App Development

Code for Equity: Innovative financing method for app development

20/06/2024

Within the options for financing technological app development, an innovative option is gaining traction: Code for Equity. This model allows startups and emerging companies to obtain the development of mobile and web applications in exchange for a percentage of their equity. This form of collaboration facilitates access to high-quality technological developments without the need for large initial investments, allowing the alignment of interests of both parties involved.

The growing popularity of this method is due to several factors. On one hand, startups benefit by obtaining cutting-edge technological developments without incurring high initial costs. On the other hand, technological development companies have the opportunity to diversify their investments and participate in the potential success of the startups. In an increasingly competitive market, this synergy can be a new formula for the success of both actors.

It is essential to understand Code for Equity in depth to evaluate whether this financing model is suitable for your project. Understanding how it works, its benefits, risks, and how to implement a beneficial agreement for both parties. In this article, we will explore all these aspects in detail, providing a comprehensive guide on how to make the most of Code for Equity in mobile and web application development.

What is Code for Equity?

Definition

Code for Equity is a financing method in which a technological development company agrees to provide mobile and/or web application development services to a startup or company in exchange for a percentage of their equity. Instead of paying cash for the development services, the startup offers a share of the company’s ownership.

How does it work?

1. Project evaluation: The development company and the startup evaluate the project to determine its viability and growth potential.
2. Equity negotiation: The percentage of equity that the development company will receive in exchange for its services is negotiated. This percentage generally ranges between 5% and 15%, depending on the magnitude of the work and the startup’s potential.
3. Contractual agreement: An agreement is formalized that details the terms of the exchange, including milestones and deliverables, as well as confidentiality and intellectual property protection clauses.
4. Development and delivery: The development company starts working on the project, delivering the products as agreed in the contract.
5. Ongoing participation: Once the development is complete, the development company maintains a stake in the startup, benefiting from its success and growth.

Traditional financing vs. Code for Equity

Code for Equity differs significantly from traditional financing models, such as bank loans or venture capital investment, in several key aspects:

1. Traditional financing:
   • Bank loans: Startups apply for a loan from a financial institution, committing to repay the amount requested with interest. This model can be restrictive due to the need to meet credit requirements and the pressure of regular payments.
   • Venture capital investment: Startups seek investors who provide capital in exchange for equity. Although this option provides an influx of capital from investors, it also involves greater ownership dilution and often the intervention of investors in strategic decision-making.
2. Code for Equity:
   • No Initial Outlay: Startups do not need to make initial cash payments, allowing them to conserve capital for other operational needs.
   • Alignment of Interests: By receiving equity, the development company has a direct interest in the project’s success, which can result in a more committed and high-quality collaboration.
   • Shared Risk: Both parties share the risk and reward, which can incentivize a more collaborative and flexible relationship.

Code for Equity offers an innovative and flexible alternative for financing app development, aligning the interests of startups and developers and enhancing shared success. This model allows startups to access high-quality technological services without the initial financial burden, while development companies can participate in the growth of new businesses.

Benefits of Code for Equity

GooApps development team

For startups and emerging companies

Access to specialized talent and technological resources

One of the greatest benefits of Code for Equity is that it allows startups to access highly experienced developers and high-quality technological resources without needing to make any investment.

This is especially important for companies with limited budgets, allowing them to focus on other areas, such as marketing or business expansion.

Financial flexibility and reduction of economic risks

By not having to disburse a sum of money upfront, startups can better manage their cash flow and reduce the financial risks associated with app development. This provides them with greater flexibility to adjust their budget according to the changing needs of the business.

For developers and technology companies

Participation in the success of the startup

Through Code for Equity, development companies receive a share in the startup’s capital. This allows them to directly benefit from the company’s success and future growth, aligning their interests and fostering a more committed and results-focused collaboration.

Diversification of investments and potential for high returns

This model allows developers and technology companies to diversify their investments by obtaining equity in multiple startups. While not all startups will succeed, those that do can generate returns that positively contribute to the development company’s investment portfolio.

