If you knew the secret ingredients to a potion that restores youth but needed someone to create the elixer in a laboratory, how would you go about that? Humor me for a few moments and assume for argument’s sake that the potion works and you discovered the most incredible antidote to aging that man has ever known. If you could create mass amounts of it, you would become the most powerful person on the planet. You would amass extraordinary wealth and command greater influence than all the world leaders combined. The world would be your oyster.
Except, you can’t make the drink. You need someone to do it for you – a very skilled bartender of sorts. So how would you go about that? Since you can’t actually answer the question to me directly, I’ll just go ahead and tell you what I would do. I would work like crazy until I saved enough money to pay for the best bartender(s) and then have them produce the potion for pay. More importantly, here’s what I would NOT do: approach bartenders all over the city that I haven’t met and offer them a “piece of the action” to make my cocktail for free. I wouldn’t do this because if I really had the fountain of youth, I would find a way to maintain as much equity as possible in the sale of said fountain. When word starts to get around, I would then be able to maximize my personal benefit in delivering eternal youth and beauty.
This situation is happening all over the city today and in many other cities. Once a week on average, I am approached by entreprenuers who have the next billion dollar idea but just need a programmer to throw it together. They all think they have the fountain of youth but from where I sit, it’s not even Yoo-Hoo. But here’s the main point: if they really did have the magic potion, why would they be so eager to split the revenue with someone like me who they haven’t even met? Why wouldn’t they try to keep it to themselves and simply offer to pay me?
Please bear with me as we go through some basic math:
– An entreprenuer approaches you with an INSANE idea that’s just primed to go viral in the mobile social networking, geo-location, recommendation-generating, party-planning space. He wants you to program the minimum viable product (including back-end which is something he doesn’t understand) with website and iOS/iPad/Android/Galaxy tab mobile apps – it’s all easy with PhoneGap right? He offers 5 to 10% equity for the privilege.
– You ask him what kind of valuation he thinks he can get from a Series A round at a major VC firm like Sequoia or Union Square. After explaining what a Series A is, you tell him that the valuation is what he thinks the overall company value might be. He says something in the billions (seriously, I get this a lot).
– Let’s say we tone it down a notch and go with $100 million – still a stupid high number. At 5% equity, your stake would be worth $5 million. Yet, you offered to code the MVP for $20,000. He says that’s too rich for his blood but he’s willing to grant what essentially amounts to millions in equity even at a valuation several orders of magnitude below his estimate.
– The math doesn’t equate. He would rather forfeit millions in equity to save $20,000 today.
These conversations are unfortunately very common and show a stunning lack of understanding of 8th grade math. If these people really had multi-million dollar ideas (forget billions), then even 1% equity is a lot to give up so they would be better off forking over cash. Even out-of-pocket cash that they save from their day jobs.
These situations betray a lack of confidence. People who think this way are already trying to defray risk and reduce the stench of failure – $20,000. If you were Charlie and found the golden ticket, would you give away a piece for a ride to Wonka’s factory? I don’t think so. You would find any way possible to pay the cabfare to get to that factory and keep the ticket to yourself. Too often, these wannabe Steve Jobs don’t see themselves the way the tech community does. Among programmers, these people are at best laughed at (behind the scenes – we’re not in middle shcool). I used to be one of those people. That was, until I spent three years and an unholy number hours teaching myself how to program so I can build out my own product. Whenever an entreprenuer approaches me with the next billion dollar plan, I ask myself, would he do the same?