Working for Equity?

[simonc]

Have you ever done it, would you, when would you and why?

[smoseley]

I would work for straight equity:

• if I believed in the company / biz plan,
  
• if it were at least 50% equity,
  
• if the other party were investing serious cash ($50k+ USD) or effort, and
  
• if I were given full control over the direction of the software and marketing.
  

 

I've worked for equity + cash in the past (given up to 50% discount off my prices in exchange for equity).  Only worked to my advantage once.  All in all, about net even on those ventures.

 

I've also taken stock options in W2 jobs in exchange for a salary cut.  I'm about net even on that as well.  Would do it again if the offer was right.

 

 

[KevinM1]

Have you ever done it, would you, when would you and why?

 

Nope.  I subscribe to the "Fuck you, pay me" school of business.  In my experience, people offering equity are those who are too cheap to pay for quality labor while desperately trying to get their ill-conceived and doomed to fail Facebook/Twitter/Kickstarter/Craigslist clone launched ASAP.

[Jessica]

Have you ever done it, would you, when would you and why?

 

Nope.  I subscribe to the "Fuck you, pay me" school of business.  In my experience, people offering equity are those who are too cheap to pay for quality labor while desperately trying to get their ill-conceived and doomed to fail Facebook/Twitter/Kickstarter/Craigslist clone launched ASAP.

Ditto.

[.josh]

Have you ever done it, would you, when would you and why?

 

Nope.  I subscribe to the "Fuck you, pay me" school of business.  In my experience, people offering equity are those who are too cheap to pay for quality labor while desperately trying to get their ill-conceived and doomed to fail Facebook/Twitter/Kickstarter/Craigslist clone launched ASAP.

 

This more or less mirrors my sentiments exactly.  If their site/idea is really all that and a bag of chips, then they should be able to come up with the cash to pay for development from friends or family or from a loan (there are plenty of investors out there willing to throw their money at you for good ideas). 

 

But if I were to consider it..it would have to be something I believe in and want to put my own self into.  It would have to be an equal partnership, sort of thing.

[smoseley]

Nope.  I subscribe to the "Fuck you, pay me" school of business.

 

Well, it's a matter of mindset. 

 

If you're a mercenary focused on immediate payout, then maybe the question isn't really directed at you?

 

My interpretation is that the poster is an entrepreneurial individual interested in the possibility of equity in a venture, and is looking for advice to that end from like-minded developers.

 

Your pessimistic outlook on joint ventures, while providing a good caveat, is a bit harsh, in my opinion.  Not every partnership opportunity is worthless.

[Jessica]

Nope.  I subscribe to the "Fuck you, pay me" school of business.

 

Well, it's a matter of mindset. 

 

If you're a mercenary focused on immediate payout, then maybe the question isn't really directed at you?

 

My interpretation is that the poster is an entrepreneurial individual interested in the possibility of equity in a venture, and is looking for advice to that end from like-minded developers.

 

Your pessimistic outlook on joint ventures, while providing a good caveat, is a bit harsh, in my opinion.  Not every partnership opportunity is worthless.

 

Look at what the OP posted: "Have you ever done it, would you, when would you and why?"

 

Kevin's reply answered that question very clearly.

[KevinM1]

Nope.  I subscribe to the "Fuck you, pay me" school of business.

 

Well, it's a matter of mindset. 

 

If you're a mercenary focused on immediate payout, then maybe the question isn't really directed at you?

 

My interpretation is that the poster is an entrepreneurial individual interested in the possibility of equity in a venture, and is looking for advice to that end from like-minded developers.

 

Your pessimistic outlook on joint ventures, while providing a good caveat, is a bit harsh, in my opinion.  Not every partnership opportunity is worthless.

 

No, not every partnership is worthless.  However, equity is often used by people to shift risk onto someone else.  Yeah, if a project succeeds, everyone makes money.  If it fails?  The developer bears the burden of a wasted effort.

 

Equity in addition or subsequent to payment is fine.  However, that's very rarely the case.  It's usually given in lieu of real money, which is a sucker's game.

