The Derisive Moment

Back when I performed a lot of freelance coding, potential (and existing) clients often approached me to do speculative work with them. I was drawn in on more than one occasion by fancy salesmanship and the idea of large returns on my time. After all, I wouldn’t be investing any money into this business, only my time.

Spec work, at least as it has applied to me, usually comes in the following proposal: “Hey, Elliott. I have the next million-dollar idea: neckties on the internet. I need a website/application/etc to make it work. How about you develop that application, and I’ll give you a percentage of the profits/company equity/etc.” This is usually accompanied by some number-dropping, claiming large returns in the months/years to come.

On the surface, this sounds great. After all, who wouldn’t prefer to generate recurring, passive income instead of a one-time fee. The problem lies in the assumption that the client’s business model will actually work. Maybe it’s the particular clients I’ve dealt with, but in my experience, this assumption has always been false.

Unless the returns are greater than what you would have charged to do the work, Speculative work is equivalent to investing cash money in the client’s operation. Let’s say that you would have normally charged $10,000 to develop the an online necktie shopping cart for the client, but instead did it for 50% of the profits. After all, he’s going to revolutionize the necktie industry. “The Google of neckties”, he is fond of saying. How is this different from:

• Client pays you $10,000 to develop e-necktie.com.
• You do said development.
• You invest $10,000 in e-necktie.com in exchange for 50% of future profits.

I would wager that an intelligent client sees it exactly that way. Only they continue to make the interest on the $10,000 while you work for free.

No Vested Interest

The root problem with speculative work is that clients have significantly less vested interest in ensuring their operation succeeds. Without that initial $10,000 outlay, so what if it turns out that neckties aren’t the future of online clothing. If, however, they had invested cash in the delopment of the business, they are going to try much harder to make it work. Additionally, I’ve found that non-investors are significantly more wishy-washy about exactly what they want. They’ll go back and forth on designs, layouts, and operational aspects of the project. After all, they are not directly paying you for your time.

There are a couple of alternatives to spec work that I find interesting. One, called Risk Reversal, suggests getting money up front, with the promise that if it doesn’t work out of the client, you’ll refund the money (but keep ownership of the product). That’s fine and good, but people who are trying to get speculative freelancers typically don’t have the money to spend.

So, I suggest the following, rather obvious approach: the client needs to get a loan from a bank to invest in their business. If a reasonable person honestly believes that an idea will produce $100,000 per year the first year (and more into the future), then it makes no sense for them not to take out a $10,000 loan to pay you right now. In fact, it’s overtly stupid for them not to. Plus, it’s tax-deductable! Combine that with Risk Reversal, if you want.

Well…usually…

I’m not saying that taking equity is never the right decision–only that it never has been for me. Maybe an idea is so brilliant that you’re convinced it will work, too. Maybe the client has significant experince in this area, and a well thought-out business plan. Just be wary, and know that there are options the client is neglecting to put on the table.

I may be cynical from my own repeated flops in speculative work, but I hold little faith in a prospective client who talks about big money, but won’t lay any on the table. I’m in the technology business–not the necktie business. And I’m not particularly interested in investing my time nor money (and don’t let them fool you–they’re the same), nor in sharing the company’s risk. Especially if he calls it “The Google of neckties” one more time.