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Andy Brice
Successful Software

Doug Nebeker ("Doug")

Jonathan Matthews
Creator of DeepTrawl, CloudTrawl, and LeapDoc

Nicholas Hebb
BreezeTree Software

Bob Walsh
host, Startup Success Podcast author of The Web Startup Success Guide and Micro-ISV: From Vision To Reality

Patrick McKenzie
Bingo Card Creator

Building a sweat equity team

This post ends with this question:  What are some good sources of information (books, forums, etc.) where I can learn about how to build a sweat equity team?

Ironically, given the state of the economy, I think now is an excellent time for me to take my micro-ISV company to the next step.  After 14 years of trying to do most of it myself, I'm ready to build a team, and aggressively build market share in a niche that I believe my competitors have neglected.

Right now, my business is just myself and a part-time employee who does support, testing, and product usability design. I intend to rewrite my internal 50-page business plan into an investor's proposal.  But this proposal isn't for angel cash investors. Rather, it is a proposal for sweat-equity investors.

In particular, I want to bring on a full-time marketing person, and a full-time developer.  I haven't decide how much more staffing will be optimal.  I'm confident that this business will be able to compensate these two additional principles along the way, after initial risk of investing their time, and will later reward their vesting with an exit strategy.

A restatement of the question is:  What are some good sources for learning how to build a start-up team, especially for a microISV business?

This isn't really a start-up team-- I've been doing the business for 14 years.  But it is a start-up in the sense of making a big quantum step forward in the marketplace.

Mark Walsen
Mark Walsen Send private email
Thursday, October 09, 2008
I think you would be better off hiring people, rather than trying to convince them to work for free in exchange for equity.  How many people would have the freedom to devote meaningful time to your project without being paid for it?
Jason Send private email
Thursday, October 09, 2008
Join the nextNY mailing list, and check out our archives where this has been beaten to death over and over.

The gist:

1. Make sure you treat people as partners, not as paid help. Equity partners need to have a hand in guiding the enterprise.

2. You simply need to network. Go to user groups. Go to tech (or other relevant industry) events. Refine your elevator pitch. Eventually you'll catch the ear, the vision, of someone who would like to jump on board, and has something you need in return.
Andrew Badera Send private email
Thursday, October 09, 2008
I quite agree, Andrew, that the equity partners need to have a hand in guiding the enterprise. The key here is motivation.  I'm interested in sweat equity parterns, rather than raising capital and just hiring key employees, because sweat equity partners will be even more motivated to help than, say, an angel investor who invested 1/4 of 1% of his assets in my business.

Sweat equity partners are further motivated if they have control over their destiny with the business, especially in their area of the business.  So, yes, sweat equity partners need to have a degree of influence in the company, commensurate with their skills and contributions.

-- Mark
Mark Walsen Send private email
Thursday, October 09, 2008
1- I've never tried a partnership myself before, but I've heard stories about how they go wrong.  I'd definitely be upfront about what happens if you have disagreements, what to do if a partner wants to leave (or be a douche), etc.

2- It might be that you can find people who:
A- Would prefer a steady income.
B- Would do good work.

Some people are just skeptical about equity but are otherwise highly competent in what they do.  You can simply ask and listen to see how people would like to get paid.
gl3nn chan Send private email
Friday, October 10, 2008
> You can simply ask and listen to see how people would like to get paid.

The answer will vary according to the circumstances of the individual. 

The challenge here is to find candidate sweat equity partners who:
1. Have the skills that the business needs.
2. Enthusiastically share the vision of the company's opportunities.
3. Are in a financial position to be paid in equity rather than income.

... and
4. Get along with me. ;-)

I have no doubt that these candidate business partners are out there.  But how do I find them?

Networking is probably the best single word answer.

-- Mark
Mark Walsen Send private email
Friday, October 10, 2008
> The challenge here is ...

Let me rephrase that. The challenge is:

1) Find candidate sweat equity partners who:
  a) Have the skills that the business needs.
  b) Are in a financial position to be paid in equity
2) Persuade them of:
  a) The company's opportunities
  b) Their place within the company

For example, although I have some skills and some personal savings, I have usually prefered to be paid in cash instead of equity, because:

* I don't control the company's success: if for example I am the software developer and you are the CEO and product manager, and if the company fails, then that failure IMO is more likely to be your fault than mine.