Code for Equity offers a mutually beneficial approach for both startups and developers. Startups gain access to top-tier specialized talent without compromising their capital, while developers participate in the growth potential of new businesses, creating a synergistic relationship that enhances the success of both parties.

Risks of Code for Equity

For startups and emerging companies

Dilution of ownership

One of the main risks of Code for Equity is the dilution of ownership. By offering a percentage of equity in exchange for development services, founders and initial shareholders see their stake in the company reduced. This can be especially problematic if the startup needs to attract multiple rounds of funding, as each new round further dilutes the original ownership.

Dependence on a third party for development

Relying on an external company for app development means that the startup depends on a third party for a critical part of its business. If the relationship with the developer is not optimal, or if there are delays and quality issues, this can affect the time to market and the company’s competitiveness.

For developers and technology companies

Risk of the startup not thriving

The main risk for development companies opting for Code for Equity is the possibility that the startup may not thrive. If the company fails to meet its growth targets or goes out of business, the received equity will have no value, and the development company will not recover its investment in time and resources.

Difficulties in assessing the company’s value

Accurately assessing the value of a startup is complex and entails risks. Growth projections can be uncertain, and developers may find it challenging to determine a fair value for their work. Incorrect valuation can result in inadequate compensation, negatively impacting the return on investment.

Although Code for Equity offers benefits for both parties, it also presents risks that both startups and developers need to consider. Evaluating these risks and planning accordingly can help mitigate the disadvantages and maximize the opportunities for success.

Evaluation and selection of projects for Code for Equity

Eric García, CEO of GooApps

The evaluation and selection of projects for a Code for Equity model is a process that ensures both startups and developers a fruitful collaboration. This section addresses the essential criteria that must be considered when evaluating a project and the necessary steps for conducting a thorough evaluation. It is vital that both parties understand and agree on the selection parameters to guarantee a positive and mutually beneficial partnership.

Selection criteria

Growth potential and business viability

Evaluating the growth potential and business viability is fundamental to determining if a project is suitable for Code for Equity. This analysis involves examining the size of the target market, the demand for the product or service, and the startup’s ability to scale its operations.

Startups with a large and growing market, coupled with an innovative and necessary product, present a greater opportunity for success. Additionally, the startup must demonstrate that it has a sustainable business model that can generate long-term revenue. A solid market and a clear business plan for scalability are key indicators of viability.

Experience and commitment of the founding team

The experience and commitment of the founding team are crucial determinants in the success of a startup. A team with a solid industry track record, complementary skills, and a clear vision is more likely to bring the project to fruition.

The evaluation should include a detailed analysis of the team’s technical and management skills, their previous startup experience, and their ability to execute the business vision. Additionally, the team’s commitment to the project is essential. They must demonstrate passion, dedication, and a strong work ethic. A founding team with these characteristics increases the chances of success and risk mitigation for the development company.

The selection criteria for Code for Equity should focus on business viability and the strength of the founding team. Carefully evaluating these aspects helps ensure that the project has the potential to grow and prosper, offering benefits for both parties involved.

Evaluation process

To ensure that a project is suitable for Code for Equity, a rigorous evaluation process must be followed. This process helps identify projects with the greatest potential for success and mitigate associated risks.

Market and competitor analysis

• Market size and growth evaluation: Understanding the startup’s target market is essential. This analysis includes identifying the current market size, its growth rate, and emerging trends. A large and expanding market suggests greater opportunities for the startup’s success and, therefore, a safer investment for developers.
• Competitor identification: Analyzing the competition is a necessary step. Identifying key competitors and their strengths and weaknesses allows startups to better position their product and define an effective competitive strategy. A market with moderate but not saturated competition is ideal, as it indicates demand without excessive competitive pressure.
• Differentiation and value proposition: It is necessary to evaluate how the startup differentiates itself from its competitors. The startup’s value proposition should be clear and compelling, offering something distinctive that attracts customers and makes them prefer its product or service over existing ones in the market.

