Paying for development with equity is rarely a good idea. Equity is the most expensive money you have, developers paid in equity have no obligation to finish, and a cap table with a vendor on it complicates every future round. It can work with a genuine technical cofounder who joins full time on vested equity, or as a small sweetener alongside cash with a partner who also invests. For everyone else, flexible payment terms, milestone-based pricing or a small raise are better.
Prices are in US dollars. Euro and pound figures in parentheses are approximate, rounded conversions. Quotes are issued in the currency of your contract.
The offer comes up in almost every non-technical founder's journey: a developer or agency proposes to build the product for a share of the company instead of cash. It sounds like a way to start without money. In most cases it is the most expensive way to build a product, and the cost is not visible until years later. This post explains why, the exceptions, and what to do instead.
Why does equity for development usually go wrong?
- Equity is priced at its cheapest moment. The product does not exist, so the company is worth little, so a build worth $50,000 (€44,000, £37,000) in cash might be exchanged for 20 or 30 percent. If the company succeeds, that share is worth millions. You paid millions for a first version.
- There is no obligation to finish. A cash contract has deliverables and payment milestones. An equity arrangement without vesting and performance conditions gives the developer their share whether or not the product ships. Many do not ship.
- Incentives drift. A developer holding equity in five startups will work on whichever is going best this month. Yours may not be.
- Investors dislike it. A cap table with a vendor holding a large, non-vesting stake is a red flag in every round, and cleaning it up later means buying the equity back at a higher price or negotiating with someone who has no reason to be reasonable.
- Ownership gets murky. Equity arrangements are often informal, and informal arrangements rarely include a proper intellectual property assignment. See who owns the code.
- You lose the ability to change vendors. Firing a contractor is a business decision. Removing a shareholder is a legal one.
What is the real cost?
| Scenario | Cash cost of the build | Equity given | Value of that equity if the company reaches a $10,000,000 (€8,700,000, £7,400,000) valuation |
|---|---|---|---|
| Freelancer builds MVP for equity | $40,000 (€35,000, £30,000) | 15 percent | $1,500,000 (€1,305,000, £1,110,000) |
| Agency builds first release for equity | $100,000 (€85,000, £75,000) | 25 percent | $2,500,000 (€2,175,000, £1,850,000) |
| Agency builds for cash with flexible terms | $100,000 (€85,000, £75,000) | 0 percent | 0 |
| Agency builds for cash, invests separately on investor terms | $100,000 (€85,000, £75,000) | Priced with the round | Whatever the round priced it at |
The valuation is illustrative. The point holds at any number: equity given for services before the company is proven is priced far below what it will be worth if the services succeed.
When can it work?
- A genuine technical cofounder. Someone who joins full time, shares the risk, makes decisions with you and stays after launch. This is not paying for development with equity. It is founding a company together. Equity should vest over three or four years with a cliff, so that someone who leaves after six months does not keep a founder's share.
- A small sweetener alongside cash. A modest option grant, a few percent at most, on top of a discounted cash price, with vesting tied to delivery. It aligns the partner with your success without handing over a founder-sized stake.
- A partner that invests on investor terms. Some development companies invest in clients through a separate, priced instrument such as a convertible note or a stake in a round, with the same terms as other investors. The build is paid in cash, and the investment is an investment. This keeps the two transactions clean and the cap table normal. 7L invests in selected ventures on this basis.
What should you do instead?
- Reduce the scope. A narrower first release costs less. Our guide to what an MVP should leave out is the cheapest money-saving tool there is.
- Negotiate payment terms, not ownership. Milestone payments, a deposit and instalments, or payments spread past launch. Many agencies will flex on timing for a well-scoped project with a credible founder.
- Raise a small round. A prototype and evidence can raise enough to fund the build. See raising with a prototype. The equity you give investors is priced by a market, not by a developer's estimate of their time.
- Pre-sell. Deposits or founding-member offers from customers fund development with no dilution at all.
- Start on no-code. Prove demand at subscription-level cost, then fund the custom build from traction.
If you do it anyway
Sometimes the only route available is equity, and a founder decides to take it with open eyes. If so, insist on: vesting over time and against delivery milestones, a cliff, a written intellectual property assignment, a cap on the total stake, a buy-back right at a defined price, and a lawyer's review of all of it. The cost of the legal work is a fraction of the cost of getting it wrong.
7L's position
We build for cash, with flexible payment options tailored to the founder's situation, and we keep the price fixed after discovery so there are no surprises. Where we believe in a venture we invest in it separately, on the same terms as other investors, so that the cap table stays clean and the build stays a build. We are a partner in the financials as well as the code, and we think that is the honest way to be one. Talk to us about payment options before you talk to anyone about equity.
This post is general guidance, not legal or financial advice. Speak to a lawyer and an accountant before issuing equity to anyone.
Frequently asked questions
A developer offered to build my app for 10 percent. Is that reasonable?
Ten percent of a company that succeeds is worth far more than any first version costs in cash. It also gives you a shareholder with no obligation to finish. Ask for a cash price with flexible terms instead, and if they will only work for equity, ask why.
What is the difference between a technical cofounder and a developer paid in equity?
Commitment and risk. A cofounder works full time, shares decisions, stays after launch and has equity that vests over years. A developer paid in equity delivers a piece of work and keeps a stake. The first can be right. The second rarely is.
Can I give equity to an agency as part of a larger cash deal?
A small option grant alongside a cash contract, vesting on delivery, is a reasonable way to align interests. Keep it small, keep it vesting, and keep the intellectual property assignment separate and unconditional.
What is vesting and why does it matter here?
Vesting means equity is earned over time or against milestones rather than granted all at once. It protects you if the person leaves or does not deliver. Any equity given for work should vest.
How do investors react to a vendor on the cap table?
With questions, and often with a request to clean it up before they invest. A small, vested stake is manageable. A large, unconditional one is a problem that gets more expensive every round.