Startup hiring on a shoestring budget?
Recently, we’ve gotten an awful lot of unsolicited requests for start-up advice, such as today’s question about startup hiring on a shoestring budget. (We’ve also received some solicited questions, as well. 🙂 ) We sometimes see the same mistakes being made over and over again by local entrepreneurs. We thought we’d cover some of these in our blog if it will help other start-ups out.
If you have or are considering doing a start-up, scroll to the bottom of this article to see how you can get your questions answered in a future version of this column.
Today, we’ll clear up some common misconceptions about the cost of engineers. This is an actual question we recently received via email from a local entrepreneur, one of many in our mail. We’ve removed the company name and altered some details for publication purposes.
Start-up newbie: “I have an idea for a really awesome video-related mobile app! I’ve just graduated college as an English lit major and am now an out-of-work actor, so unfortunately I have no real-world experience or any real technical knowledge. I had some basic development done by a programmer on the East Coast, but now I want to hire a top-notch team of developers here in Los Angeles for the next six months until my Series A round. I’ve raised a ‘significant amount’ of seed money for my start-up….
Acculation: “OK, our CEO has interviewed hundreds of software engineers, managers, project and sales people for some of the most selective employers in Los Angeles over the years. We certainly can give some pointers on how to set up hiring, HR, and project management processes, as well as provide advice on corporate culture. So we might be willing to help this you out.
Acculation: US-based engineers are expensive, especially if you need a team of them working full-time for the next six months. You say you are an English Lit major and out-of-work actor with no real-world experience, so your idea of a ‘significant amount’ of seed money might be very different than ours. Just out of curiosity how much was that ‘significant amount’ of seed funding?
Start-up newbie: “About $5,000
Acculation: “Gulp. Engineers are not paid out-of-work actor wages. You might be able to get a US contractor for a small project or even a good off-shore team for a small amount of time. But you also have to consider legal, accounting, and tax expenses. Depending on where you are located and what your startup is doing, any of these can easily eat up much or all of that $5,000. You might have much left over for the Engineering team, even if you hire off-shore developers.
Let’s keep things simple, however. Let’s ignore the legal, accounting, taxes and other expenses we mentioned earlier. For the purposes of this post, we’ll assume he’s got a full $5,000 budgeted that he can spend just on the engineering of the project.
In the interests of simplicity, let’s mostly ignore minimum wage laws in the U.S., which alone would normally exceed $5,000 after a couple of months on a full-time project for a direct hire. Let’s also ignore significant potential required benefits like worker’s compensation. (Both of these issues are complicated. They can vary significantly by region and the exact circumstances. In some cases, these can be a consideration even with equity-compensated co-founders and with 1099 contractors, especially if they become disgruntled after putting in long hours for you. We did mention there might sometimes be significantly legal and accounting bills associated with your start-up? Considerations like these are some of the reasons why. As obvious as some of these things seem, he’s not the only guy out there asking questions like these or trying to figure out how to do a complicated project on a shoestring budget. Which is why posted here.)
With those caveats, can he do his project somewhere in the world on a budget of only $5,000? Depends on the size of the project. How complex is his app? Does he really need the engineers to work full-time for six months?
Let’s ignore equity compensation for the moment, and talk about pure cash compensation. There’s essentially no way he can hire a team of top-notch engineers to work full-time six months on only $5,000 anywhere in the world. (The operative words are “top-notch team.”) Having worked with many off-shore engineers, we can state categorically that this is true even for off-shore engineers (unless, perhaps, you’re willing to eliminate the requirement that they be highly competent and are will to have only a single off-shored full-time developer, in which case they would no longer be a “top-notch team.” :). Although some off-shore engineers may be willing to work for a fraction of what US-based engineers demand, it is still a significant fraction. (There may also be some negatives to off-shoring. We’ll talk more about the pro and cons of offshoring below.)
The typical first-hire developer needed for a start-up is a seasoned full-stack developer who can develop a complete, complication application and backend architecture without supervision. The minimum going full-time rate for someone like that at a start-up in U.S. will normally be in the six figure range in the absence of equity or other similar considerations. (A well-established company, where there is less risk of the firm suddenly collapsing, might be able to hire a more junior developer for under six-figures under some circumstances. Similarly, if the firm is backed a very famous fund that is essentially guaranteeing the longevity of the start-up for at least a little while, some might be willing to accept less cash compensation to get in on the ground floor. Developers that are just starting out or need supervision might make less than six-figures at a tech start-up. We’re taking about the first few hires, or the sort or people that can reasonably be expected to finish a complex project.)
What about part-time? Well, for a very small project, he can hire a contractor, and time-share the developer with other start-ups. This is pretty easy to do, but for $5K the project does need to be very small. We’re aware of some reputable contractors that will setup a working 5-page WordPress or PHP site to prototype an app for investors for about $5K. (This is a bit more than a WordPress blog, and closer to an actual working website with custom functionality on each page. But 5 web pages of custom software functionality is not going to get you much of a website.)
Can this guy get by with a contractor for his mobile app? He said it’s a video app that will presumably do some sort of video processing. That sounds like a fairly complex app, a lot more than a typical US-based contractor will be willing to chew off for $5K. We’ve already ruled out an overseas team as well on that budget.