* I don't control the company's valuation: if for example the company is privately-held, then the 'value' of 'equity' might be complicated and outside my control (you can dilute equity, reinvest any revenue instead of paying it in dividends, etc., etc.)

* I don't necessarily need 'equity' to motivate me: because instead I can be motivated by (sufficiently high) salary, and/or by wanting the earn a good personal/professional reputation

Anyway: apart from finding people before you persuade them, and apart from working with people after you persuade them, I think that the above are some of the difficulties or objections you might face in trying to persuade them.

Part of my question would be whether you'd be expecting a finite investment from me (and I'm not offering myself to you: just using 'me' as an example of a candidate developer). For example when Y combinator invests in a company in return for 10% equity, Y combinator knows exactly how much it's investing in exchange for that 10% stake. If you were offering me sweat equity, are you asking for a finite amount of sweat in exchange for equity: e.g. will you say "work for 18 months in exchange for a 10% stake in the company"? Or would you be saying something more like "sweat until we cash out, whenever that miracle might occur, and if you quit before we cash out then you don't deserve to keep your stake"?
Christopher Wells Send private email
Friday, October 10, 2008
What I guess was I was trying to say is:
Suppose you found somebody who was competent and highly motivated, but wanted to get paid in cash.  You shouldn't turn them down unless you couldn't afford to pay them.  They also wouldn't dillute your equity share. 

2- You could also look at setting up an affiliate marketing program.  Marketers get paid based on performance.

Find popular, relevant websites and see if you can get them interested in signing up for an affiliate program.

There is also an industry of people who put up "independent" review sites and drive a lot of affiliate sales through PPC.  Unethical IMO but some people make money that way.
gl3nn chan
Friday, October 10, 2008
Perhaps a good way to think about this is that the sweat equity partner is a blend of angel investor and employee.

Angel investors contribute cash to start-ups in return for equity that is hoped to liquidate at a good profit at an IPO, or more commonly, an acquisition of the company.  Angel investors exercise varying degrees of control over the direction of the company, more so if another round of angel investment is needed.  Angel investors also are motivated to help the company with whatever influences they have in the marketplace.  An ideal angel investor is one which not only brings cash, but brings expanded opportunities for the start-up business.

An employee is normally paid a salary or wages.  In a large company, stock incentives tend to work more like bonuses than as motivators for the greater cause of the business.  A typical employee at Google isn't going to increase the value of his Google stock significantly by working twice as hard or efficiently.

The sweat equity partner is a blend of employee and angel investor.  He's an employee in that he is providing labor that will make the business profitable.  He is an angel investor in that he is assuming a shared risk in the business in a return for the share rewards of the success of the business.  He is an _ideal_ angel investor in that his energy is highly focused on the success of the business, especially in the area in which he directly contributes the most.

I know this works, in general, because sweat equity startup teams are quite common and often successful.  The difference here is that is not really a startup situation. I'm bringing to the team an accumulation of business assets, that I hope a larger team than just myself and half-time employee will be able to leverage into business success and rewards for the equity partners.

-- Mark
Mark Walsen Send private email
Friday, October 10, 2008
If you are fairly confident an extra employee or two will tremendously help, why not polish the business plan and get more capital from a bank or yourself and hire more employees?

Oh wait, credit crunch and all...

If you are willing to take the risk, you'll see the rewards, good or bad.
Friday, October 10, 2008
From my experience, your potential team members will come from two likely sources:

* People who are neglected and want more attention
* People who would join an open source project

In the first group, some people are neglected by this industry, wrongly or rightly.  So, they join you because they want to get skills or maintain skills but just haven't got a paying job.  They may be new graduates who would rather work with you than sit at home.  They might be experienced people who want to work on a new technology but hate interviewing.  They might be people who feel that they can learn from you.  (But, they might be annoying good-for-nuthin' losers, too.)

In the second group, you are recruiting from the zillions of people who would voluntarily sign up to work on an open source project.  Except that you have an edge: they might someday earn money on their work.  I've actually heard people say this: "It's like working on open source but it might actually pay off one day!"

I don't think that a whole business plan is necessary but I suppose that it couldn't hurt.  Most potential employees won't understand it and won't care.  Even though some posters imply that they will, my experience is to the contrary.

I've written some articles related to it on my blog:

Daniel Howard Send private email
Thursday, October 16, 2008

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