The work-for-equity model as expounded by Loom
|Richard Harris in Developer Jobs Wednesday, March 15, 2017|
Work-for-equity model expounded on by Loom's Ceo, Chase White.
ADM: What are the benefits of a work-for-equity model?
White: Although relatively new, it's becoming more common. Working for equity can be a very unique and beneficial compensation method if structured the right way. That said, I don't recommend it for all people on all projects. If you’re not in a financial position that lends you the flexibility to work for equity, then you should limit your freelance work to cash compensation. However, if you are able, then freelancing for equity (or a combination of cash and equity) can provide unique project opportunities in areas that you’re particularly passionate about, high-potential to become a full-time part of the team, and of course the possibility of a larger payday. Ultimately, in the same vein of working for cash and equity at a more traditional full-time job, working for equity compensation drives passion and ensures motivation to have a high standard of quality in your work.
ADM: What do critics of the work-for-equity model argue - do they make any valid points?
White: The most common misconception is that this hiring for equity is a way to get freelancers to work for free - which couldn’t be further from the truth. At Loom, we are staunch advocates for fair compensation in the forms of both cash and equity. As we have created a two-sided marketplace for freelancers and entrepreneurs, we tend to fall on the side of protecting and advocating for freelancers to ensure timely, proper compensation. To that effect, we’re big fans of the work that's recently been done in New York City with the Freelancing Isn’t Free Act, designed to protect freelance workers against nonpayment. The Freelance Isn't Free Act mandates contracts for gigs paying over $800, and increases penalties for clients found guilty of late or nonpayment. We need more support for freelancers like this, and our goal at Loom is to be a part of the solution.
ADM: What is the average pay for developers seeking freelance work? How does this change with a work-for-equity model?
White: Average pay for freelancing developers depends on a number of factors, including but not limited to the amount of work, the nature of the work, experience level, demand for the skill, timing, and more. With a work-for-equity structure, your hourly rate becomes less of a factor, and your judgement becomes a bigger factor. What are you willing to do that work for? Typically, equity compensation is associated with fixed-price projects. For example, “I need this mobile app built to these specs by this date in exchange for 3% of the company.” That said, there are other ways to structure equity compensation with freelancers that create a more variable structure. An example of that might be, “For 200 hours of work, I will pay you half of your hourly rate in equity proportionate to our current valuation, and the other half in cash.” You can get creative with equity compensation, as long as both parties are comfortable with it, which can lead to a win-win scenario.
ADM: What are the biggest pain points expressed by freelance developers you meet with?
White: We hear a lot about the unique complexities of freelancers and we’re working hard to support them - especially developers. Really, most of these pain points fall into one of two categories: tools and protection. Freelancers need solid, industry-standard tools at their disposal like work discovery tools, contracts, invoicing templates, and even their own HR tools to provide themselves with affordable care that they would similarly receive working at a larger company.
Freelancers also need to be protected against people who may want to take advantage of them. The reality is, those bad apples - although rare - do exist. The best protection freelancers can provide against them is clear communication, legally binding tools, solid platforms, as well as a healthy amount of skepticism. Developers need to make sure their hard work is protected, and to never fully give that work over in its entirety until the agreed-upon payment is fulfilled. When you get too casual about those things, that’s when it can create unfortunate situations. However, when you stay on your toes, chances are, you’ll be treated fairly while dodging the bad apples.
ADM: What do developers say when asked about the work-for-equity model? What are the biggest concerns they share? What are they most excited about?
White: I think the biggest concern with the work-for-equity model on early-stage startups is that the likelihood of that equity turning out to be worth something significant isn’t guaranteed, which is understandable. With the amount of exciting technology being created every day, all over the world, many developers are truly excited about the financial potential that comes with working for equity. On the other side, I think there are a good amount of developers that are becoming frustrated when they are creating immense amounts of wealth for other people, without getting a proportionate piece of the pie for their work.
I personally know many developers (especially in our home city of Austin) that are earning comparable incomes to financial managers and lawyers. And a big part of that for them has been a result of exercising stock options that are earned from both full-time and part-time projects. It’s worth noting that, for the most part, these are young people with a much healthier work-life balance than their financial and legal counterparts; they often work remotely, they spend more time with their families and they also have a hand in building the future of technology. I think together, that's a very rewarding lifestyle.
ADM: What are the current challenges with the work-for-equity model?
White: I think the biggest challenges today with the work-for-equity model are in creating standards of compensation. No one really knows what is an appropriate amount of equity to give away for building an app or a mobile-responsive website. It all varies so greatly, and every startup is so different, that it creates variability even beyond what you would charge in cash for your work. The best advice I can give for a starting point here is to use the freelancer’s standard rate, along with your startup's valuation to work backwards in finding an appropriate level of equity as compensation ((200 hours of work x $100 hourly rate)(/$1mm valuation) = 2% equity). I also recommend padding the equity offer with a bit more than you normally would to account for the risk that this developer is taking in working for equity, especially if they are working only for equity compensation. In short, be generous with developers who are willing to take a risk on working on your project for equity. Chances are, they deserve it.
ADM: How do you expect the work-for-equity model to evolve in the future? What needs to happen in the industry to get us there?
White: With this trend, we’re seeing the creators - the early-stage builders of the world - becoming the new early-stage investors. No longer do you need to have wealthy people back your idea. What you can now do, instead of trading equity for money then paying that equity to developers, is pay that equity directly to developers who are willing, able and passionate about your cause to bring your idea to life. The reality is, most of these contracts are a combination of cash and equity, and the beauty there is that we’re seeing young, ambitious developers create portfolios of equity holdings for themselves, while also paying their bills as they go. As we see these start to pay off more and more, developers are becoming bigger influencers in the economy, and they need to be treated as such. These are essentially the new early-stage investors, and they will have a big part in shaping the technology industry as a whole to create standards, support independent workers and bring back more flexibility into the workplace. It’s a pretty cool time to be a part of this developer movement that seems to only be gaining even more momentum.
ADM: What’s the number one lesson you’d give to developers seeking to go freelance?
White: Cover your personal bases with things like health insurance and proper financial management tools, and cover your profession with freelance toolkits to streamline your business. One I highly recommend is AND CO. The AND CO team is doing great work to equip freelancers with top-notch tools for their arsenal. Another thing I recommend is to do a lot of research on your specific niche of the industry and seek to always become a better businessperson. You are going to be your own HR department, sales department, marketing, etc., so the more you can do to learn about making your personal business run smoothly to ensure you have a solid pipeline of new work coming in, and successful projects going out, the better off you’ll be. And have confidence in yourself - you no longer have to share a cut of your earnings with anyone else, and that’s something to be proud of.
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