What can he do? This looks like a fairly complex app. It doesn’t seem like it will be possible to develop it for $5,000 cash, at least given what’s told us in terms of the app and in terms of the quality engineering hires he suspects he’ll need.
He can turn to offering equity compensation. That probably means offering a significant amount of equity, however. Remember, since he himself lacks technical knowledge, and he’ll need a full-stack developer that can work independently and eventually supervise a larger team of more junior engineers. Typically he’s looking bringing about a co-founder, and that probably means offering 50% or more equity stake.
Let’s take a step back. We’ve already said this of engineer is very much in demand and can make six figures. On the other hand, our visionary entrepreneur, lacking a developer, is otherwise a mostly out-of-work actor picking up the occasional gigs. Those kinds of considerations factor into the cash and equity consideration. There are no shortage of out-of-work visionary would-be entrepreneurs, but there is a great shortage of competent software engineers in the world. Even though he’s the visionary with the big idea, it’s quite possibly he’ll have to end up giving his co-founder more than 50% of the company, or significantly sweetening the deal by throwing in hard cash in addition to the equity. (Either way, recall our earlier caveat about first needing to discuss potential liability for minimum wage back-pay with your attorney in situations like this.)
We know of at least one example where the founding engineer received equal equity compensation to the MBA CEO, but received a very significant cash compensation package as well (so that the engineer was, at least initially, much more highly compensated that the CEO). The argument was the same as above: that particular engineer can make $200,000 if he quits the start-up, whereas the visionary but non-technical CEO will be out-of-work despite the MBA. This blows some peoples minds. (People think the equity will be worth huge amounts of money. If large amounts of VC funding are required, that equity might worth less than people realize. We might do a future blog post we throw out some hard numbers from actual industry averages.)
What about hiring an off-shore contractor? Here he has a better chance of completing a project for $5,000, although he’s unlike to get the “top-notch” team he desires. If he really needs several months of engineering time, he might be looking at a team of one or less (i.e. a time-share).
While this looks much more tractable than the US hire (at least the parameters he’s provided), given that he’s non-technical there are significant drawbacks to hiring off-shore engineers.
In many countries, the hiring culture is very different than in the United States. Engineering schools in some countries are huge, churning out large numbers of degrees each year with high variance amount the graduates. People from those countries may look at other factors besides the degree when hiring engineers. They might have a personal connection with a professor recommending certain students. Some off-shore companies may only hire friends or relatives to ensure quality. (This looks like corruption and would likely be illegal in many Western countries, but is the way business is done in some countries. In the U.S., where better mechanisms for evaluating candidate strength lead to a more efficient and more meritocratic hiring process.)
Another problem with off-shore development is that it is much more difficult to use processes like Agile development. (This could be a topic for a future blog post.) What this means is off-shore developers expect the application to be spec’d out in great detail in order to work efficiently across time-zones. That’s not possible if our founder is non-technical.
We have anecdotal evidence of off-shore contractors often having difficulties meeting project deadlines. This is a problem everywhere, but may be much more pronounced when using an off-shore contractor. We’ve also heard complaints that off-shore work is, on average, of lower quality than work done in the United States. (The old adage “you get what you pay for” may at least be partially true.)
So, if he wants to do off-shore hiring, it would be much better if he already had a technical co-founder or at least a US-based technical contractor to help with the off-shoring. This would let him fully spec out the application before sending it overseas, as well as better vet off-shore contractors. A US-based (local to the founder) technical resource could also help supervise the off-shore contractors to ensure quality and make sure reasonable project deadlines are met.
In the absence of a US-based technical resource, it’s of great help if our founder has connections in the off-shore country. For example, if the off-shore developers are friends or family that he fully trusts, then he obviously doesn’t US-based technical resources as much. He doesn’t need to vet the off-shore contractor, and he knows their quality and on-time deliver characteristics from past experience.
Incidentally, similar considerations apply if he wants to go the route of recruiting a technical co-founder. The best co-founders are ones you trust deeply as a result of years of experience. If you’ve got a family member that’s very technical, it’s going to be much easier to recruit them to your project than if you need to arrange a generous equity or cash compensation package for an outside founder. In addition, many VCs prefer start-ups where co-founders have a significant previous personal history with each other.
What happens if you don’t have a technical friend or family member here in the US that would make a good co-founder? And, you don’t have connections in an off-shore engineering hub? Well, your $5,000 complex mobile app might be a bit ambitious.
There are still things you can do to save the project:
- You can greatly simplify the app. We mention the simply 5 web pages that can probably be done for $5,000 here in the U.S. This could be a mock-up of the final app that you ultimately envisioned, to help explain to potential investors.
- You can decide that $5,000 isn’t actually a ‘significant’ amount of seed funding given the complexity of the app that you envision. In that case, you’ll need to raise more money. (And perhaps you can do this together with the simple prototype in #1, although that’s optional.) There are many sources of funding for start-ups. There are great books entirely devoted this topic. Maybe we’ll review some of these resources in a future post, but for now it’s well beyond the scope of this article.
Send us your start-up questions!
If you’re doing a start-up, send your questions to [email protected] or tweet your question to us at @Acculation. We’ll try to answer as many as we can in this space. Although we generally remove company names and specific details for publication (except perhaps if you ask us not to), your email should not include confidential information for obvious reasons.
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