At the earliest stages of a startup, founders face a familiar and uncomfortable reality: there is no revenue, the product still needs to be built, and every month burns cash. Development is one of the largest expenses, and naturally founders look for ways to reduce this pressure. One of the most common approaches is to ask a software development company to work for free or at a discount in exchange for equity.
From the founder’s point of view, this looks like a rational optimisation of risk. From the point of view of an established software development company, it usually does not.
At Software Planet Group, we receive such proposals on a regular basis. And we almost always decline them. This article explains why, what founders often misunderstand about this model, and what needs to be in place before a partnership with a development vendor has any real chance of working.
How Founders Optimise Their Risk — and Why It Gets Shifted, Not Removed
At the idea or pre-revenue stage, a founder personally absorbs almost all business risk. There is no money coming in, no proof of monetisation, and no guarantee the product will ever reach the market. Offering equity instead of cash is an attempt to delay costs and share uncertainty.
That logic is understandable. But it is important to call things by their real names. In this scenario, risk is not eliminated — it is shifted.
When a software development company is asked to work for equity, it is being asked to exchange an existing, predictable cash flow for a highly uncertain future outcome. In other words, a working business is asked to downgrade its financial certainty to match the risk profile of a pre-revenue startup. This is not an investment decision most operating companies can make lightly.
The Reality of a Software Development Company’s Cash Flow
Unlike early-stage startups, professional software development companies already function within a stable economic model. They have paying clients, contractual obligations, salaries, and operating expenses. Their cash flow is real, measurable, and ongoing.
Agreeing to work for equity means replacing that real money with a promise that may or may not materialise years later. Even if the idea sounds exciting, even if the market looks large, this exchange is structurally unfavourable unless very specific conditions are met.
This is the core mismatch founders often miss. What feels like a clever partnership opportunity to them feels like a direct financial regression to the development company.
Why You Should Not Offer Equity From Day One
One of the most common mistakes founders make is offering equity immediately, as if it were a substitute for payment. This is not just ineffective — it is dangerous.
Equity should never be a starting point. Choosing a long-term partner is one of the most critical decisions in a startup’s life. A wrong partner with equity can create more problems than a bad hire: conflicts over priorities, architectural decisions, pace of development, or even strategic direction. Removing such a partner later is expensive, legally complex, and emotionally draining.
A healthy partnership starts with professional collaboration. Only after both sides have proven they can work together, communicate well, and deliver results does equity become a meaningful conversation.
Show the Cash Flow — Not the Vision
Founders often speak in abstractions: future rounds, large markets, upcoming launches, impressive roadmaps. None of this helps a development partner assess reality.
What matters is very simple: what cash flow exists right now.
Even if it is small, even if it only covers part of the work, it provides something concrete to build on. How much money is coming in today? How is it growing month over month? What part of this flow can be allocated to development immediately?
Free users, early sign-ups, and “validated demand” without payments do not answer these questions. Free users prove interest, not willingness to pay. From a business perspective, they say almost nothing.
Money flow is the signal. Everything else is noise.
Involve the Vendor in Growth — Then Introduce Equity as an Option
A much more mature model is to involve a development partner in the growth phase before any equity is discussed. The vendor enters as an operational partner, not an investor. The focus is on scaling what already works, not gambling on what might work one day.
In this model, the vendor should be able to reach its standard profitability within a clearly defined timeframe — for example, three months. This is not an arbitrary number. It is enough time to assess product dynamics, founder discipline, decision-making quality, communication, and the realism of growth assumptions.
Only after this stage does equity make sense — not as payment, but as a long-term incentive aligned with proven results. This is the “carrot”, but it must be placed low enough to be reachable. Equity that is always “later” is worth nothing.
Partnership Means Shared Decisions, Not Just Execution
Another critical point founders often overlook is the nature of partnership itself. If a development company is treated merely as a pair of hands executing predefined wishes, equity becomes meaningless.
True partnership implies shared responsibility for decisions — technical and business alike. Architecture, technical debt, roadmap priorities, trade-offs between speed and quality, and sometimes even monetisation logic must be discussed together.
If a vendor carries risk but has no voice, the relationship is broken by design. Even a small equity stake requires equal participation in discussions and accountability for outcomes. Otherwise, it is not partnership — it is outsourcing with venture-level risk.
If a founder is not ready to share decision-making power, then equity should not be offered at all. In that case, the honest model is simple: pay for services in cash.
Product Mindset Matters More Than Company Type
There is a common phrase that developers from outsourcing companies are “lost” for startups. This is not about outsourcing as a model — it is about mindset.
Many engineers are trained to think in tasks, not in products. Deliver features, close tickets, follow specifications. This works perfectly for traditional outsourcing. For startups, it is often fatal.
A startup needs product-oriented thinking: understanding user value, prioritising learning over perfection, cutting features aggressively, and accepting constant uncertainty. A partner without this mindset will faithfully implement the wrong decisions — and do so very efficiently.
Equity does not change this. A task-driven developer does not become a product partner simply because they own a percentage of the company. Founders must actively assess whether a potential vendor thinks in terms of users, metrics, and business impact, or only in terms of technology and deadlines.
A More Honest Model of Collaboration
The most successful partnerships we see are built on shared growth, not deferred promises. The founder brings a product with paying customers. The development company brings engineering expertise and scalability. Revenue funds development, and development increases revenue.
This model respects economic reality on both sides. It avoids false expectations, power imbalances, and long discussions that were never grounded in viable business fundamentals.
For founders, the conclusion is simple but uncomfortable: partnership with a software development company is not a way to save money. It is a more complex, more demanding model that requires transparency, shared responsibility, and real financial traction.
When money flow is real, the conversation about partnership becomes not only possible — but genuinely meaningful.