 

And, yeah, as a freelancer, I'm a mercenary by definition.  I don't see the wisdom in spending time (which directly equates to income) on something that will likely not succeed when I can, instead, spend that time on projects that are guaranteed to pay.  It's just bad business, all the way around.  The lottery is called an 'idiot tax' for a reason.

[simonc]

Yeah its pretty interesting offer, its a foursome; they got a good front-end guy, a finance prof., some serious marketing dude and me a back end guy; deal is 5 shares per year on a 5 year cliff.  Idea is sound.  Been tested to pretty awesome results.  What would you do?

[Philip]

Also, there has to be some serious legal paperwork involved. I would never ever even consider this unless it was written in stone by a lawyer I trusted. Just because they say "yeah man, you'll get half the company later" doesn't mean shit!

[Christian F.]

I've worked for equity quite a few times, and it has yet to be a positive experience for me. So the answer to this would be no, not unless I was guaranteed some payment as well. Working for 6+ months without getting a single cent is soul crushing, I tell you.

[DavidAM]

I worked for equity once. Well, actually, I worked for pay, but accepted stock when they said, "there's not any money to pay you right now". Then the company reorganized and did a 1 for 20 reverse stock split; which drastically reduced the value of my shares. I now own 101 shares of a stock that might still be on the penny-stock board. I really don't know what happened to the company, I lost track of them. Yeah, I lost money, but it was a moon-lighting job, so it did not impact my living.

 

Would I do it again? Possibly, but only if the deal were clearly defined in writing and did not involve non-preferred stock.

 

However, if I were making my living as a freelance consultant/programmer, the answer would have to be categorically, "No". Not because I'm a mercenary; but for the same reason I wouldn't take a commission only sales job. (Aside from the fact that I can't stand selling) there is just too much uncertainty to gamble the rent money.

 

[smoseley]

No, not every partnership is worthless.  However, equity is often used by people to shift risk onto someone else.  Yeah, if a project succeeds, everyone makes money.  If it fails?  The developer bears the burden of a wasted effort.

That all depends on the arrangement.  There are many ways to arrange an equity deal.  I've seen some crappy ones and some great ones. 

 

Equity in addition or subsequent to payment is fine.  However, that's very rarely the case.  It's usually given in lieu of real money, which is a sucker's game.

Equity without any payment is fine, as well.  Again, as long as the other parties in the venture are investing an equivalent effort and/or cash contribution.

 

And, yeah, as a freelancer, I'm a mercenary by definition.  I don't see the wisdom in spending time (which directly equates to income) on something that will likely not succeed when I can, instead, spend that time on projects that are guaranteed to pay.

Completely understood.  You're not an entrepreneur.  That's a completely acceptable attitude to have.... but....

 

It's just bad business, all the way around.  The lottery is called an 'idiot tax' for a reason.

Completely unfair for you to relate entrepreneurship to gambling.  "Idiot tax" is borderline offensive.  My 2 cents.

[smoseley]

Yeah its pretty interesting offer, its a foursome; they got a good front-end guy, a finance prof., some serious marketing dude and me a back end guy; deal is 5 shares per year on a 5 year cliff.  Idea is sound.  Been tested to pretty awesome results.  What would you do?

 

Doesn't sound too interesting to me.  I'm assuming there are 100 outstanding shares, and so after 5 years you'll be a 25% partner?

 

Definitely sounds like they're trying to take advantage.  What exactly have the other 3 guys contributed so far that your share requires 5 years of slavery to acquire? 

 

If they're structuring it as options, you should draw a salary during the 5 years.  I'm assuming they each draw a salary already?  By the way, sounds like a 1 year cliff... 5 year vesting period.

[Mahngiel]

"Idiot tax" is borderline offensive.  My 2 cents.

The lottery IS for fools.  Lottery winners are statistically doomed to be broke within five years, landing themselves in worse financial distress than they were rescued from by hitting a jackpot.  It's a fool's dream to win the lottery, as winning has shown "... that lottery players have below-average incomes and education; it's no great leap to assume they tend to have limited financial literacy " (source) and the money will accomplish nothing.