Financial evaluation and growth projections

• Financial status analysis: Reviewing the startup’s current financial status provides a clear view of its economic health. This analysis includes the balance sheet, income statement, and cash flow statement. A startup with solid finances and good resource management shows a stable foundation for growth.
• Revenue and expense projections: It is important for startups to present realistic financial projections based on reliable data and reasonable assumptions. These projections should include detailed estimates of revenues and expenses for the coming years, demonstrating how they plan to achieve profitability and scale their business.
• Business model evaluation: The business model must be viable and sustainable. Evaluating how the startup plans to generate revenue and maintain long-term profitability is essential. A well-thought-out and market-tested business model offers greater security of return on investment for developers.
• Financial risk analysis: Identifying and assessing potential financial risks is crucial. This includes considering factors such as dependency on a few clients, market fluctuations, and potential regulatory obstacles. A solid plan to mitigate these risks is a positive indicator of the startup’s ability to manage uncertainties.

The evaluation process for Code for Equity projects must be thorough and detailed, considering both market and competitor analysis as well as financial evaluation and growth projections. This approach ensures informed and strategic selection, increasing the chances of success and benefits for both parties involved.

Steps to implement a Code for Equity agreement

Eric García and Osvaldo Ulises, CEO and Senior Developer at GooApps 

Implementing a Code for Equity agreement requires a structured approach to ensure that both parties are aligned and that the project has the best chances of success. This section outlines the steps for negotiating and establishing the terms of the agreement, as well as the legal and contractual aspects that must be considered.

Negotiation and establishment of terms

Determination of the equity percentage

Determining the percentage of equity to be granted to the development company is perhaps the most important point of agreement. This percentage should reflect the value of the work performed and the growth potential of the startup.

Generally, the equity can range between 5% and 15%, depending on the project’s magnitude and the startup’s stage. Both parties must reach an agreement that is fair and beneficial, ensuring that the startup is not excessively diluted and that the development company obtains a stake that it finds attractive and incentivizes its commitment.

Definition of milestones and deliverables

Setting clear milestones and deliverables is essential to ensure that the project progresses as planned. These milestones should be specific, measurable, and achievable, and should align with the startup’s strategic objectives.

For example, a milestone could be the launch of a beta version of the application within six months, while the deliverables might include a complete user interface design and implemented basic functionality. Defining these milestones and deliverables in advance helps keep the project focused and facilitates progress assessment.

Negotiation and establishment of terms in a Code for Equity agreement should be done with attention to detail by both parties. Determining the equity percentage and defining clear milestones and deliverables are necessary steps to ensure both parties are aligned and the project has a solid foundation for success.

Legal and contractual aspects

Implementing a Code for Equity agreement involves negotiations and establishing terms, but also managing legal and contractual aspects to protect the interests of both parties. This section details the most important elements that should be included in the contract to ensure a safe and beneficial collaboration.

Equity contracts

An equity contract formalizes the percentage of shares that will be granted to the development company in exchange for its services. This contract should clearly detail the terms of the agreement, including the exact percentage of equity, the rights associated with these shares, and any special conditions that apply. Additionally, it should specify the obligations and responsibilities of each party to ensure mutual understanding and prevent future disputes.

Confidentiality agreements (NDAs)

Protecting confidential information is essential in any Code for Equity agreement. A confidentiality agreement (NDA) ensures that both parties will keep any sensitive information shared during the collaboration secret. This includes technical details, business strategies, and any other data that could harm the startup or the development company if disclosed. NDAs should be clear and specific, detailing exactly what information is protected and the consequences of any breach of the agreement.

Intellectual property protection

Intellectual property (IP) generated during the project’s development must be clearly defined and protected in the contract. This includes any software, source code, designs, and other innovations developed. It is crucial to specify who will own the IP and under what conditions these assets can be used, modified, or licensed. The startup generally should retain ownership of the developed IP, while the development company may receive a license to use it according to the agreement terms.

