Payment Structures with Developers

Beginning a startup is a tedious process, so bringing along the right team can help. Just make sure you are setting up payment structures that make sense for the entrepreneurs and the hired help.

Fixed Rate

The simplest way to pay a developer, or anyone for that matter is via a fixed rate. This is great for small projects that can be completed within 1–3 months of work. Any project longer than that and it makes it difficult to find someone willing to work so long without seeing any return.

It works exactly how it sounds; the developer gets paid once the project has been completed.

Hourly Rate (difficult to honestly track)

Another common way of paying developers is with an hourly rate. This is most common when employing freelancers. I have always been weary of paying an hourly rate just because it’s a difficult thing to track. You must be able to trust that this person will not over bill you. As mentioned in our blog about technical screening, asking for references of past employers can give you a good sense of character.

To successfully set up this payment structure, I encourage the use of a time logging system. Something as simple as having a developer log the hours worked on specific features can be helpful. However, using advanced time tracking software will provide more transparency. Check out this article to see some software options.

Milestone (recommended for projects over 2 months in length)

Finally, we saved the best payment structure for last. Milestone payments take time to plan, but often provides the best results. The entrepreneur is happy to pay when progress is made, and the developer gets paid for incremental work. It’s a true win-win.

Open up a dialog with your potential developer immediately to discuss this payment structure. The entrepreneur will have to go over the details of the application and help the developer form a development plan. Once the development cycle of the project has been roughly sketched out, the entrepreneur and developer can begin to discuss the prices of each milestone. Once both parties are happy with the structure it’s time to start building and rewarding.

For those that are cash strapped:

Equity Reduction with Revenue Milestones

Now this is a very interesting concept that has come to light more recently. Many entrepreneurs are strapped for cash starting out, and offer equity as a form of payment (can be paid in a structure similar to anything above). While equity is a great form of payment, it can be dangerous to give away too much during the infancy of a company.

So how can I use equity instead of cash without killing my company? Offer equity up front, but as company revenue increases reduce the equity ownership and increase the salary or cash payout. This is very experimental stuff, so be careful. But it is a creative way to offer something of value and eventually convert it to cash as the company becomes more successful.

We encourage all to utilize an escrow service (check out VentureStorm’s) when using any of these payment structures. This will ensure that your money is held by a trusted third party and will not be paid out until you receive an acceptable product.

By Taylor Johnson

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