For established, mature and growing product companies (e.g. SaaS companies), the industry standard for product and technology spend is about 20% of revenue (with 40% going towards sales and marketing and another 20% on general administrative expenses - leaving 20% for profit).

However, this will vary massively in the early stages of the company, where the norm (for product & tech) is often 100%+ and then some. In those early days when you’re looking for that elusive product-market fit and building the MVP, the product/tech spend will easily form a major chunk of all available budgets (or early investment in the absence of meaningful revenue).

This puts the entrepreneur in a tricky position - in order to scale, they need to invest heavily in the product and tech upfront. With the demand for technology and product skills continuing to skyrocket, this cost is getting higher every year.

This discrepancy in investment in technology and product early on is, in my view, one of the main factors in the slow growth of early-stage startups, especially in regions outside the mainstream global ecosystems where the funding is scarce and risk levels are higher (compared to Silicon Valley for example).

Sweat equity can be a useful tool in the entrepreneur’s arsenal to address this gap, and accelerate product development early on.

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In the world of startups and investment, the term has stuck. It refers to the alignment between entrepreneurs and employees or service providers who share equity ownership. Both parties have skin in the game, tying their success to the company’s growth.

At its core, sweat equity allows cash-strapped startups to pay for services or skills partly with equity instead of cash. It’s a common practice when hiring—startups often can’t match the salaries offered by large tech companies, so they offer equity to attract talent. This approach has paid off for many successful startups, motivating teams to push through uncertainty and rewarding them if the business thrives.

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There’s a school of thought—brilliantly explored in Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb—that argues it’s a critical principle for how the world should operate. Whether or not you agree with its broader application, it’s undeniably relevant when discussing startup equity, ownership of risk, and incentive alignment. Whether or not you agree with its broader application, it’s undeniably relevant when discussing startup equity, ownership of risk, and incentive alignment.

In early-stage startups, skin in the game means that everyone involved shares both the risks and the rewards when key decisions are made.

Here’s how that plays out in practice:

Imagine you have to decide how to go about a certain product feature. From the perspective of an engineer, do you take the easy solution that you can hack together, even if it brings long-term challenges with scalability, tech debt and maintainability?

Or do you embrace the uncertainty and experiment with new technologies to try to build something that can fundamentally improve the chances of success?

If one is not aligned with the business (e.g. they're getting a salary either way), they will always go with the path of least resistance or a personal preference, regardless of the impact it can have on the startup.

However, these sorts of decisions often make or break a tech startup. I’ve seen tensions arise between founders and engineering teams when there’s a significant mismatch in risk exposure. It often boils down to one thing: who has skin in the game?

Take another example. Imagine hiring an agency to deliver a key product feature. You’re racing to get to market, prove product-market fit, and generate revenue. Speed and focus are critical.

But the agency has different incentives. Their business thrives on billable hours, not necessarily your startup’s success. Projects that drag on or balloon in scope are more profitable for them. This can lead to overengineering in some areas, underengineering in others, and a lack of focus on the features that matter most. In my experience, many over-budget, behind-schedule projects come down to a simple issue: a misalignment of incentives between the client and the service provider.

In both cases, the core problem is the same - decisions made without shared risk often lead to poor outcomes. That’s why skin in the game matters.

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The relationship with employees often feels personal—like sharing ownership with family. In contrast, tech partners can seem like faceless companies that might disappear, leaving your cap table in a mess. Plus, we’ve all heard horror stories about sweat equity deals gone wrong, where partnerships collapsed and startups were left exposed. Bad actors exist in every part of the business world, and it’s important to stay vigilant. But that doesn’t mean sweat equity with tech partners is inherently risky or a bad idea.

In fact, it can offer real benefits when done right.

Why shared risk matters🔗

As a founder, you’re juggling everything—product development, fundraising, operations, and more. Delegating some of that responsibility can help you focus on what you do best, increasing your chances of success. If you have a technical co-founder, great. But if not, having a trusted tech partner who can deliver on your vision is crucial.

One of the best ways to create it? Work with someone who shares your risks and stands to gain (or lose) alongside you. Sweat equity and shared-risk arrangements can create that alignment.

Even if you’ve got a technical co-founder, building a tech team is no small feat. Skills, culture fit, scalability—they all matter. While equity incentives like stock options are standard for employees, there’s no reason the same principle shouldn’t apply to tech partners. When the people doing the work have skin in the game, they’re more invested in the outcome, which often leads to better results both short and long term.

What about IP?🔗

I often get asked about intellectual property. The answer is simple: all IP should stay with your startup. This should be non-negotiable in any contract with third-party developers, whether sweat equity is involved or not.

That said, when you’re working with a partner who has skin in the game, IP ownership usually isn’t an issue. If everyone benefits from the startup’s success, it’s in everyone’s best interest for the IP to remain with the company. Just make sure the contract clearly outlines IP transfer terms, with no loopholes tied to equity vesting or payment schedules.

The challenges of shared risk🔗

Of course, there are challenges.

It’s your idea, your baby—you might feel like you should call all the shots. If that’s how you feel, sweat equity with a tech partner might not be for you. But here’s the reality: no one builds a successful company alone. At some point, you’ll need additional skills, expertise, and experience. When that time comes, working with people who are fully aligned—sharing both the upside and the downside—is far more effective (and rewarding) than micromanaging every detail.

Another concern is attention. Tech partners have businesses to run, often juggling multiple clients. How do you ensure your project doesn’t get lost in the shuffle? The key is to partner with firms that limit the number of equity-based projects they take on. Sweat equity works best when there’s a personal connection, not just a business arrangement. Make sure the individuals—not just the company—are invested in your success.

Lastly, even with sweat equity involved, tech partners still need clear scopes, budgets, and timelines to manage their resources effectively. Startups are dynamic—there’s always something new to build, test, or improve. But open-ended projects can quickly become one-sided, turning into cash cows for service providers (something no startup needs).

Use equity strategically—to accelerate product development, shorten time-to-market, and reach product-market fit faster. Once you’ve hit that milestone, it might be time to build an in-house team to drive the next stage of growth.

I wholeheartedly believe in the power of skin in the game when it comes to technology build and delivery, to ensure full alignment between multiple actors focused on the single goal. If I could, I would change all software delivery projects (especially those run by the governments and large organisations) to introduce shared risk - incentives that pay if the product being built achieves its goals, and risks if it doesn’t.

Unlikely that I’d be successful in changing how public procurement works - but in the smaller scale of tech startups, this is something we can and should use more. Be it in the form of share options for employees, sweat equity, revenue sharing or something else, working with people and teams with skin in the game is the best way to achieve more together and increase odds for success.