With the advent of the cloud and many shifting paradigms, many of the services typically associated with consulting firm will start to become commoditized and productized at an ever increasing pace. Customer will begin to expect their IT partners to stop telling them everything is a unique, custom problem very particular to their specific scenario. I run a consulting firm which finds itself in a similar predicament.
Although we are a consulting firm, we have a fair bit of experience building and maintaining software products for our clients. Some of these clients have, in the past, offered to give us equity against services rendered, but few of these deals materialized in the past. While there were many reasons for things not working out, I would say the key reason was the lack of consensus between both parties on the value of their contribution in terms of equity. We are a company of exceptional people and so understandably everyone I know thinks they are the most important person in the project J. That their contribution is key and (sometimes) the world may not turn without them. This is all great if you are a solo-flight entrepreneur but if you are a team player and the sales guy, the tech lead and the money man all have this attitude, the plane never really takes off. For this to be a successful venture, I believe one of the key things is a mutual respect of each other’s art. This is ofcourse is a subjective statement, rather useless unless you have some numbers to back it up.
If you are ask professional VCs they will tell you that there really is no norm in the purchase of equity for early stage startups and that its really about who needs who more at that particular time. I think while that is largely true for relatively more mature companies with few takers, there is a market place developing now for startups that is starting to standardize these things somewhat. One example of this is angel.co. You can search for open positions with 0 salary (only equity) and start to get a sense of what sort of equity people are willing to offer key roles in the company.
Here are some observations I have for working with equity for offshore companies:
- Equity generally ends up getting split 3-4 ways:
- Tech/Dev lead,
- Tech/Dev leads usually make around 15% if working on pure equity. I’ve seen some cases around 30% but those are probably outliers. If you are getting a salary, expect less. Most techies don’t like hearing this but I think most need to accept how it is and understand the contribution of their partners.
- Check out this nifty tool: http://foundersolutions.com/founder_equity_solution
- Another one: http://foundrs.com/
- Offshore companies are generally great at cost-effective offshore delivery but generally handicapped when it comes to thinking of ideas that are relevant to the US customer base and also in terms of selling things.
- The sales handicap is changing rapidly with the development of SAAS marketplaces like Google’s play store, apps store, office 365 marketplace etc…
- The ideas landscape is also levelled for many things that are universal in scope. E.g. most people will play games much the same way no matter what part of the world you are from. This is in contrast to for e.g. an e-invoicing application, which will vary quite a bit depending on the industry and geography the app is aiming at.
- The legal paperwork around the equity partnership is something that should not be taken lightly. From diluting shares to shares you can’t ever sell, the fine print is something to be studied very carefully. You can invest quite a bit into it and then you realize you got it very wrong.
- Sometimes founders will suggest (though complicated financial term sheets) how much equity (how many shares) you should be getting based on value of the hours you put into the product. Make sure that these rates are market rates, and not cost rates. The difference between the two can be quite significant. Another way to look at it, depending on your circumstance, is to look at the number of hours both parties put into the mix and split the pie based on that. Remember that based on rates, the onsite hour is worth 4-5 times more than the offshore hour – whereas in terms of effort both are probably putting in the same.
- Another key concern that generally plagues partnerships is assurance that both parties really are putting in the hours they are saying they are – and how much of these are productive hours. With offshore, this becomes an even more acute problem. Your sales guy might be socializing on his trip to the client or he may have gotten it all wrong with his sales pitch. I guess a lot of this boils down to trust between partners around competence and fair-play. When in doubt, take it slow.