Four reasons why accepting equity is a bad deal for your dev shop

Erin Equity, Running a business, Web Design & Development 1

Over the years, we’ve had clients ask if we’ll offer a price break or even waive our costs altogether in return for equity in their product.

As an idealist, I totally understand and love the idea of equity. Hey, we’re all part-owners of this product now! We all have equal incentive to make it succeed! I also like money, so this also runs through my head: “When this great idea does succeed, I’m gonna be rich, rich, rich!”

As a business owner, though, I think equity is generally a bum deal for development shops. Here’s why:

1) Scope creep

The client/software developer relationship generally works like this: The client wants a bunch of features, and the developer is happy to build these features, as long as client will pay for them. That’s key: somebody’s gotta pay in this situation. Budgets and real monetary costs are handy tools for keeping a project’s scope in check. When each new feature or flourish on an application comes with a real monetary price tag, it offers a powerful incentive for the client to consider whether or not this is a worthwhile investment.

But when the developer is being paid in equity, there are no hard wallops to the pocketbook to keep the client’s expectations in check, so adding a little more here and a little more there is a little too easy.

2) Development fatigue

When you’re in it for equity, you’ll probably be working harder and longer than you would if you were working for a client paying cash. Not only will you be working harder and longer, you’ll basically be doing it for free. Without immediate compensation, you’ll become more and more unhappy as weeks of work go by. You’ll be tired of working on this project pro bono. You’ll be watching your bank balance dip. You’ll resent that you took this job.

3) It makes bad business sense

When you’re working for equity, you’re not just fronting your client $10K. You’ve also lost the $10K you could’ve earned from a paying client in the same time. You’re down $20,000, my friend. Not a good deal.

4) You don’t get the same respect as a venture capitalist or an angel investor.

People sweat for months about making pitches to VCs and angel investors, but when it comes to asking a development shop to build the product in return for equity, they often ask like it’s no big deal. “Hey, here’s my awesome idea. Would you help me build it in return for a share in the company?”

Let’s rephrase that: “Would you loan me $10,000 to build this application? If it makes any money, I will give you a cut.”

Angel investors and VCs get detailed presentations about financials, about teams, about burn rates, about all kinds of business-y stuff. Developers deserve the same.

I am sure there are plenty of folks who’ve seen big returns on their equity, and kudos to them. But here’s my advice: if you’re going to entertain the idea of equity, respect yourself enough to ask the client to give you the same pitch they would give to their other investors, and seriously consider the investment you’re making before you agree.