Why We Don't Take Equity

Startups frequently offer equity instead of cash for engineering work. The pitch varies: “We’re pre-revenue but have huge potential.” “Our last round valued us at $10M.” “You’d be getting in early.”

The economics of these offers rarely work out. Here’s why.

The Math Problem

A typical equity-for-engineering offer might look like:

• Engineering project: $50k equivalent
• Equity offered: 1% of the company
• Implied valuation: $5M

For that 1% to be worth the $50k you’re forgoing, several things need to go right:

1. The company needs to succeed (most don’t)
2. Your shares can’t get diluted to nothing (they often are)
3. There needs to be a liquidity event (exit or IPO)
4. You need to still hold the shares when it happens

Here’s how the numbers tend to play out in practice.

Startup survival rates (rough estimates):

• Something like 90% of startups fail entirely
• Of those that survive, maybe 10% achieve a meaningful exit
• That puts the odds of a good outcome around 1%

Dilution:

Your 1% might become 0.3% after a Series A, 0.1% after Series B, and so on. By the time there’s an exit, early equity holders have often been diluted 70-90%.

Time to liquidity:

For startups that do exit, it often takes 7-10 years. That’s potentially a decade of waiting to maybe get paid.

Expected value calculation:

• 1% chance of exit
• $5M needed exit value just to break even (at 1%)
• With 80% dilution, need $25M exit
• Most exits are acqui-hires under $10M

The expected value of that 1% might be under $5k. In that scenario, you’re giving up $50k for something worth maybe $5k in expected value.

The Incentive Misalignment

Cash payment creates simple incentives: deliver good work, get paid, earn repeat business and referrals.

Equity creates complicated incentives:

Engineers become investors, not vendors. Equity holders start caring about business decisions outside their expertise. Should the company pivot? Raise more? Hire that person? These opinions may not be informed ones.

Risk tolerance shifts. Equity is worth zero if the company fails and potentially worth a lot with aggressive growth. This incentivizes pushing toward higher-risk strategies that may not fit the situation.

Exit becomes difficult. If scope creeps, requirements change, or the relationship sours, neither party can walk away cleanly. Financial interest in the company persists indefinitely.

Termination becomes complicated. If work quality doesn’t meet expectations, the client is stuck. The contractor owns part of the company. The relationship is harder to exit than a standard vendor contract.

When Equity Might Make Sense

There are exceptions. Equity can work when:

You’re a co-founder, not a vendor. If you’re joining full-time, taking real risk, and building the core product, equity is appropriate. That’s different from a consulting engagement.

The cash equivalent is small. A $5k project for 0.1% equity? The expected value calculation is less punishing, and the relationship is simpler.

You have specific domain expertise they need long-term. If you’ll be an ongoing advisor, not just a one-time contractor, alignment through equity makes more sense.

You’re independently wealthy. If you don’t need the cash and genuinely want to bet on this company, that’s your choice. Just understand what you’re betting.

Alternative Approaches

Several responses address equity requests effectively:

1. Separate expertise. Engineering firms build products; investors evaluate companies. These are different skills. Startups benefit from working with investors who specialize in company evaluation.

2. Cash simplifies relationships. Both parties know the terms. No cap table discussions later.

3. Phased work addresses budget constraints. Tight budgets can be addressed through phased deliverables, reduced scope, or milestone-based payments. Clear pricing beats fuzzy equity arrangements.

4. Reputation creates alignment. Contractors benefit from successful projects through referrals and repeat business. This provides sufficient incentive alignment without equity complications.

The Real Issue

Usually, when someone offers equity instead of cash, the real issue is that they don’t have cash. That’s a funding problem, not a payment structure problem.

If you can’t afford to pay for engineering, you might not be ready to build yet. That’s okay. Raise money first, validate your market, get some customers. Then hire engineers when you can pay them.

Taking equity lets you defer this reckoning, but it doesn’t solve it. You’re still spending resources you don’t have. You’re just hoping the equity becomes worth something before reality catches up.

Recommended Approach

Cash compensation with fixed-price quotes, milestone payments, and standard consulting terms provides the clearest arrangement.

Clean vendor relationships benefit both parties. The client gets predictable costs and easy termination if needed. The contractor gets fair compensation without long-term entanglement. Incentives align around delivering good work.