Ask HN: Should I code for equity? | Hacker News Reader

Ask HN: Should I code for equity?

8 pointsmars4rp24 comments

Hello HN,

I am Mid/Senior developer, and I have a part time job with that pays the bills and I don't need more money right now.

I was thinking about starting to code for pure equity, like warrants for 1.5x of my rates based on current valuation.

Do you think this is a good idea? I am assuming finding clients are not hard, am I wrong? How should I set it up legally?

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If they have a current valuation, from a priced round, they can probably pay; I'd go that route. If they don't have a priced round, I'd recommend code at a rate in exchange for convertible debt, with a reasonable discount on their next priced round. It's just cleaner, though it could have an impact on their future financing, but that's not your problem. For example, let's say they agree to $150 per hour and a 20% discount. Then, you give them 1000 hours worth of work. you have $100000 worth of debt (technically, plus your interest), they raise a round of $2m on $4m and you are getting $100k worth on $3.2. Or, a scenario where they raise convertible debt for seed and the incoming investors see your discount for in-kind, not cash. That could be a problem.

Here's your problem. Startups want to get as much as possible and given that you have a day job, that's going to create some friction. If they are hustling and pressed enough to go for this sort of arrangement, be prepared to be micro-managed, for free work. And what happens when they argue with you over how long something "should take" vs. how long something did take.

Good luck.

It is sometimes tough to work for startups even if you are getting paid. A large part of freelance work with startups is determining scope, because they won't do that for you!

(no one will do it for you, but startups tend to be much less "understanding" ... which is understanding I suppose)

Working for a startup this way would essentially turn into an angel investor, but instead of investing money you're investing your time. If you really believe in the team (grit and execution is more important than ideas IMHO) you could absolutely do this. But keep in mind that investing in startup is all about making 10 or 100 bets and hoping that while most of them will go bust some of the bets will earn outsized returns. Common wisdom is that 9 out of 10 investments go belly up but the tenth become Facebook and the whole portfolio makes a good profit.

How many startups can you invest your time in and how confident are you that you can find the startup that succeeds?

Now, if I where in your shoes, and I am in fact quite envious of the freedom you have, I would find a startup and a cause that I enjoy working with and disregard financial outcomes. Maybe see if there are technical solutions that I could help with to combat human trafficking or child pornography.

Interesting idea, but I'm not sure it would work. An angel investor typically invests only a small sum, and I don't think investing only a little coding time is going to help a startup a lot.

On the other hand, you could set up a firm with a number of people who invest their time in a larger number of startups. Like a VC fund, but for coding.

I meant it as a rhetorical question, so the idea is entirely yours. But I like it, kind of like a collective of coders investing their time in startups. Even if individual bets don't pan out all the collective bets might/could pay quite handsomely.

very interesting, I was thinking about the exact thing. I think it is a great idea!

> Do you think this is a good idea?

Absolutely not. Coding for equity is essentially working for free since you have ZERO idea of when or if their business will be profitable enough for an IPO or a sale. And since literally anyone can claim to have a Facebook killer in their head these days, literally anyone can claim that they have a startup (IIRC, you don't need to file any sort of paperwork to be a sole proprietorship in the US).

Best case out of all this is that they pay you as an independent contractor. But even then, it's probably going to be a lot less than what you'd earn in a truly paid role. And you're withholding taxes on your own, so there's that issue. And the business owner(s) could still probably claim taxes as sole proprietors since you were never really employed (read up on contractor classifications). And etc, etc, etc...

Again, just don't do it.

When I first began, I thought about doing this, and I had done it for someone, they would invest in just the domain and hosting, but I'd end up doing all the coding, and I wasn't experienced enough at the time, so the idea was scratched.

Nowadays, with more experience, and knowing what I know now: I wouldn't do it. It's like taking on an unpaid internship, and well, I got bills to pay. I might be willing to negotiate a lesser salary until things took off, or I had some ownership and stock in the company, which might make me change my mind.

However, I did build a website, for an engineer who had a pretty solid product, and after 3 years or so of working for him, he gave me stock in his company, but thought that by doing this, he could skimp out on paying me, even though I didn't charge him very much to work on his website. He eventually found another developer and paid them what he wouldn't pay me. But I'm definitely no longer in the business of working for free, except of course, for myself.