Rights of the parties

The contract must also establish the rights and obligations of each party. This includes the development company’s rights as a shareholder, such as the right to receive periodic information about the startup’s status and participate in important decisions. It should also detail the startup’s obligations towards the development company, ensuring that any equity promises are fulfilled and that the collaboration is conducted fairly and transparently.

In conclusion, legal and contractual aspects are crucial for the success of a Code for Equity agreement. Through well-drafted contracts, comprehensive confidentiality agreements, and clear protection of intellectual property and the rights of the parties, both companies can ensure a safe, fair, and beneficial collaboration.

Why choose GooApps as your app development partner

GooApps development team

Choosing GooApps as your app development partner ensures an efficient, secure, and high-quality collaboration. Here are the reasons to consider GooApps as your partner in a Code for Equity agreement.

Access to expertise and specialized talent

At GooApps, we have a multidisciplinary team of experts in advanced technologies and development methodologies ready to tackle complex projects and deliver innovative solutions. Our multidisciplinary teams include profiles such as:

• Frontend and backend developers: Experts in web and mobile technologies who ensure an excellent user experience and a robust backend.
• UI/UX designers: Professionals focused on creating attractive interfaces and intuitive user experiences.
• DevOps engineers: Specialists in continuous integration and delivery (CI/CD), automation, and infrastructure maintenance.
• Security specialists: Professionals who ensure application security through penetration testing and security audits.
• Business analysts: Responsible for translating business requirements into detailed technical specifications, especially in sectors with specific regulations like healthcare.

Use of advanced technology

We master a wide range of modern technologies, such as:

• Artificial intelligence (AI) and machine learning (ML): Utilizing predictive models, natural language processing (NLP), and recommendation algorithms to enhance application functionality and personalization.
• Blockchain: Implementing blockchain technologies for applications that require high security and transparency, such as financial transactions and data management.
• Augmented reality (AR) and virtual reality (VR): Creating immersive applications with interactive experiences in sectors like entertainment, healthcare, education, and retail.
• Internet of things (IoT): Developing applications that communicate with smart devices, offering innovative solutions in health, sports, wellness, smart homes, and automobiles.
• Cross-platform development: Using frameworks like React Native, Ionic, Flutter, or Xamarin to develop applications compatible with multiple platforms from a single codebase.

Agile development methodologies

We use agile methodologies such as Scrum, Kanban, and Lean to ensure efficient and adaptable development. These methodologies allow us to deliver product increments continuously and adapt quickly to changes in project requirements, improving the final product’s quality.

Effective communication strategies

Communication is key at GooApps. We use efficient tools like Slack to keep everyone involved informed and aligned. We establish regular communication schedules and clear methods for sharing updates and quickly resolving issues.

Legal and security compliance

We ensure compliance with all relevant regulations, including GDPR, LOPD-GDD, MDR, and IVDR. This guarantees that our applications are secure and meet the highest legal standards, protecting both end users and our clients.

Quality Assurance and testing

We implement strict Quality Assurance (QA) standards and procedures to ensure that each developed application meets the highest levels of quality. We conduct unit testing, integration testing, functional testing, and usability testing, along with quality audits and regular code reviews.

Capacity for innovation and rapid adaptation

Our ability to incorporate the latest technological innovations into our projects ensures that your applications remain competitive and aligned with market trends.

Conditions for accessing the Code for Equity agreement

To access the Code for Equity agreement with GooApps, it is necessary to analyze the startup’s phase. This is because GooApps evaluates the project’s eligibility based on its development stage. Below, we explain the different phases of a startup to better understand GooApps’ evaluation process.

Phases of a startup

1. Pre-seed: In this initial phase, the entrepreneur develops the business idea and creates a basic prototype to validate market interest. Funding generally comes from personal sources, family, friends, or business angels.
2. Seed: Here, the startup has a Minimum Viable Product (MVP) and seeks to validate the product in the market. External capital is sought to improve the product and expand initial operations.
3. Early stage: The startup begins to generate revenue and establish a customer base. Investment focuses on improving the product and scaling the business.
4. Growth: The company has reached a certain maturity with positive cash flow and a stable customer base. Funding is used to expand the market and increase market share.
5. Expansion: The startup seeks to expand into new markets, possibly internationally, and achieve strategic alliances with other companies.
6. Exit: The final phase where investors seek to recover their investment through the sale, merger, or public offering of the startup.

