I recently saw a tweet for this story: "Loom Launches Work-for-Equity Network for Web Developers and Startups".
The story begins:
Somewhere out there, right now, a developer is probably telling the true story of how he or she built a site or an app everyone has heard of that is making mad cash for its founders. Meanwhile, the developer collected their freelance fees or hourly rate – enough to cover a month's rent and maybe a vacation, but nothing to brag about.
If only they had an equity stake in what they built. If only.
Loom, the startup that's the focus of the story, has created a platform where developers and startups can find one another. Loom offers standard contracts for the two parties to use. In that regard, Loom is a standard freelance hiring site. Developers can use the site for free. Companies pay.
The difference between Loom and other sites is equity. Loom make it easy to negotiate compensation in terms of cash, equity or a combination. And that's the point of the story.
The author makes Loom's case that many developers want to trade some of their compensation for equity. A situation the site's founder, Chase White, notes is appealing to startups: "I don't think you could find a single early-stage founder who hasn't been like 'where can I trade equity for development services.'"
Getting Equity is Never the Problem
My initial reaction to the tweet and the news story was "What rock has this guy, White, been living under?" I'm a developer. I freelanced for nearly six years and am considering doing so again. I never lacked for offers of work that included equity. Even when I had a full-time job I never lacked for opportunities to work for equity.
I speak with startups frequently. I've been offered "spec" work (build it and when (if) we get paid you'll get paid), 100% equity work, combinations of equity and (low) pay. I've been offered escalating pay (work cheap now, we'll pay more later … which is a form of "spec" work).
What's challenging to find is 100% market value for professional work. It's out there but you have to look for it.
What's Wrong with Equity?
So what's wrong with equity? In principal, nothing. In practice, almost everything.
The first issue with equity is conversion. There's typically no market for private equity. Worse, ownership contracts often restrict to whom the equity can be sold to and often requires approval from the original company.
Closely related to the first is the second issue: does the equity have value now and will it have value in the future. Many startups go nowhere. That equity has no value. When the company eventually closes it might not even be a tax deduction.
The third issue is what happens if the founders of a successful company don't create an "exit" opportunity and don't distribute dividends. You may as well not own the equity if you can't convert it.
There are other issues and potential complications with equity but these are the issue that I immediately think of when someone asks whether I'll accept equity in lieu of or for reduced compensation.
I don't oppose trading compensation for equity. Each developer should make their own decision. I will offer a few more parting thoughts:
Developer (graphic artist, accountant, etc) time is valuable. It has measurable market value. If you're going to trade compensation for equity don't blindly accept what's being offered. Think about the value trade off. Why are they offering a flat 1000 shares when you're taking 45% off your hourly rate indefinitely?Ask yourself also the following:
- Why am I building this person's business at a discount?
- Do I think they have an idea with real potential?
- Is there a real possibility of an "exit," i.e., a payday?
The first of the questions is valuable to ask when there's no quid pro quo, that is, they're not offering equity but just want a discount off your rate. I give discounts for large blocks of hours (less time spent finding work). I also give discounts for huge pre-payments.
The last two are questions everyone who freelances or moonlights should ask. If equity really is compensation, how likely is it you can "cash the check"? You don't take work from companies you doubt will write the check. Why are you taking equity if you have the same doubts?
If you're a young, inexperienced developer don't let anyone bully you into trading compensation for equity or buy the argument "experience is the compensation". If you really dig the project and want the experience, by all means take it. But keep in mind you can also get valuable experience working on open source projects or creating one of your own.
Also keep in mind they need you. Get some compensation.
I'll reiterate the last point above. They Need You! Many more people have ideas than can execute them in code (Photoshop, InDesign, etc). Your knowledge and experience is hard won. That makes your time valuable. Treat it as such.
Lastly, if you're a full-time freelancer you're also a business person. You have employees (yourself at least) to pay. Cut a good deal for your company and your employees.
Regarding Loom, I have no beef with them. I may check it out if I stay freelance.