I am starting a software company. We will start with one service in particular, but will expand from there. My question is, is it reasonable to pay developers in equity alone? Also, seperate question, how can I motivate developers to finish the project ASAP? Obviously I want a quality product, but the sooner it gets to the market, the more money the company will make, and in turn, the more their equity will be worth.
I've been on both sides of this, both as a developer and a founder. Here's how I would see this from a developer's point of view:
When you do this, you're asking me to take on 100% of the risk, for only a fraction of the reward. That is, if the business fails, I did a lot of work for which I get nothing. If it succeeds, I get a portion of the profits, along with a bunch of other people. That's a turn off, especially if you don't have a proven track record of continual success. (If you did, you would have the funds to at least pay me a living wage while I work for you).
Second, there is a very high demand for good developers (let's assume, of course, that you want a good developer). At any given time, I am presented with more projects than I have time to do, so I have to choose them. 99.9999% of the time, if I am presented with a project that will guarantee payment vs one that pays in equity, I will laugh at you and choose the one that I know will pay. This is true of ALMOST any developer that you actually want to hire.
That said, there may be a small handful of developers that meet a few criteria: 1. They have enough money that they don't NEED to make any more, and so they can afford to take a risk of getting no payout from you. 2. They are very passionate about your particular project, enough to want to invest in it and take the risk of failure. 3. They believe in you personally, and that your business skills can equal their programming skills and make the project profitable.
Now, if you can find that guy, here's the problem: He's going to want a bigger piece of the pie. He's not just a code monkey, he's an investor, and he's going to want a serious ownership stake, with all that that entails. Frankly, you're not likely to find someone that meets those criteria, but if you do, he's probably worth selling a big chunk of your company to, because if he's in that position, he probably has the track record that you lack, and he should be a founder.
The bottom line: To get a programmer with the skills that will actually make you succeed, you should be prepared to pay him in cash. It's quite possible that you can come up with an agreement that splits cash/equity, but if he can't at least pay his bills with what you're paying him, he'll go to someone else who will.
Finally, how can you motivate the developers to finish the project ASAP? Pay them more than anyone else, so they can focus all their energy on you. :)