Conditions for accessing the Code for Equity

GooApps offers Code for Equity agreements exclusively for startups in the Seed phase or more advanced stages. Startups in the Pre-seed phase are not eligible for this type of agreement. The specific conditions for accessing this agreement include:

1. Project status: The startup must have at least an MVP and be in the Seed phase or more advanced.
2. Established company: The startup must be legally established.
3. Minimum funds: The startup must have minimum funds to sustain basic operations.
4. Growth potential: The startup must demonstrate clear growth potential and business viability.
5. Market study and validation: The startup must have conducted a market study and have validation.
6. Founding team: A committed founding team with relevant industry experience is required.
7. Marketing plan and strategy, and execution capability: The startup must have a solid marketing plan and strategy and proven execution capability.
8. Full-time dedicated team: The team must be dedicated full-time to the project.
9. Feasibility evaluation: GooApps will conduct a thorough to determine the project’s suitability for a Code for Equity agreement.

These conditions ensure that both GooApps and the startups can benefit from an effective and satisfactory collaboration under the Code for Equity model.

Code for Equity agreement options with GooApps

At GooApps, we understand that each startup has unique needs and resources. Therefore, we offer different Code for Equity agreement modalities, depending on the status and specific circumstances of each project:

1. 100% of technological development cost covered in exchange for Equity: In this modality, GooApps covers 100% of the technological development cost in exchange for a very high percentage of equity in the startup.
2. Technological development at cost price + Equity: In this option, GooApps performs technological development at cost price, significantly reducing initial expenses for the startup, in exchange for a share of the equity.
3. Discount on technological development price + Equity: With this modality, startups receive a discount on the total technological development price, and GooApps receives a low percentage of equity in the company.

If you want to know which option would apply to your project, do not hesitate to schedule a free consultation with us We will discuss your project, evaluate how we can collaborate in the most beneficial way for both, and make you a proposal.

Conclusion

In summary, Code for Equity is an innovative financing method that offers advantages for both startups and developers. Through this model, startups can access talent and technological resources without initial disbursements, while development companies have the opportunity to participate in the success and growth of new businesses. However, there are also risks that must be carefully evaluated, such as ownership dilution and dependency on a third party for technological development.

Choosing the right financing model is important for the success of any startup. Code for Equity can be an ideal option for companies seeking financial flexibility and willing to share a portion of their equity in exchange for technological development services. It is crucial that both startups and developers conduct a thorough evaluation and establish clear and fair terms to ensure a fruitful collaboration.

At GooApps, we are committed to providing high-quality development solutions through Code for Equity agreements. With our experience and dedication, we can help you transform your vision into a successful, high-quality application that meets all your market expectations and needs.

Contact GooApps for more information on Code for Equity

Are you interested in exploring how Code for Equity can boost your mobile or web app development project? Contact GooApps to get more information and discover how we can help transform your vision into reality.

• Get an appointment: Click here to schedule an appointment with one of our experts and discuss your specific needs.
• Contact information: You can contact us directly through our contact form or by calling us at +34 656 828 020.

Next steps:

1. Initial Consultation: During our initial consultation, we will understand your needs and goals.
2. Evaluation: We will conduct a feasibility assessment to determine if the Code for Equity format is beneficial for both parties.
3. Personalized Proposal: In case of a favorable evaluation, we will develop a personalized proposal tailored to your project.
4. Project Start: Once the proposal is accepted, we will start working on your project with a focus on quality and success.

Don’t wait any longer, GooApps is your ideal partner for Code for Equity projects. Contact us today and take the first step towards success!

And if you already have a mobile or web app developed but want to improve it through Code for Equity, we will conduct a free code audit of your application to evaluate it.