Dear [Under-Capitalized Business-Guy who wants me to work on your site for 'equity'],

Posted on January 3, 2012 by Kevin

[Note: This was cut/pasted from an email response I sent an individual I had a meeting with. I did not enter into a business relationship with this person. I posted this here since it seemed to contain general advice that might be useful to others. - Kevin]

Dear [Under-Capitalized Business-Guy who wants me to work on your site for 'equity'],

Thanks for taking time to meet today. It was interesting to learn about what you’re doing.

I’ve put some thought to what you’re trying to do and I have to be honest, I have some reservations about it. The business model itself may work, though I don’t know that much about the kinds of businesses you’re hoping to get as customers. But the very rough proforma you’ve put together gave me a bit of pause.

I appreciated that you’ve had the foresight to put together some financial modeling — that was reassuring. But it concerns me that you felt you could somehow spend only $50,000 on developer salaries over a 5 year period. And while I understand that at this point the numbers are all pretty rough, it just seems way low for what you’re trying to do.

A single developer (one with the skills to handle all aspects of the site, build it and keep it running, backed up and responsive as your customer base grows) would cost a very minimum of $75-80K/year (plus benefits, etc.) For $10,000/year you might be able to hire a single person at far less than half-time. That’s to me just so unrealistic as to be almost impossible. I can’t imagine it. You can’t build a software-based company without software developers. To realistically handle what you’re trying to do would likely require an ongoing staff of 2 or more people once you got to 2-300 or more customers using the application.

And if you can’t find someone willing to work for free I’d recommend a budget of closer to $50K to have enough to get things live with a decent design and cushion for when things go wrong — which they will.

But given your current funding level you probably can’t afford that. So what I’d recommend is finding a ‘technical co-founder’ that you can partner with. The only appropriate thing to do, though, would be to be up front that you don’t have money and are looking for a co-founder — and provide co-founder-level equity participation for their efforts (meaning probably no less than 30% ownership). Otherwise you won’t likely find someone with the level of skill and experience to make this thing work. You have sales experience and the idea, and that’s worth a lot.

But either way, given your current unrealistic expectations regarding cost I don’t think I can in good conscience refer you to contacts of mine as a potential partner. I wouldn’t feel right about it.

Maybe we can get together in a couple weeks and talk about where you are. I’m happy to meet and provide what guidance I can over coffee periodically.

Best of luck,
Kevin

This entry was posted in career, leanstartup, management, personal_insight. Bookmark the permalink.
  • John

    Kevin – I’m with you on this. The one thing I would change is the Equity arrangement. I think the technical co-founder should negotiate (that is: insist on) for 50%.

    Typically the founder brings an idea, sales experience, and capital. But here the capital infusion is really quite small. Yet: anyone who can afford even a small amount like this HAS capital, which means that they can afford it. People who can start a company with a budget of $50K usually say that they’re “funding the company on credit cards,” etc., but I don’t buy it. Anyone who can put $50K into something that is completely non-tested in the marketplace has money to burn.

    What this means is that, in terms of the money, the founder actually has very little risk. She’s risking her time – but in terms of the money, there is always other money. She’ll be able to pay her mortgage or get a real job after the startup fails.

    But technical co-founders, in my experience, don’t have capital, which if anything means that they’re incurring MORE risk. To me that means that only a 50/50 partnership can work, because there has to be serious acknowledgement up front that if a technical co-founder is giving up a lot of time, it’s worth at least as much money as the cash infusion from the non-technical-founder. AND, these days, how much money is an “idea” worth? Execution is all, and unless the founder brings, say, incredible sales skills, the execution side is going to be largely the responsibility of the technical co-founder.

    When I was in the Entrepreneur’s Organization, the question of partnerships was a constant theme. The old-timers — the ones with the most scar tissue — always advised 50/50. They said that for a two-person company, anything less always resulted in problematic inequity (in the non-monetary sense). Furhermore, a partnership is like a marriage. “Finding a technical co-founder” is on the face of it problematic – something of a “gunshot” marriage. As a potential technical co-founder, I’d hold out quite a bit before trusting the romance.

    Current score: 0
  • http://twitter.com/kbedell Kevin Bedell

    @9b4c0e92d862c88ded3744fc5f244bcf:disqus Thanks for adding your insight to the conversation. In general, I completely agree with your points — success comes much more from effective execution rather than just the idea. 

    In fact, I had that exact discussion with this founder. He and I disagreed to some extent on the point — he felt that the idea itself was of great value. In fact, he even lowered his voice at times so people around us wouldn’t hear about the idea (which to me was a warning sign).

    I’m much more a believer in execution of the idea (both from a sales/marketing standpoint as well as from an engineering standpoint).

    Current score: 0
  • Jdchmiel

    maybe the 50k would be better invested in his own education. As a senior Programmer, I would LOVE to have 50k to spend on an MBA.  Ideas are easy, paying the bills while building the idea is the hard part.

    Current score: 0