What is code for equity and why is it better than traditional funding methods?

The startup culture is taking over the world. It is what everyone is talking about and has become a popular choice for fresh grad students and seasoned industry veterans alike.

People get into the startup game for a range of reasons. Sometimes it is because they want to earn more than they currently do, sometimes because they want to make a difference in the world. It may be simply that they want to be in control of their own time and destiny, not stuck in a 9-5 job.

According to smallbiztrends.com, the reason 29% of startups failed was because they ran out of cash. Funding is what often makes the difference between a failed idea and a successful company.

There are many forms of funding which you have probably heard of. You can raise money through Bank loans, Friends & Family, Angels Investors, VC’s or go through various Incubator’s or Accelerators who will often fund your company and provide guidance along the way.

A not-so-common way of raising funds is “Code for Equity”.

What is Code for Equity (C4E)?

With Code for Equity, you compensate for the funding you receive with shares from your company. The percentage that you give away depends on your company valuation, product development stage, and a host of other variables and can be anywhere between 5-30%.

Code for Equity Vs. Traditional Funding.

In comparison with traditional funding, Code-for-Equity is often a road less traveled. So why would you choose it over the traditional methods?

  • 1. The cost of capital is much lower with C4E.
    When you take money for equity, specifically at an early stage company (pre-seed and before an MVP is built), the investor is taking a huge risk and therefore often wants a large percentage of your company.
    When you trade code for equity, you get a product/tech in return for a fixed amount of shares/equity. The risk is significantly reduced for the investor and so they take a lower percentage of your company in return..
  • 2. Future rounds are de-risked and cheaper.
    Once you have built an MVP or a product, with tangible users, a proof-of-concept or if you are lucky, market validation you have significantly de-risked your business. Where you may have given away 20-30% at Pre-seed and then a further 15-25% at the Seed round, you will now be giving away a significantly lower percentage at the pre-seed stage and accordingly at the seed stage with a product built.

Risks

The biggest risk with code-for-equity is similar to all outsourced projects, where the initial Intellectual Property (IP) is going to be shared with a third party.

Arsalan Amdani, CEO of LiveWire Group, an active investor through C4E says “The investments we make are long-term plays. Start-ups are one of the most illiquid and high-risk investment options. The biggest advantage of partnering with LiveWire Group to build your MVP rather than outsourcing to a development firm is that we will have a vested interest in your success. This guarantees the safeguarding of IP as well as maximum motivation to achieve project quality and timeline goals”.

Takeaway

At first glance, code-for-equity seems like a harder road to travel. There are more initial negotiations and trust required in your investor than traditional methods of funding. However, if you are able to find the right partner, it seems there is no doubt it is a great option and will result in much lower dilution of the founders, along with a higher chance of further funding for the startup.

If you would like to apply for the code-for-equity program with LiveWire Group, click here.

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