A while ago, I sent a notice out asking if any developers were interested in working for equity on a Java-base P2P commerce system which I'm serving as an advisor on. Among some notes indicating interest, I received the following question:
So, if the business plan is good enough that the equity isn't worthless, why isn't there enough funding to pay a single developer's salary?
I can think of several reasons:
- Usually, before investors will put money into a deal, they want to see something, even a prototype, working. So, the business plan may be sound, but there could be very little cash laying around.
- Programmers can often see the potential of an online product before there's enough detail to attract investors because they live in this space.
- Even if investors are willing to put money into a deal, the higher the value of the company at the time you do the first (and successive) rounds, the less equity you give away for a given investment. A working prototype increases value.
- Programmers who have an ownership stake, especially early, can make a huge difference in terms of direction and vision. Programmers working part-time for money in a start-up typically don't have that kind of impact.
All of this means that programmers can make a big difference in early-stage firms and get a piece of the action for a relatively small investment in time. That's leverage.