Questions

Should I accept a deal with an equity trade-off for free services?

Deal: Outsourced Product Dev - proposes 12% vested equity for $15k discount + free branding & marketing. Should I accept? The product dev studio I am outsourcing the initial development to is happy to give a discount of $15000 for 2 years vested equity of 12%. They will also help with free branding and marketing efforts totalling to 95 hours. Plus key contacts with investors and partners. The studio group is credible with good clients list and second time entrepreneurs.

5answers

We have a few programmers in house but when we have to we outsource to a NJ based Software Development company - www.BetaBulls.com, their leader Sree is amazingly talented and well adapted to working with startups as his niche market. I know they have taken clients on equity before but is always a small percentage and even allow flexible payment options. How flexible? You'd have to ask him for more details.

With that said, I do agree with you, when I launched my very first startup years ago I had to partner with a small programming team and gave them the CTO position (as a team) with their shares and rights but because they were being hired - they also took payment. Needless to say, the partnership didn't work out. We did get an MVP going but because they weren't entrepreneurs themselves they only cared about their share of the work and pay and were not willing to put in extra work for the equity they had received - equity is not meant to be seen as a payment for the contractor, but as an opportunity for the contractor who believes in your product to generate something for themselves much higher than their typical fee would allow.

As first time entrepreneur, or Newbie CEO as I call them, you need to watch out for these subtle differences in the companies you are looking to outsource your work to. Consider the dev agency's entrepreneurial spirit, their capabilities as well. For example, we chose BetaBulls because they have so much skill power behind their team that any development setback can be quickly out maneuvered and they can probably churn out better work than other teams who have the same skill sets through out the table where as they have overlapping and niche skills.

ON BRANDING
Beware of these promises, it reminds of me those who offer 'free promotion' in exchange of your service. Branding is part of marketing, and marketing is not advertising while branding is also not a logo. If what you need is cohesive branding through out your app, web and accounts online an affordable graphic designer (maybe one from our team) can do that for you. If is branding design work for the app/web itself - then that is not something they are doing for free, because it should be part of the Statement of Work - how can they build something with no design? As far as Marketing goes, do they have any marketers in place? previous case studies of how they did something for someone and exponentially grew their company?

MARKETING IS NOT ADVERTISING
Marketing is a management level effort, for example when we get hired, our clients get our MBA, Startup experience, Strategy expertise to help them fine tune their operation, their product, their branding, market positioning and anything else that is CUSTOMER FACING - once we have that do we begin working on a marketing strategy that involves advertising to the right audience, right demographic, timing, channels, with the right words, the right content, right images, right blogs, right relationships and running paid advertising on the right channels - if their "Marketing Help" is helping you post on social media--- that's not worth 12% equity, maybe .5% percent.

For context/contrast - is typical for board members of a growing startup to get .5% - 2% for their participation - for most non-snap chat type of startups .5% is the standard offering - because you need as much equity to leverage as you continue to grow.

I hope I was of any help, below are some links for you.

www.betabulls.com - app / software development
Http://blog.unthink.me - marketing tips, practices, strategy

If you can do me a favor and follow me on Twitter @HumbertoVee and or http://facebook.com/iwillunthink

Thank you for asking and reading :)


Answered 3 years ago

12% is a real number! Ok on a Financial basis you need to think as follows
- 12% for $15,000 that values your company at $125,000 : does that seem right to you?
- if you think that feels wickedly low then key is how much value will you receive beyond a $15k discount and how do you get that part as clear and confident as possible.
- once you understand and have confidence in total contributed value you can better understand if its in the ballpark of value for you
- and then look at your other options to gain the same value (paying $15k more in cash and how else you'd gain access to investors etc).
- then due diligence as 12% is a serious impact on your future.

- one question that isn't here is $15k discount on what size of total project? It's not unusual to gain some discount off core Dev rates based on project size wp giving up anything.

Epilogue: My take on this is: without knowing all the details. It's sounds really really steep unless it comparable in total and real value to an incubator like effort (tech Stars) but even at that at 12% they better have a strong track record of delivering this type of added value time and time again. If you feel it is a incubator model than it's not about 12% for $15k, it's really about a whole lot more and you need to make sure that is well defined and agreed and or set double trigger vesting on a bulk of the 12% allocation (double trigger : time vest and action or milestone - i.e. They get some basis for the deal but earn up to the 12% by actions and results ).

- schwartz out


Answered 3 years ago

There are two parts you need to consider in making this decision: 1)the total value of the discount and branding & marketing services to your company and 2) the value of your company.

Part 1) The value of the services is an "opportunity cost" of using this company. If you were to hire another firm with the all of the same qualities, skills and timeline, how much more would you have to spend in cash for the same development, branding and marketing services. Call this figure X

Part 2) Develop your valuation for your company that would use for an investment at this stage. Call this figure Y.

If X/(X+Y) is greater than 12%, then you should do the deal, otherwise you should not.

Example: If all of the services are worth 20K to your company, and you value your company at 140K, then you should be willing to give up 12.5% and would take the deal. If all of the services are worth 20K to your company, and you value your company at 150K+, then you should be willing to give up 11.7% and would decline the deal


Answered 3 years ago

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