This is somewhat midway between complete outsourcing and complete equity partnership options. Those clients, who have small budgets and are not too keen to share equity, particularly prefer this option. With this option, percentage of development cost is compensated as equity and rest as regular payment.
Many startup companies prefer this engagement model as it helps them build beta version of product with lower cost and at the same time not give away too much of equity.
Below procedure is followed in this type of engagement: