Hiring at a bootstrapping startup company?
October 4, 2006 8:53 PM   Subscribe

StartupFilter: A two-person software startup wants to bring on two developers, what can we offer them?

A little background... We are two mid-20s software guys who long ago decided we wanted our own business. We met frequently earlier in the year, talking ideas, until we finally hit on one that seems perfect for us. Since then, we've researched the market, the competition, business models. We've done a lot of catching up on the technology we'll need to produce a tool for this market. We've begun to make functional specs for the software, and will soon start prototyping and designing. We think we're capable of doing it all, but it seems apparent that with some help, things would go a lot better.

The market is vertical, not exactly niche but not huge either. The software is targeted at businesses. We are not interested in going public or selling the business, we're simply interested in the freedom of running our own venture and the possibility of making a nice amount of money, too.

As such, we're not looking for VC, we don't have a CEO or other management personnel. We're hoping to bootstrap, although we may look for some seed money from an angel or other similar investor.

The crux of the question is this: If we have no money today, what is reasonable to offer people who want to join the team and help us get this thing out? We believe with 4 or 5 people total (including us), we can deliver this thing successfully, in the late 2007 time frame. Since we don't plan on going public, it seems that stock options are not an option, so to speak. Do we offer them a nice bonus when we start bringing in cash? A slice of future profits? To complicate matters (or maybe make them better), the people we want to approach initially will be friends or acquaintances (we already have people in mind who would be perfect). These people will either continue to work day jobs, or have enough savings to take some time off and work on this idea with us.

Obviously, when we start selling, we'll start paying everyone a nice salary. But for someone to work at a startup, they're assuming a certain amount of risk. (It helps that they'll probably be mid-20's single guys with no dependents.) To compensate for this risk, there should be a certain amount of payoff if we succeed.

A lot of the reading I've done about startup companies is targeted toward companies looking to raise $20m VC and eventually go public or sell the entire business. Unfortunately, I haven't found much advice for our particular situation.

Yes, we have formed an LLC already. Myself and the other owner are 50/50 owners and decision makers. We will be investing our own cash ($25k or so) to buy the software and hardware needed to make this all happen. That's going to be all we can afford to invest, though. We both still have day jobs.

Sorry this is so long. I wanted to put as much here now, because I can't reply in thread.
posted by anonymous to Work & Money (7 answers total) 9 users marked this as a favorite
So much depends on specifics of your project, but frankly, assuming you're a U.S. based company, 25K wouldn't get you far in IP law firms with what you'll need to do to protect any product you might create, such that you have a clear title to the product you will want to sell, to say nothing of building the product itself. You may think, "Well, if we don't buy the hardware and software we need to build the product, we won't need legal advice, because there won't be anything to protect."

That's true, but it points to the fact you may be unreasonably under-capitalized to bring such a product to market, without doing the additional financing. And frankly, for the kind of product you generally describe, third party angel money is going to come at such costs as you might later view as economic rape, due to the relative high risk, and limited reward companies such as yours tend to present.

Before you get too far down the development path, you should do at least a three year business plan, and shop it around to accountants, and leading IP law firms in your area, as well as other senior executive contacts you may have in the business community, for some comment and feedback. If you don't know any one you think you could trust, you might get in touch with the good people at SCORE, for some free or very low cost practical help. If you have your numeric research handy, you can probably do a minimal business plan in a month, for the kind of thing you're talking about. Give yourself another month to shop it around, and listen to the advice you get, before dropping dime on your idea.

What you want to do, if it involved any kind of equity guarantee, would probably be covered by your state's Blue Sky Laws. In a small business, you've got to be really careful with how you handle equity, and you should have a shareholders agreement that covers all the contingencies you can reasonably anticipate, signed by everyone (at this point, you and your partner) who are equity interests. If you don't think equity will be at stake talking to angel investors or other savvy business people, think again. Now.

If you are trying to attract people without giving away an equity position, you're talking about deferred compensation plans, and both you and your potential employees should be aware of IRS and state guidelines under which deferred compensation programs operate. If you can get people to work on the come, and they want to do it, you may be able to put your product together very cheaply, during the development phase, and you may even be able to get pre-delivery sales income from potential customers, in the form of sales deposits, when your product is nearing release (but this is highly dependent on industry norms for the vertical market you are addressing).

Some companies generate operating cash during a product development phase, while building customer relationships, by selling other products or services, while they work to develop their own. This can have some real advantages, if the customers they develop are the target customers for the product they are creating, and they are not otherwise filling the same need with a solution that will compete with their own product. As an example of this, some friends of mine developed a linear programming solution for ingredient mixing in animal feed blending operations, while selling and servicing a bulk inventory control system, and it worked out very well for both them and the customers. In addition to providing operating income through their development phase, their customer relationships provided valuable real world insight into their target market dynamics, that they couldn't have paid for, or obtained, any other way.
posted by paulsc at 9:58 PM on October 4, 2006 [1 favorite]

You pay them with a share of the business. Because you won't have a business without them. Unlress they put in gruelling hours to realize your idea.
posted by orthogonality at 10:01 PM on October 4, 2006

Employee Stock Ownership Plan? It would require administration/valuation, and the ability to pay out their share value if the employees leave (and happen to be vested).

You don't need to be publicly traded (or even have a goal to be public) to do this. However, it'll cost some money.

It would give the employee part of the risk/reward thing, and incentivize performance. Of course, you may need to switch from LLC to Corp so it's sounding like ESOP may be more than you bargained for...

You could always "promise" to set up a generous profit sharing plan once profitable.
posted by powpow at 10:07 PM on October 4, 2006

One other thought which I forgot to include, if you are thinking of the deferred compensation route. The concept of work-for-hire has a founding in the concept of conventional employment law. You definitely need to have some certianty, if you are not paying regular wages, doing withholding, and all the other things that define an employer/employee relationship, that your deferred compensation employees are in fact creating works-for-hire, to which your business is the undisputed copyright and intellectual property owner. If you are not paying a regular money wage, in some states, this can be hard to substantiate, and you risk putting your project in the lurch at a later time, if the key developers decide to encumber your rights in some dispute.

IANAL, but you definitely need to be talking with one, competent in IP law for your state, before going too far with this.
posted by paulsc at 10:18 PM on October 4, 2006

That's a long time to work without compensation. I don't think you're going to find anyone good who will take that kind of risk for anything less than partial ownership of the company, on an equal footing with you guys. Even then it'll be hard; you'd better have an extremely convincing business plan.
posted by equalpants at 1:30 AM on October 5, 2006

I have no particular expertise in this stuff, but common sense suggests that, since you're asking them to take on a significant amount of risk, their compensation needs to be greater than the compensation they'd receive for doing the same work in a less risky context. In particular, since the amount of risk you seem to be proposing to me seems to be not just significant, but huge, I'd guess that the amount of compensation they receive if you're successful needs to be on the order of some multiple of what a more stable employer would pay.

Regardless, yeah, lawyer.
posted by gsteff at 2:30 AM on October 5, 2006

Why not outsource your software project overseas based on your specifications and design? 25K would be more than adequate to hire an Indian firm to design a prototype of your software. Focus on hiring a lawyer once you actually have a product to protect.
posted by banished at 3:50 AM on October 5, 2006

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