SaaS Business - Drawbacks of Paying Developers in Equity May 23, 2019

SaaS Business - Drawbacks of Paying Developers in Equity


In theory, a software as a service (SaaS) business seems like it would be a pretty straightforward endeavor. Find and idea for a new app, hire some developers to build it, then pitch to investors who can help take it to the next level.

Unfortunately for SaaS startups, the reality is far more challenging. There are thousands of business owners trying to reap the benefits of a subscription-based software model while there is great demand for developers and funding.

The real conundrum fledgling SaaS businesses face is how to hire good developers without funding, and getting funded without good developers on staff. This  has led many SaaS startups to try to lure developer talent with equity-heavy compensation plans. The lure of the exponential growth never quite played out the way they had imagined, leaving them with a bunch of worthless paper as the next big thing became the next startup failure statistic.

It’s not just the developers who are at risk when it comes to working for equity. The software business owners are, in fact, putting themselves at a much greater risk than the developer and here’s why:

 

    • Commitment Level - While an owner will work day and night to see their business grow and become successful, the same can’t necessarily be said of a developer working for equity. The idea, of course, is that as the business grows so will the developer’s interest. It’s good in theory, but promises of future earnings based on today’s work can’t pay today’s bills. Because of this, it isn’t uncommon for a developer working for equity to have one or more side jobs to support his or her current financial obligations. This can leave owners eager to progress frustrated.
    • Security - If, say, after six-months of working for equity, the developer receives an actual paying offer, there’s nothing stopping them from up and leaving. This puts the owner in an even tougher predicament. Not only must a new developer be hired, but they’ll have to then work on code someone else wrote. Poor documentation or no documentation could mean potentially long stalls and delays in the launch of the product. It also wouldn’t be difficult for a developer to walk away with a copy of the application they wrote.
  • Valuation - Owners may over inflate the value of shares to a developer which can cause a host of problems down the road. Valuing shares ahead of actual revenue is near impossible, even with a solid forecast. Owners who value their company and offer equity ahead of launch are asking for trouble. Future investors will look at revenue and may reduce the valuation. In other cases, owners end up giving away more of their company than they would have originally liked.

While hiring for equity shares may seem like a good option, it’s a slippery slope and one SaaS owners should avoid whenever possible. Giving away too much too early will hurt good businesses when they actually start adding subscribers. SaaS business owners would be wise to:

  • Find a way to get funding and pay developers a fair wage in dollars. Once loyalty is earned (on both sides) futures in equity may be part of the growth or retention plan.
  • Take the time to find experienced software specialists who can execute your vision. Perhaps request deferred payments that you can pay within a six-month period. Deferring payments when possible will allow for better cash flow management while demonstrating to development talent that you’re in it for the long haul.
  • Work with developers who have developed a platform to completion and have had a stake in the financial outcome. Work with someone who understands the risk.

Whether you’re looking for funding or development help, Metisentry can offer options in both areas. Contact a Metisentry software or funding specialist today to learn more. Fore more about planning, building, and growing SaaS applications, download our eBook below.

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Jeff Schafer

Written by Jeff Schafer

Jeff joined Metisentry in early 2017 as part of our merger with Pantek, which had previously acquired Pencilneck, the custom software firm that Jeff founded and ran for over a decade. His background as a software developer, systems architect, project manager, strategist and entrepreneur position Jeff well for his current role as Metisentry's Chief Revenue Officer. In his capacity as CRO he is responsible for attracting, identifying and building collaborative relationships with partners seeking to transform their businesses through the effective application and management of custom, cloud-based software solutions.