A successful entrepreneur recently approached me and asked me to develop a CRM web application for a niche industry. The problem is he wants me to work for equity but there is no business entity yet so the business will be built only if the investors see potential in what I develop in phase 1. Essentially the business won't exist until the application exists.
The entrepreneur's company will be the first customer and they say they have 3 more customers willing to pay. The product has a good chance at success. I would be the only developer to start and I would be working only weekends on it. I have requested that he give me a check for the development of phase 1 that I will cash only if he decides to not proceed with the project.
My question is if we proceed past phase 1 how do I structure the deal since I will be the one doing all the work at first? The way I see it is if I invest 30 hours to build out phase 1 that is equivalent to me investing $3,000. Therefore he should invest the same amount or more in cash into the company.
Anybody out there ever been in a similar situation? Any advise or ideas you can provide would be greatly appreciated.
Welcome to the Sitepoint Forum. I am very happy you came here to ask for help.
This 'story' is so common it seems like a broken record.
I congratulate you on demanding that check up front. Many of us are not business-savvy enough to anticipate the inevitable.
The problem is that so many people have "GREAT" ideas and are not technically skilled. Secondly they assume that what we do (writing code, designing and developing web sites) is simple. As a result the perceived value is very low.
The PROMISE of equity in a company that may-one-day-be is really nothing more than "a promise".
Thanks for your tolerance of my rant. Unfortunately, I have no good advice for you. But my confidence in this Forum is an assurance you will get some good advice here soon (along with much debate and some bad advice).
Given what you said in the rest of your post, he's successful because he's able to talk talented people into making him stuff for free. When that "stuff" ends up at a dead end, he's not out any money but the developer is still out thousands of dollars worth of work.
The only time I would consider work for equity is when the request is from a friend and I would probably end up helping them for free any way. Anyone else needs to pay for my time, because they are also paying for a chunk of the thousands of hours I've spent getting to the point where I can charge for that time.
I have gone through this once and lost heavily in terms of time and money I put into the venture. The client simply walked away one day. Since that day, I have stopped doing such work without any paperwork in place. Here is how it goes. A client approached me for a "revolutionary" product and I found the concept quite good. Hence, the client mentioned that I need to develop the modules and in return I would get equity in the new company. This development never ended! Once the basics were done, the client came back that till now no funds could be raised as customers want X feature or Y feature. Once those were developed, a new set of features came into play. This went on for quite some time. Then I mentioned that a total of over 100 hours of development time has gone into the project and even if I calculate a low rate of say $ 30 / hour it works out to 3000$. So either the client needs to say pay me part of the money or have some paper work in place to protect my interests. The client simply walked away saying that as no funds could be raised, they are closing the project! So if you have some paperwork in place then continue or without paperwork I would not begin work on the project. The paperwork should clearly state that if the client is unable to raise funds post Phase 1 then they should pay the developer (ie you) the sum of X at Y$/hour for ZZZ hours. That way your interests are protected and customer if genuine, would not mind signing such a document.
The only alternative to doing work on spec for a friend, would be a long-time client. I've had some very successful (no up front payment) joint ventures with clients I've worked with on a paid basis for years. You really have to know someone before going down that road.
With that said, you might consider increasing your value for the deferred payment. For example, if you were to charge a typical paying client $3,000 for 30 hours of work, you would build into the contract that the true value of the work is actually $5,000 which would be paid by percentage of product sales OR payments would begin by a certain date in the amount of $500 per month until the $5,000 is paid up. I did this on a recent project and it worked very well. Gave the client a good full 6 months to get things going....but it was the date in my contract that got the fire going for him to get to "launch day."
See, if you just do work on spec like that and don't have some sort of arranged launch deadline and detailed project scope, they're going to review your product and want two YEARS worth of revisions before they decide to start selling it and launch. Gotta nail that part before you go doing tons of work.
Personally, I wouldn't touch it. The first danger sign is that "if the investors see potential in what I develop in phase 1". What an investor will look for is a solid business plan, backed by thorough research into the potential market. Has this guy done that? Never mind how great the application will be. The important thing is the market.
If he has faith in the product; if he is sure the market exists; if he is confident that he can successfully sell the product, then he should put his money where his mouth is, and pay a decent fee to the developer. If not, then it shouldn't be up to you to share the risk.
As for asking for a cheque in advance and not cashing it unless he proceeds, that seems fraught with danger. What if he spends a lot of money getting the business off the ground, and consequently goes bust before you can cash the cheque? What if he gets into a dispute with your for whatever reason, and decides to stop the cheque? What if - and this seems the most likely scenario - there are endless delays and prevarications in starting phase 1, and by the time he decides not to, the cheque is out of date.
Above all, I wouldn't go for it because I see no reason why I should take the risk. I would take the view that I am a software developer; I will write do the best job I can with the software, and I want to be paid accordingly.
But that's just me. Different people have different attitudes to risk and reward. If you can accept the risk, don't let me put you off.
Form the company, now, before you write too much code, and get a good stake in the company; like 50%, not some horrible single-digit percentage that you'll probably be offered. If your co-founder (and you are a co-founder at this point, no code has been written so you have an equal stake in my mind) doesn't want to put his incorporation fee where his mouth is then it's not worth pursuing.
Get an attorney to review any contract that you might have with this company BEFORE you write a line of code. And don't sign the contract until you're satisfied with the level of compensation that you will be offered.
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