An app begins with a germ of an idea. You may flesh out your idea and validate it on your own, but to bring your app to life, you’ll need a developer. At this point, you’re probably thinking about how you’ll fund the development of your app. You have a few options to choose from, including self-funding, raising funds, and offering equity compensation to bring in the right people. Here’s what you should consider before taking the next step and making this decision.
Why Bringing on a Quality Development Team is so Important
To succeed, you’ll need a development team with expertise in the areas your app will require. Ideally, this team will work with you for the long term to help build out new features as your company grows. Finding the right developer is a key decision for your new startup, and that means finding a way to compensate and motivate them. Now let’s look at whether giving away equity compensation is the right option for you.
What to Consider Before Using Equity to Lure a Development Team
Giving away equity may seem like a win-win proposition. But when your company is brand new without a track record, potential future value won’t motivate everyone — including, perhaps, the people that you want on your team. Your first priority should be building a high-quality team, since the team has such a vital impact on a startup’s success. In fact, because the team is so important to the ability of a startup to execute, angel and VC investors want to see key information about your team in your pitch deck.
Something else to consider is that, if your startup is new, you’ll need to offer a decent percentage to account for the risk your developer is taking — typically a minimum of 25%. This can become a problem later on, when you’re trying to raise funds to expand your company. It will be difficult to attract later-stage investment since investors don’t want to see a large portion of your equity already given away. But if you aren’t providing any other compensation, a developer won’t be motivated to work with you without a large equity percentage.
Alternatives to Offering Equity Compensation to a Developer
There are other ways to fund your app development than an equity proposal, however. Here are a few options to consider.
1. Bootstrapping
If you have savings, you can consider bootstrapping your app’s development, funding it yourself. While it can be a risk to take money out of an emergency fund, if you’re successful, you’ll be able to put that money back in, and then some. Many entrepreneurs choose to self-fund their V1 and then look elsewhere for the additional money it will take to build the next version of the app.
2. Loans from Friends and Family
Your friends and family are likely to believe in you and your vision for your company, and for this reason, they are a good place to start with fundraising. However, there are pitfalls to keep in mind. It’s important to remember that taking a loan from friends or family could change the relationship.
3. Crowdfunding
Crowdfunding is another option, one that’s especially effective for startups with a compelling story. Rewards-based crowdfunding comes with little risks, and depending on the nature of your business, it could be ideal. Just be sure to avoid equity-based fundraising, since it has legal requirements that will include you managing shareholder voting and dividend rights. You’ll need extensive legal counsel if you go the equity-based route.
4. Incubators
Startup incubators offer more than just access to funding. They provide mentorship, collaboration opportunities, and an environment conducive to innovation. Check to see what’s available in your area. It may also be worth considering moving to a city with an incubator or accelerator that supports the kind of business you want to start.
5. Angel Investment
Angel investors are an excellent option for many startup founders because they typically take a lower share of equity than other investors and they can also provide mentorship and connections. Additionally, they’ve seen what works and what doesn’t work to make a company successful, so they can offer invaluable advice.
If you want to grow your company quickly, you’ll probably want to give up equity in exchange for funding to fuel your growth at some point. But offering equity to a development team isn’t typically the right move.
Want to learn how we help startups think through all the angles of their idea? Ask about our SolutionLab workshops.
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