Why your dev shop should take equity to develop your app.

If you’re a non-technical startup founder, choosing a dev shop who will take equity to develop your product is definitely a smart choice.

A lot of non-technical startup founders don’t really know where to look at when it comes to giving life to their ideas. They get an idea, get excited, sketch some specs on a napkin corner, turn them intro wireframes at best, and then if they don’t have a CTO co-founder they start wondering how to proceed next.

First thing to do is usually to develop a Minimum Viable Product (MVP) which is the simplest version of your app with just the core features that allow the product to be deployed and no more. Its purpose is for early and affordable testing of an idea, with the smallest subset of functionality required to validate the idea or assumption.

Building an MVP is an essential first step in order to:

  • Test the product idea on real users and get traction metrics (build-measure-learn your way to a successful product)
  • Demonstrate how it works (prototype)
  • Impress investors
  • And even sometimes convince a potential CTO to get onboard (studies prove they’re much more likely to join once the idea is validated, which means made attractive thanks to useful traction metrics).

Then you’ll have to decide wether or not you want to continue working with the team who built the MVP or hire your in-house team.

A freelancer vs a dev shop

Most entrepreneurs who don’t have a lot of cash to spend on their MVP usually turn to freelancers. It could be a good idea to hire both a freelance developer (or several) and a freelance designer.

Contrary to what some people might think, the development part is not more important than the design. You must recruit both an excellent developer and an exceptionally skilled designer. Don’t cut expenses on the design as focusing on the front end is important. Having a product that looks good on the front end will help you visually tell your story and persuade engineers to help you work on the back end later.

But working with freelancers can only work as long as the startup founder is able to describe exactly what needs to be done (speak to engineers in their own language) and most importantly has the skills to recruit the right people (which framework and language should I use to build my app? do my applicants really master these technologies?), manage them individually, and coordinate their work. I have seen a lot of people turn crazy after making the wrong choices in their recruitments or after realizing they didn’t have the skills to manage efficiently their newly hired team.

Once the founder has passed a round of time consuming interviews (assuming they have enough technical background to judge people on their coding skills) and painful negotiations, they will have to manage the whole project, being in constant communication with their team.

Most importantly they’ll have to be very careful to make sure their freelancers are developing exactly what they want, or even better, what they NEED. Most of the time people do know what they want but it’s usually much more than (or quite far from) what they actually need. They’re not seeing what is truly essential, the core features for an MVP.

So working with a team who has an experience of building products and can advise you on product/market fit, MVP features, product architecture, UX design…will make you save considerable time and money.

Which is why an interesting option to get help validating the idea before developing anything would be to work with an agency or a development shop (or “dev shop”). But not any dev shop.

I believe founders would really benefit from making sure they work with a dev shop who will take equity in their startup. Not as a single mode of remuneration of course, but more of a mixture of cash and a small amount of shares.

The main objective for the startupper is not so much to minimize the cost of app development (even though that’s definitely the icing on the cake) but rather to give the dev shop a real purpose for commitment. Having a small ownership in the startup keeps their interests aligned. They will work really hard to develop a topnotch product with the hope it would pump up the value of their shares.

Another advantage of working with a dev shop is the long term involvement that freelancers don’t always offer since they usually jump from a project to another. After launch, when many updates to the product will be necessary after measuring and learning from early adopters feedbacks, the entrepreneur can choose to continue working with the dev shop until they find a CTO and/or hire an in-house team. This gives even more sense to equity distribution in order to build a solid long-lasting relationship.

Why your dev shop should take equity in your startup

Startups succeed when there is a strong alignment of interests among all parties. The team who is actually building the product should have an extra incentive (other than billable hours) to create a quality product. Even when it means challenging the clients’ requests, based on your market knowledge and/or technical knowledge. Being able to say “no” or “why” to the client is essential.

Contrary to a classic agency or dev shop when the client comes in with an idea and the agency executes the client’s vision without challenging it, a dev shop who takes equity will be engaged in a co-building process where both visions are brought to the table and discussed.

The dev shop will provide business advice instead of just blindly taking the client’s requirements and code it. Equity is both an extra motivation and a compensation for this added value.

Of course talking about co-building doesn’t mean the dev shop should completely redefine the client’s idea. Instead they should keep the genesis while doing what it takes to improve it and turn it into a beautiful functional app that will please end users.

Based on this belief, I created Lean Mean Factory. We’re a dev shop using lean software development methodology and offering “MVP for equity” services to selected startups.

If we like a project enough and believe in the team behind it, we offer to work at an agreed rate (discounted hourly rate) and take a remuneration based on a mix of cash and equity. It allows us to invest in promising companies while allowing the startups to get cheaper MVPs.

It is a good way to help startups who don’t have a lot of cash afford their MVP and at the same time allow us to get involved with amazing products and projects and make smart investments. We offer a higher value of services because a large part of our upside comes from the equity and our incentives are aligned with the startups.

We are passionate with startups and like working hands on with founders on every aspect before launch (brand strategy, product/market fit, creative concept, wireframes, layout, UI/UX design, development…) and after (digital marketing strategy and growth hacking). We like the idea of being a real partner, helping visionary founders giving birth to a startup.

Taking a mix of cash and equity allow us to have vested interests in seeing our clients thrive and to offer them a cheaper and better MVP. So it’s definitely a win-win!

This trend of swapping equity against professional services has proven to be really efficient over the last few years and not only in tech. Many B2B businesses are using this model these days. But to make sure equity for trade will work well for both parts there are a few rules to observe.

Financial and human considerations

Giving away equity is not a decision that should be taken lightly. Founders should keep in mind that once someone owns a share of their startup they cannot reverse this decision. So every time new investors will get onboard and they hand new shares out, their control of the business will be diluted.

At Lean Mean Factory, because we understand that, and also because we split remuneration between cash and equity, we only ask for a very small amount of shares, usually between 2 and 5% depending on the value of the product we are developing. It gives the startup plenty of space to give shares to other people. We always give our clients the flat rate and the discounted hourly rate so that they can completely understand the costs involved.

I believe that a combination of cash and equity could be a less risky solution for a startup than pure equity. Besides each side should give each other safety cushions with a clause in the agreement that allows the founder to buy back the equity they should want and an exit clause who allows the dev shop to sell their shares anytime they want.

Then comes the human aspect. Each partner should carefully choose the other based on a common vision and working style. At Lean Mean Factory we only work with startups who share our genuine passion and working style. And we expect them to do the same. Believing in the team is at least as important as believing in the product that is being built.

If you’d like to discuss this topic further with me or learn more about what we do at Lean Mean Factory, feel free to say hello on Twitter: @LeanMeanFactory or @MymyAb.