A development shop as CTO?

June 18th, 2015

I've been approached by a development shop that likes my idea and would like to come on as my development team for equity. I met with a founder and we had a good connection. They are putting together a proposal and I'm meeting with their team next week. I know there is no way to confirm anything until I have the proposal in hand but assuming we could come to an agreement, what is the downside of such an arrangement? I like that they can bring a team and we can get the mvp done in a few months but if/when the mvp proves successful and I need funding, I feel like I will have a problem in that I won't have a full time tech partner. Anyone else have experience with such a situation?

Tony Peccatiello Principal at Social Starts

June 18th, 2015

Hey Joey, I would need to know more about your idea and the dev shop to say what is the most important thing to consider is but I will just go through a few big ones. A little background on me, I have been through this type of situation before and it is definitely one that has a lot of moving parts. So let's dive in! 1. Is the technology the root of your business? If so having an in-house team or at least a rock star CTO is important. For example, if you are trying to create the next Facebook than the technology is your entire business and is going to be very important. However, you are working on the next custom suite company with a new innovative way to measure and order online than it is not as important. Speaking with an investor hat on, it is important to have the essential business processes under your control so when something breaks it can be fixed as quickly as possible. 2. Investors like to invest in teams and almost never see an outside dev shop as really part of the team. This is a tough one to overcome and should not be downplayed especially if the tech is part of your core business. I have had personal experience and if you do decide to go this route I would be more than happy to talk to you about how I have overcome this in the past. 3.How much equity do they want? Don't want to give up too much too early. Also, as your project progresses would they want more equity? 4. How long does the agreement go for? There should definitely be some sort of vesting schedule that provides you enough time to prove the business 5. What will the hour limit be per month? In an ideal world you would be able to make small changes and maybe even a few true pivots quickly and without having to be too concerned about how much it costs you. 6. What is the plan for when you raise money and want to move away from the dev shop? There should be clear terms surrounding this. In an ideal world you would be able to retain some of the engineers who worked on the project but this is probably not going to happen. Better would be to hire people and have them work hand in hand with the dev shop for a while and slowly transition away. Anyway, hope this helps and if you want to talk more let me know. -Tony ᐧ

Travis Russi

June 18th, 2015

Unless you are VERY close to cashflow positive, don't do it! And if you are very close to cashflow positive, definitely don't do it!

Giving equity to a dev shop is a bad idea. Equity doesn't pay salaries, so they will put all paid work in front of your project, regardless of what they say or commit to.

There is an allusion of alignment (they are equity partners, so they care, right?), but it still doesn't pay salaries. So they will meet their commitment as slow as possible with the minimum of effort. That means it will take longer and be a lesser quality product.

You also don't need a CTO. A CTO is somebody who can build and manage a team of developers.

You need one senior full-stack developer that can build what you have in your head as fast as possible. It has to be only one person (read Mythical Man Month) and they have to be be senior level (or they will be slow because they won't know what features to cut out).

The easiest way to get a senior developer at a reasonable compensation level is to show them traction. So don't start the conversation until you have something tangible they can use to judge whether you're the real deal.

Just my two cents as a full-stack developer and a former CTO of a web dev company that did equity deals with clients. :)

Travis Russi

June 18th, 2015

As Gary Vee would probably say, "Just f**ing do it"! Lots of examples of getting traction without a product (thegrid.io, mailbox app on iOS, Kickstarter). Traction is absolutely possible in virtually every opportunity without a product. Like I said, getting traction (especially without a product) will get good devs to take you seriously. [On my phone, I type faster than I think.]

Michael Barnathan Adaptable, efficient, and motivated

June 18th, 2015

You do eventually need to find a CTO, but as long as you're ok with the MVP possibly being throwaway code, using some equity to get to the point of funding isn't a bad idea. That'll help you land a CTO/lead engineer later as well.

Crystal Grave Founder, President & CEO at Snappening

June 18th, 2015

I agree with the comments of both Roger and Tony above. What this seems to boil down to for you is:

Does the speed of using the dev shop outweigh the precision of finding your own future technical hires?
What sort of valuation are you using to do the equity share? What terms are tied to performance (both good and bad)? Think about this so you leave yourself room for some failed concepts at the beginning. You'll need to rework and rethink more than you may realize.
Is equity being calculated at the market (retail) rate for the development, or their out-of-pocket rate for the team? An important consideration and discussion I would think.
Does the dev shop have any immediate previous experience in your space (or with a similar implementation in another vertical) that you can see and use? Do you have any technical friends who can look at a small sample of their code to see if it appears logical, best-in-class and strong? Would they be wiling to do a small test project with you as a starting point to make sure the partnership works?
Does the dev shop have at least 3 - 5 satisfied existing customers (preferably also startup / founder types) that you could contact and ask about benefits and drawbacks of their experiences?
What happens if it blows up and doesn't work out? (Even worse (and possible), what if it blows up before you have an existing product, can test it and can take a non-glitchy product to market for user adoption?) Probably can fix this if it's tied to some sort of sprint-based vesting schedule.
How will this team handle the least sexy parts of the build: (a) documentation, (b) A/B testing, (c) QC and (d) bug cleanup and tracking? Is all that covered in their proposed plan? If not, it should be.

Keep us all posted on how it goes!

Roger Smith

June 18th, 2015

If you are building a technical product that requires a CTO (not all technical products need a CTO), then the ideal scenario is to have one as part of your team. If you do not have that person on your team and need them, then you have to consider how long until you are able to bring someone on vs. moving ahead now with this development shop and pushing your idea forward. Starting a company is about crossing off unknowns, some call it jumping lilly pads. So my feeling is if you don't have that technical person now, then do what you can to cross off more unknowns with this development team so you can move your company further down the line. That being said though, be careful with your equity that can come back to bite you in the future if you give out too much.

Mike Whitfield Sr. Software Engineer, EPAM, Google

June 19th, 2015

I'll give you a recommendation if you want.

Why is the previous post mentioning IVF (I'm ignoring that)?

You need a technology team, but my assessment of today's market is that Squarespace gets you 90% of what you want. Hardly anyone is building a technology product and most of the time you're gonna poach a business person who has picked up how to code.

Ride the seed wave with an outsourced team since this works for 70% of use cases where a startup needs a digital presence.

Joey Chandler

June 18th, 2015

Thanks all. And to be clear there isn't a heavy tech component which is why this makes sense for both sides. I'm pretty sure I could replace them if needed and they don't have to worry about getting bogged down in tech heavy implantation. I do have a lawyer and tech advisors to confirm the agreement will work for me and that their code won't require a complete rebuild when I bring the team in-house.

I'll let you know how it goes.

Joey Chandler

June 21st, 2015

To move this forward (and hopefully not cause any more faux pas), if this type of situation were to prove positive, what would you like to see in the agreement? I know there are lots of ways this could go south. But what are the components that would make it work?

Gopi Mattel General Partner. Lifeboat Ventures

June 18th, 2015

This is a great idea. A CTO can provide direction but may not be able to fully build out the MVP. This arrangement can really help you execute. And you can still work on bringing on a CTO once the MVP milestones have been hit.

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