Pros and Cons of Equity Based Technical Cofounders

I and every peer of mine in software have been approached dozens of times to be an equity partner in a startup. As with any decision in an early stage company, there’s pros and cons to this approach.

Pros

  • The first obvious positive is that it costs nothing. You get work done without investing capital now. If the product market fit isn’t there, you got to test it out and preserve capital that can be used on future ventures. If product market fit is found easily and quickly, your team is in place to get moving on the next version immediately.
  • Equity efficiently aligns priorities for company success. Having the engineering leader aligned with the priorities of the company’s success helps focus priorities on fundraising or finding paying customers. If the vision and strategy are agreed upon, this can lead to a partnership with minimal conflict.

Cons

  • Finding a willing software engineer or technical leader can be exceedingly difficult. This will lead to delays that may time your idea out of the market. Staying nimble and taking imperfect action, now, is key. Constant learning needs to happen, and waiting for the ideal person that is willing to work for free is often an infeasible goal. You’re competing with Google who is paying over half a million dollars a year to engineers for a stress free work life. Waiting too long may allow competitors to pivot into your space and win your desired marketshare.
  • When you bring on an equity partner, they get equal or even final say on product direction. You lose control of what is being built and why. Because they’re the one building it and they have an equity stake, they get to build what they think is best. And they’re probably wrong. They are not a domain expert in your field, they are an expert engineer. You should be deciding on direction and approach.
  • With a bit more than a formed idea, you come to the table in a poor negotiating position. You must hand over significant equity, as there is no company without an MVP. Often, you are left with minimal options, and have to give whatever the potential cofounder asks. Obviously, with huge success and a cofounder that only built the MVP, you’ve forgone much of the reason you got into the business in the first place — a big payday.

Personally, I think it makes sense to get started immediately, to get expert help on technical strategy and decisions. I’m biased because I do this professionally, and I do this because I’ve seen it work over and over again. If you do use equity to bring on your technical talent, a SAFE is a good agreement to start with to minimize negotiation contention. If you want to explore if MVP consulting and a fractional CTO would be helpful for your situation, reach out here on linkedin, I’m happy to share how I’ve served other companies like yours.