 

As a budding freelancer I've been burnt more times than I care to count by fast-talking "partners" who pitch me into equity-based propositions.  I've always been smart about it, however, and hosted the files on my own servers.  So when they don't honor their end of the bargain, i pull the fuckin plug.  But that doesn't give me back my wasted time, effort, stress, and legitimate revenue streams. 

 

The entire concept is whack without loads of legalese, anyway.  No logical person would enter into a business arrangement without thoroughly investigating the statistical probability of success.  Not with your family, not with some dude you met over Skype.  There are very, very limited circumstances I would accept an equity-based arrangement, and every time, they involve a well-reviewed contract.  Otherwise, like Kevin said "fuck you, pay me".

[KevinM1]

It's just bad business, all the way around.  The lottery is called an 'idiot tax' for a reason.

Completely unfair for you to relate entrepreneurship to gambling.  "Idiot tax" is borderline offensive.  My 2 cents.

 

Why?  Most small businesses fail, especially in a fickle and ever transient industry like technology.  Even the successes are fragile.  Remember when MySpace was relevant?  Or Facebook held promise?  Have you seen all the various projects that Kevin Rose has created and run into the ground?  Locally, I remember when Cabletron was a fairly big deal in my state, and when Ektron wasn't hemorrhaging employees.

 

Creating a new business is always a gamble.  For me and my business, hooking my wagon to someone else's idea just doesn't make any sense.  I'd rather toil away doing sites for other small-to-mid business owners for a few years in order to build the capital needed for me to work on my own ideas.

[KevinM1]

Yeah its pretty interesting offer, its a foursome; they got a good front-end guy, a finance prof., some serious marketing dude and me a back end guy; deal is 5 shares per year on a 5 year cliff.  Idea is sound.  Been tested to pretty awesome results.  What would you do?

 

If you're truly interested, get a lawyer, and hammer out a contract that won't leave you in the lurch.  Before that, try to verify the buzz surrounding the idea, and have someone else (3rd party) look over the business plan.

 

Basically, if you're going to go for it, cover your ass and verify it's a good idea.

[smoseley]

It's just bad business, all the way around.  The lottery is called an 'idiot tax' for a reason.

Completely unfair for you to relate entrepreneurship to gambling.  "Idiot tax" is borderline offensive.  My 2 cents.

Why?  Most small businesses fail

...

Creating a new business is always a gamble.

True enough, yet a 33% success rate over 10 years doesn't nearly equate to "lottery' or "idiot tax".  Your previous post implies that anyone starting a business venture is a hopeless fool who is destined to fail.  In other words, you waaaaayyy overstated your case.

 

For me and my business, hooking my wagon to someone else's idea just doesn't make any sense.

That may work for you, but there are 7 billion people on this planet, all different.  Most are not "idea people", so "hitching their wagon to others' ideas" is not a bad prospect. 

 

Anecdote: A friend of mine built the software for someone else's company about 8 years ago, for a measly 25% of the company.  A year later, he left his job as a programmer at FedEx, taking a pay cut to work on it full time.  After 4 years, it was paying him a 6 figure salary.  2 months ago, they sold the business, and he cashed out for 7 figures.  Not a bad prospect.  Goes to show it works out for some.

[simonc]

Really fantastic comments everyone.  Steve you kept the sizzle with some calm logic.  Lots to think about.  And it's also really great to see your attitude towards validated stats versus fast talking cockbags with just an "idea".  These people are not that and the contract et al checks out fine.  We are getting underway and I hope to invite you guys over to see what I have done soon.  Peace and love. 

[marginhound]

Once...probably never again unless I start the company

 

The big problem I have with "working for equity" is the offer is generally made by someone who doesn't understand / appreciate the value of technical talent vs. business talent in the early stages of a startup. Now - if the person offering it is either another developer (getting their hands dirty) or a boots-on-the-street sales guy who has a proven ability to close deals (and is willing to work on the same basis), they might be able to talk me into it. But a marketing or "strategic" guy? Never...been there, done that, got the t-shirt...it wasn't pretty...