or issues that come before this, and have no interest in now jumping to a new business model
The above article references this line:
While ideas usually take hold in small niches of innovators, they can often spread to early adopters, who are only slightly more resistant to join in. Once they’re on board, those in the early majority begin to feel comfortable giving it a try. As each threshold is past, the next group becomes more likely to adopt the new idea. That’s how disruption happens.
The point to this is that the concept of “when we build it, they will come,” couldn’t be further from the truth. Overnight success is a myth, it is statistically so rare that people will generally have a better time playing the lottery.
There is a HUGE difference between “overnight success” and “early success,” which is where people often get confused. People will refer to things like “Mark Zuckerburg built Facebook over a weekend!” without accounting for the fact that:
- He was already a good programmer
- That version of Facebook wasn’t even a fraction of what it is now
- It actually took between two weeks and 2.5 months, depending upon who you ask
- He ripped off almost every single person involved in helping him in the beginning
Finally, working for equity and working on a shoestring just sucks. It’s overly romanticized in movies, media, and with these “success” stories. In reality, it’s really a lot of late nights, unearned revenue, and frustrating situations (“If we only had $50,000…” type conversations).