Working for Equity Doesn’t Always Work

Working in IT, a common occurrence is to hear about projects being run by a group of people who believe in the product, and are essentially donating their time. Money is generally budgeted in such projects toward difficult-to-avoid expenses, such as incorporation fees, or for services which they cannot get donated.

However, occasionally a skill will be needed for which some serious cash will have to be paid out. As an example, a business might require an e-Commerce site set up, from which they can sell their product. They can try to create something on their own, but unless someone on their team has the needed knowledge, it will cost them a few thousand dollars to get this set up properly.

A choice must be made at this juncture – do they sink the entire budget into the site, risking that if the development is sub-par, the money may well be wasted, or do they consider offering equity or promise of future revenues in exchange for work done now?

From my experience, both choices are dangerous – the first because there is usually no insurance policy against the worst-case scenario, and the second because it is difficult to find people willing to work on such promises.

What motivates YOU to work on a project is not likely to motivate someone else to work on that same project. If you’re inspired by the idea of working on a particular product, you may be happy to do so for little or no compensation. But your pet project is not someone else’s, and they don’t have the same belief in the project that you have. They have no reason to trust in the success (including the fact that you’re putting everything you’ve got into it).

They’re going to be motivated by being paid, in general. They don’t want a piece of your business, or a promise to pay. They want cash. While on a successful project it might have been better to accept equity, other businesses don’t manage their risk of being unable to meet payroll by relying on the risks of other businesses being profitable.

While it’s fantastic if you can assemble an entire team of motivated individuals, each of whom is willing to work in exchange for a piece of the pie, once that team is assembled, extending it usually proves difficult.

If you find yourself in such a situation, then the question you should be asking potential service providers is not whether or not they can reduce their price for a particular product, but whether or not they can find a cheaper product that would meet your needs for the short-term. If you can’t afford the $5,000 full solution, maybe there’s a different $1,000 solution that will work until you can afford more.

Just don’t expect to get the bargain, instead, see if you can get a more appropriate solution for your budget.