Developing Apps for Equity: A Checklist
Published on September 29, 2020
This post was originally written in 2016, but we've updated it to be more accurate in 2020.
We are pitched on at least one app a day (usually, many more). After giving us the pitch, more often than not, we hear something along the lines of:
"So I don’t have any money, would you be willing to do it for free in exchange for some equity?”
Ask any mobile app developer, and they will tell you that this is one of the more frustrating parts of the job, primarily because most people don't understand how hard it is to succeed in the mobile space.
Gone are the days of the "app store gold rush". A good idea is all fine, but you have to have a strategy to make that app succeed.
When you start an app, you are actually starting a business. You need to know how your app is going to make money.
We've been running a software development business for over a decade now, and we have heard enough pitches and made enough mistakes that we can tell if a project is worth taking based on many factors. In that spirit, we want to give you a list of the questions we require to have answered before even considering an equity deal:
What is the Idea?
Is it a novel idea? How complex is it? Do we have to sign an NDA before hearing the idea? (Pro-tip: if the answer to the last question is "yes", then please don’t reach out to us.)
Who else is in this space?
How big are they? How is your product different? If there is nobody else working on this problem, why not?
How did you come up with the idea?
Do you have 15 years of experience in this niche? Do you know the space well and have customers already lined up?
How will this app make money?
Are you using ads? If so, who will advertise in this space, and how much revenue do you project you'll bring in within the first six months?
If you aren't using ads, are you charging money up front? Assuming you follow traditional paid app trends in the app store, how will your app sustain itself after the initial spike received after the launch?
If you’re planning on in-app purchases, how will you decide which features of your app require an unlock?
How will you spend that money?
Are you going to hire us (or another development team) to keep building features? How much do you have set aside to pay for infrastructure? Do you need to take a salary or are you going to reinvest the profits into making the app better?
What type of marketing will you be doing?
How will you get people to download the app? Do you have a marketing strategy in place?
When will we see a return on our investment?
Some apps won't see a dime until the company gets sold. Others are more like lifestyle businesses, where we can see a small trickle of money right away. Which one are you?
What is the ongoing plan for development?
How deep is your roadmap of features? Are bug-fixes expected to be made free of charge? Are feature improvements expected to be made free of charge?
Who will handle day-to-day operations?
If we are handling the tech side of things, are you handling the business side of things? Who is in charge of handling support inquiries? Who will be meeting with potential investors? Who will be recruiting users? Who will be collecting and assessing user feedback?
What is the exit strategy?
Are you selling it to a larger player in the space? Do you want to run this in perpetuity?
How committed are you to this company?
Running a business requires a tremendous amount of time and energy. Will you be in it for the long haul? Are you equipped to run a business?
What are you bringing to the table?
Do you have a deep network of paying customers ready to bring on board? Do you have a skillset that is helpful in running a business? (Pro-tip: if your answer to this question is “the idea” and nothing more, please don’t reach out to us.)
What is your past performance like?
Have you started an app business before? Have you started any business before?
How much money have you personally put in?
Have you put your money where your mouth is? How much have you personally risked in this venture not just in money, but also in time?
Who are the other people in this business?
Is the business just you, or are there others? What are they like? Would we be able to sit and have a beer with them? Are they even-tempered, or will they implode at the first sign of stress?
What are they bringing to the table?
Do they have connections in the industry to which you are targeting? Are they designers, marketers, lawyers, accountants? Have they started businesses in the past?
How much effort will we need to put in? What is the risk-to-reward ratio?
We ask all of the questions above in order to answer this one.
We run a digital product development company, and people pay us in order to build their apps, websites, and custom software. By taking a project on an equity basis, we are essentially paying you in order to build your project.
Sometimes, this makes a lot of sense. Let's say you have an idea that is quick for us to build and get out the door. If your business plan will start seeing revenue quickly, and your exit plan is enticing enough, we could possibly make way more money than if we just took cash up front.
Usually, the people who can answer the questions above are the ones who fit into that camp.
Is this something we are excited about?
This is definitely a subjective question, but it's quite important.
App development is a lot like solving jigsaw puzzles. If you crack open a 20,000 piece jigsaw puzzle, you’ve gotta have something inside you that keeps you going when you are stuck with a thousand blue pieces of sky that all look the same.
When people pay us to build their software, the money is what keeps us going to push past those dark times when you’re stuck on a logic problem and can’t go anywhere.
When we’re building a project for equity, there needs to be something that keeps us going when the times get tough.
Time is the most valuable thing anyone has in this life to give. At the end of the day, if we're spending our time on your project, it's at the cost of the time we can spend with our family/friends (or on our own hobbies).
Working on your app needs to give us value, just as our tech expertise is valuable to you. Whether it's through the idea or the business model, or whether we're partnering with a person we really like, we need to see the value in working with you.
The Red Flags
There are a few telltale signs that an app for equity project just won't be a good fit for us. Here's the short list:
You tell us "This app idea will make you millions!" without a business plan.
Eh, it probably won't make us millions.
We’ve worked with hundreds of startups since we started nearly a decade ago. Of all of those startups, the ones who went anywhere were the ones who had a business plan in place and (typically) VC investment.
You tell us "This won't be too hard to code."
Eh, it probably will be hard to code.
And even if it isn't, it's because we've been doing this for a long time now. There's a fantastic parable about Picasso drawing a woman's portrait on a park bench which sums up this point pretty effectively.
You won't share your idea with us until we sign a non-disclosure agreement.
This might be best illustrated by quoting a scene from The Office:
Jim [conducting interview] Your paper experience is very interesting. Do you think you could use that experience to inform decisions here?
Fred Henry: Absolutely--I, yes. In fact, I actually have a three-step plan that I believe could effectively double your profits.
Jim [waiting for Fred to continue] ...What is it?
Fred: Nice try.
Toby: I'm sorry, what is your three-step plan?
Fred: Well, I mean, I can't just hand you my plan. I mean, if you guys give me the job, then, then you'll get the plan.
Gabe: Well... it's an interview, and we don't know that you really have the plan.
Fred: [speaking faster] Well, I'm not gonna just make up that I have a plan. I got a plan. Believe me, you guys want it. You're in paper, right?
Gabe: How would we know that, if you don't...
Jim You could just be saying it to get the job.
Fred: I guess I could be, if I was... who would do that?
Jim How about this. Why don't you give us a part of the plan, and that way we know you have it.
Fred: Tell you what. I'll give you part three of part two. Not gonna give you a whole part.
Fred: "Color-code sent documents, TM."
Joking aside, we've discussed non-disclosure agreements before. The bottom line is this:
- Ideas are worthless. The execution of the idea is what's valuable.
- You don't need to share your secret sauce with us in order for us to get the ball rolling.
- Not sharing your idea with us because you think we'll steal it is a terrible way to start a relationship.
You keep us in the dark at any point during the first few conversations.
Bringing in a team on an equity basis makes them a partner in your business. Relationships can't thrive when you don't have open communication.
App development is complex, and the development process can get stressful at times. The only thing that can ease that tension is being able to talk through problems.
Taking an equity project is an investment. Investments are always risky, but being able to answer those questions helps us mitigate the risk and make sure we're making a sound decision.
We have worked on successful equity-only projects in the past and continue to do so on an infrequent basis. If you want to work with a smart, hard-working team of experienced developers, and you can provide solid answers to the questions above, then what are you waiting for? Reach out to us today!
And if an equity deal isn't in the cards, we have connections and resources that could be of value that we'd love to share with you.