Many founders of software startups still believe that the fastest way to develop the very first version of their product is to hire developer(s) locally, even if they often have to use equity to pay for their services.

They merely think of outsourcing as a much less risky way to bring their product to the market on time and budget.

In fact they should, and here is why:

Unless the parties are well versed in Agile-like approaches or the co-founders are talented developers, it is wrong to believe that face-to-face daily meetings at the local coffee shop are the best way to bring spectacular and rapid results.
It might just be the other way around. An idea seems wonderful one day, and its implementation starts. Another day comes, and a new idea pops up that makes the previous one obsolete.

The unfortunate outcome after a few weeks/months is that founders have the feeling their project is stalled, and therefore become impatient. Developers too get frustrated by the lack of consistency in addition to the fact that they have no or little paycheck, a loss-loss scenario.

In addition, founders should not give away equity in lieu of cash for development. They should rather talk to their “family and friends” when no cash available. If they cannot convince their inner circle to invest in the venture, then I am afraid it is worth giving the venture a second thought.

As an outsourcing vendor, we have been asked too many times to take over the development effort for a product that was described by the founders as “80% complete” or “almost done”. Much to the dismay of the founders, we found out that the effort required to complete the remaining 20% was usually close from the entire initial workload, leading to an uncomfortable situation between the startup and its potential vendor.

Here is what I would suggest to a company founders who cannot develop the solution by themselves:

  • Estimate the workload it would take to develop your first version. If you are not capable of performing this evaluation, then write down a project overview, submit it overview to a few potential outsourcing companies, and ask them to provide with a cost estimate. If you need help for the design of the system, ask them to provide you with a (part-time) local resource (CTO/product management level) to help design the system

  • Based on the estimates, make sure you have the cash needed; if not go raise some

  • Select a partner that is financially sound and willing to share the risks (SLA contract)

  • Make sure the final contract protects you against any under-performance from the vendor. In other words, attach payment to deliverables.

The time and energy saved by the founders can certainly be used to fine tune their business strategy, another interesting challenge nowadays.

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One Response to “Funding Software Development: Cash vs. Equity”

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