If you don't need the cash right now, and are okay with not getting a return on your investment for many years (if ever), go for it. Just make sure you vet the opportunity as an investor would, not as an employee or contractor would.

This means understanding the company's team, product, market, financial condition etc. You also need to understand the full cap table and who has liquidation preferences, how your shares might get diluted, and other such factors. If you don't intimately understand what all those terms mean, don't do it.

If there is a current valuation that probably means they either have raised significant amounts of capital in the past or have significant revenue. Which raises the question of why they'd even be willing to pay a premium to compsensate you in equity.

Hell no!

Considering 99% of startups fail, and I'm guessing on average, start-ups reach a liquidity event in let's assume 5-8 years if not more, you're basically working for free on the off chance (1%) that you might get paid in 5-8 years?

but the 1% that pays going to pay 100X , isn't that how VCs operate?

If you can get VC-like dealflow and vetting - yea. Would need a few years before building a reasonably sized portfolio too. On top of that - this kind of a deal isn't going to play too well with future investors. Not to mention you won't be getting liquidation preferences etc.

It's stacked against you in every possible way. You could work for regular pay and just make angel investments?

VCs also operate with various protections and guarantees (e.g. against dilution, position in the chain for repayment of the original investment, etc.). An individual contributor isn't going to get that kind of deal.

Not really no. Most VCs and frankly most angels would not invest in a startup without a validated product - validated by revenue. The exceptions are usually where the team is being lead by a founder who has previously had a successful exit or worked as an executive inside the startup's target market. You might agree to build an MVP more for your own curiosity/experience. Consider making a bright line in your agreement around when they get customers. At the point you will carry a lot of responsibility and accelerating demand for feature improvement by default.

I think you should not, because you're trading time which is your most valuable asset, and (statistically) you're not good at picking the right startup (read it as "you're not guaranteed to be good", I don't want to say that you're necessarily bad).

To elaborate. An angel investor has a lot of money, say a spare $200k, so she can invest $20k in 10 startups. If one of these does 20x in, say, 5-10 years, she doubled the money which is good.

You, instead, will only bet on one startup. From a purely monetary perspective, you shouldn't go too early stage to increase your prob of success. At that point, might as well work for a late-stage startup that offers cash + equity.

In your situation, I'd find a cofounder and a project, that can either become a startup, or even just grow to a passive source of income. If you arrive to a good amount of money, then you can think investing.

If you decide to go for it anyway, from a legal point of view I don't think you need anything. The easiest thing is that you'll become an advisor for a small percentage (I assume of very cheap stock options). Keep in mind that it will take several years before you these options may become stocks (company goes public) and there are many ways for the company to silently cut you out of the pie if they sell or exit in any other way.

My plan is not to invest all of my time in 1 startup, I was thinking of doing 2 or 3 a year, I don't want to build their whole product! In 5 years I am going to have a portfolio of 10 to 15 startups, if one or two do 20x, I would collect all of my money plus nice return! And it is much more fun than to work 70 hours a week for a company for 5 years!

Legally what is the best way to reduce a chance of being cut of in sell or exit?

Ok, sorry that wasn't 100% clear to me, but in this case it makes sense.

To the best of my knowledge you have no legal solution -- that's probably where investors may give you good advice. But if the founders decide to close down and go work for another company, there's no liquidation event. This said, we go back to the 1:20, if your plan is to invest in many, then you should be good.

You are in a very good position: you can pay your bills AND you have some more time on your hands. Start an own side project instead of working for someone else. This is from a father who thinks this would be a dream come true ;) ... use your time as long as you have it and create steady side income!

I tried this couple of times but I am really bad at marketing, I currently have a ready product with no clue on how to market it! And I am unable to find a non-technical partner that meet my expectations!

I'll be in the minority here, but if you can partner up with an awesome non-technical co-founder on a project you believe in - then absolutely. Otherwise? Nah.

That's different, OP is asking to just code for equity and suggested finding random clients for it?

Sure, if you believe in the idea, and can find the right partner, then go for it, it's going to be your baby.

But coding for free on someone else's idea... no thanks

Yeah, it's too much risk and time. Maybe putting together really scrappy MVP's and taking a decent chunk, but I don't know too many good founders who would do that.

Yes, if you believe the idea has merit.

Never a good idea.

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