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Coding for equity experience

We have summed up all our past experiences over the last 8 years. We have analyzed successes and failures encountered in our years of expertise as a technological partner and we have concluded that coding for equity is just not working.

Every web-studio wants to become a product company. Our studio just like hundreds of others is not left out of this craving. We started work as a bunch of freelancers some few years ago, when the demand for our services started getting more than we could handle, we began to hire more workers to boost our manpower. What led to our success in such a short time was the ability to study and discover the right niche to start with. As at 2006 when we began, we started from scratch, infact we started with little or no knowledge of this business (we didn’t even know what start up meant in business) but out of curiosity and desire for knowledge we were able to guess the right and correct niche to begin with.

We got our first coding for equity contract in 2006 the same year we started out as a business enterprise. An entrepreneur who developed an online-service for personal ads without any tech background found us. We took development in our hands. But the plans to conquer Saint-Petersburg ad market and then scale to Russian market failed. Six months later the investors backed off. The founder got a nervous breakdown, and never recovered after it.

We were upset by this story, but optimism prevailed. So we started our second startup. It happened that all our internal projects and coding-for-equity projects are different from projects by other web-studios. Usually, studios develop solutions for their own needs and pains, that existing tools can’t solve. In our own case, all ideas that were internal or external were decisions neither for studio nor for us, its founders. Proposals to code for equity came from startup founders who had no idea how it should work. They assumed that entering as a tech investor; we took care of coding and technical risks too. This would later prove to be a grave mistake.

Minute of theory

Coding for equity (technology investment) — it is the project of programming for a stake in a business. The terms of such collaboration (like scope of work, amount of stakes, costs of developer’s company) depends on agreements of parties.

In simple terms: we code an MVP for you, you give us 10% of your company.

Our code-for-equity path can be divided into several periods depending on number of years and the work scheme involved.

2006-2009

During the earliest years of our formation, our role was not only coding but we had right to manage and partly took over responsibility for development of the business-part of the project. The agreements were on paper but had no legal force. The decision to participate as a technological investor was taken according to the founder’s adequacy. Lack of experience didn’t allow us make deeper analysis.

All of these projects had not lived up till today.

Year

Project name

Essence of the project

Work scheme

Exit stage

Current state

2009

HappyPartner

Automatic gift selection service

Covering our expenses for 80%, our share is 5%

Made the first online-version

Became an offline-business. In future plans there’s online-service developing.

2010

Twijector

Twitter-wall for events

Internal project

Still working

Small market. Project is popular, but has no monetization. An attempt to sell failed.

2010

MyBizCards

Online business cards

Covering our expenses for 100%, our share is 10%

Developing of third version. Attempts of first sales.

Wrong business-model.

The original idea is non-viable.

2011

PruffUp

HR-palatform for startups

Covering our expenses for 100%, our share is 20%

Developing of MVP. User attraction.

Founder freeze the project, focused on main business.

2011

Joys

Online contest for the right to purchase the household appliances with 80% discount

Internal project

Developing of MVP. User attraction.

Wrong business-model.

2012-2014

According from experience of the past previous years, it became clear that a complete suspension from management was a bad idea. So we went back to the model that implied participation in all aspects of sales, marketing and so on. Our work was paid at cost plus 5% for risks.

At this stage, starting with a restaurant project we and our partners created the process: at first we made an idea and business-model, and then searched out a co-founder for the project, who became its CEO. Our Studio played its part as technological partner and took care of all tech risks, development, HR of state coders and CTOs (when project became independent). Such model had a little in common with coding for equity, and that became a final experiment for us. We stopped being an accelerator and that meant that we didn’t take a part in next rounds of projects.

Partnership had clear processes of interaction with studio partners and performers, prescribed in the contracts of the offshore company. We developed and tested MVP. Unfortunately it was of no significant effect after several attempts; hence, the project had to be shut down.

Also on this stage we launched HackDay School — 100% internal studio project, which is still running.


Year

Project name

Essence of the project

Work scheme

Exit stage

Current state

2012

NDA

Tech entrepreneurs self-education tool

First version for free, next — to cover expenditures.

Developing of MVP, than a several versions.

Had some pivots, looking for customers.

2012

NDA

Content personalisation system

First version for free, next — to cover expenditures.

Developing of MVP, than a several versions for pivots.

Running. Looking for customers.

2012

NDA

Management of customer loyalty to the catering establishments

Costs compensation and share.

Developing of several versions for hypotheses testing.

Closed. No hypothesis has not been confirmed

2013

NDA

Mobile social media.

Costs compensation and share.

Developing of the first version.

Closed. No customers.

2013

NDA

Automation of changing a table data.

Costs compensation + 5% for risks + share

Developing of the first version.

Closed. No demand.

2013

NDA

Marketing research in social media

Costs compensation + 5% for risks + share

Developing of the first version.

Had some pivots. Raised the second round of investments. Looking for customers.

2013

NDA

B2C-service for event communication

Costs compensation + 5% for risks + share

Developing of several versions.

Had some pivots. Raised the second round of investments. Looking for customers.

2013

NDA

Marketing research using mobile apps

Costs compensation + 5% for risks + share

Developing of the first version and team recruitment for independent work.

Raised the second round of investments. Looking for customers.

2014

NDA

preventive delivery of FMCG items service

Costs compensation + 5% for risks + share

Developing of the first version.

Looking for customers.

The reasons to reject the practice of technological investments

The main cause of insolvency in coding for equity is the lack of full involvement in the business of technical team, and lack of control in the business part. You cannot shift the responsibility for the business to someone else’s shoulders. Those in charge of the business must play their roles diligently and accordingly. Other causes of insolvency includes: inexperienced business leaders, lack of understanding of the specifics of the market, lack of understanding of what to do with the product and how to develop and change direction.

What we tested

The projects were of varying proportions, some were with offline component and some without it, some were with experienced founders and some with beginners, some were simple while some were technically demanding, some were with an agreement and some without it, some were a legal entity in Russia, and some, a legal entity in Delaware, and some without a legal entity altogether; some were invested in and some were not; some were made with founder’s money and some with money of founder’s parents, some were launched with the money from a sold car or property, some were projects of friends and some were from complete strangers, some were launched intuitively and some were from books.

The result in either case was not pleasant. Even if the projects did not die, they didn’t make enough money, which made it disproportionate with the time spent and hence unprofitable.

How it ended

You may think that the time spent on coding for equity is dramatically high. However, it is not. Most part of the time spent in the studio will be as an outsource developer while in the next few years continue working in that niche in the market. Except for the experiment with the accelerator, our employment from inside and outside projects were not as high as 10%.

The most valuable asset we have is experience. Your Experience as an accelerator will make prospective client regard you as a successful entrepreneur. So far, the project works has had a direct relationship with currency fluctuations, with the prices of dollars and rubble affecting it significantly and that has been the case for a long time now. The studio has a decent percentage in five projects presently, and now the question is, will they be successful or not? We have sold a part of the shares in one of the projects and received a small sum of cash (this is pretty good half-measure, dammit!).

With frustrated partners we dispersed without any conflicts. They are were wonderful people, many of whom are now developing their businesses, maybe not super successful, but rather good and stable.

Already over a year now into developing a studio 100% that we can call own project, personalization system REES46. It’s developing gradually, not as fast as expected, but heck! We control all the directions.

That’s all.

Russia,

Saint-Petersburg,

Michael Kechinov/s startups development studio.