A Software Development Company as a startup Co-Owner: Pros and Cons

For non-technical founders of early-stage startups, it is quite difficult to find a person or a team to develop their initial documentation and MVP. If you’re like most of today’s startups, an app is a critical part of your journey. 

Since Technical Co-founders are in great demand you should have something to catch their interest — an MVP to show or a satisfying cash reward. Since the second variant is rare, you come to several ways to start: no-code tools, learn how to code by yourself, work with a development agency etc. In the material we describe pros and cons of getting investment from an application development company in the format of developing software.

Short description of pros:
  • higher software development company motivation
  • money remains with the start-up
  • risks shared
  • opportunity to learn technical staff
  • simplified team scale-up
  • access to software dev company network
  • time to market speed

Why not just hire Chief Technical Officer

Despite the fact that it sounds really wise to have a technical co-founder for your startup, often it is incredibly difficult and time-consuming. Most people who are good at software engineering (and not only) already have a great job (with 6-figure salaries from the likes of Google and Facebook) or a company of their own. It is harder to find a technical talent than the capital. 

  • It is expensive. A study found that the average US salary for a chief technology officer is $150,000 annually, and for a full-stack developer — $114,000. So how will you afford to build your team?
  • You need something to present to them so they become interested in participation in your undertaking. Technical people who are willing to take a risk on a startup are already building their own products. They don’t need a person with an idea. 
  • It is a long process. A lot of founders spend anywhere between six months to a year, or more, looking for that technical person to no avail. The big risk  they run is that they can miss the market opportunity. 
  • He is not a free software engineer. CTO might organize a development team, shape the development strategy, the project’s tech stack, dealing with other business-related tasks. What exactly will he manage when you have just an idea?

Dev agency invest by developing software: how it works

IT services for startups don’t work on a pure cash basis, since small companies usually have limited budgets. In response, the market starts offering application development for equity

This practice is especially relevant for first-time founders, early-stage startups, non-technical founders. Some of the scenarios:

  • You give up 20 percent to the development shop, in exchange, they will build the product and forego charging you any cash for it. 
  • Software development is worth $100k. The investment will be equal to the sum in exchange for no more than 25% and vested gradually for each milestone: 5% vest after design phase; 5% vest at clickable prototype; 5% vest at beta launch; etc.
  • You also can blend equity and cash: pay part of the sum in cash and the other part provide in equity. By this, you will balance the risks. 

Benefits: why to choose investment by developing software

1. Since they become a part of a startup, a software development company is more motivated to help build the foundation of a successful company. 

2. Money remains with the start-up. 

With your start-up needing funding, every penny counts and is highly valuable to investors as they are always looking at your expenditures. Making a software development company your co-owner will keep the start-up costs for app development with you to spend on marketing and other business development activities, while at the same time, you will have the software ready to use too.

3. Risks shared.

Since the software is a high-value investment, much of the technical risks will be shared by the Software Development Company, leaving you with operational and marketing areas that you can manage with your expertise.

4. You get the opportunity to learn technical staff.

As an entrepreneur, you need to see the inside of the process. So when you finish the agency relationship you understand why the decisions have been made and how they impact the business. 

In Digis we have transparent processes so that our clients are able to actively participate in the process and communicate directly with software developers, designers, QA testers, business developers, solution architects etc. 

5. Simplified team scale-up.

A software development company has a lot of professionals with a proven track record. This is beneficial, as the specialists have worked with each other for a long time and there will be no issues related to onboarding or team cohesion. Ultimately this allows you to get to market quickly whilst lowering the risk of onboarding “bad apples” in the process.

6. Access to their network

Working with a software development company provides you with access to potential customers and/or partners. You will get a presence in their social media and PR companies, they will tell stories about you in their blog and etc. 

7. Time to market 

Speed and a fast way to market are the key to a startup’s success, and that, in waiting to find the perfect CTO, you could miss your market opportunity. At the same time, hiring in a rush and ending up with the wrong people is worse than not hiring at all and can easily kill your startup.

Digis offers help with business strategies, fundraising, also we can invest with our own money or by developing software. It is a great option when you suddenly face a lack of resources but need to continue operating. Besides this, Digis is a sister company of business accelerator RichelieuV.

Risks to keep in mind

1. You become answerable to the software development company. Even though you gain on accounts of the monetary part, you will have to give away some power to take decisions when they become an investor or co-founder. 

2. They may opt-out later. It’s one of the options you might consider, as doing so may then cost money or equity if you want to continue using it. So, please, keep that in mind and have a plan B lined up, just in case.

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