Payroll entrepreneurs Stuart McLeod and John Freeman will no longer be needing to count their pennies.

Their two-year-old bootstrapped startup, Paycycle, which provides an online payroll system, is being acquired for $1.5 million by New Zealand’s accounting software provider Xero. Of the amount, $500,000 will be paid in cash and the rest in shares of Xero, which is listed on the New Zealand Stock Exchange. The shares will fully vest over three years.

For the two beer buddies, and wine enthusiasts, it all started, well, at a Canberra pub on a “perishing” July afternoon in 2009, as the founders recall.

McLeod had ‘ideated’ the concept for Paycycle when studying at Melbourne’s Swinburne University. But he had not yet actively pursued it. That happened while working at Contract1, when “the dreadful state of the payroll software industry for small businesses in Australia” reinforced his view. That is when he set up a date with Freeman, a former colleague at AusAID, the federal aid agency.

“I didn’t even have to twist John’s arm with another beer before he agreed on the business,” says McLeod. “After a phone call to the number cruncher, Paycycle was born.”

Shared passion for UX movement

Both McLeod and Freeman have degrees in information technology. Besides beer, wine and IT, what bonded the two is a shared passion for the UX movement – an initiative to create better, and simple, user interface and design.

Today, two terms that best characterise Paycycle’s software are “easy” and “online.”

“Paycycle has become a system that is easy to use, with the flexibility and freedom that every single business owner craves for,” says McLeod. “Because, truth be told, who likes to be stuck in the office running payroll?”

Paycycle’s software, built using Microsoft’s Silverlight technology, launched its beta version in a mere four months. It took a further six months to fine-tune the product. Today, it has more than 750 clients.

“…the evolution of Paycycle from a bootstrapped startup to an acquisition target for a global business such as Xero fills us with a great sense of achievement, especially in a technology landscape where the level of M&A activity appears fairly low,” says Stuart.

Xero, co-founded by Rod Drury and specialist small business accountant Hamish Edwards, is buying Paycycle in order to accelerate its growth in Australia and also enhance Xero’s online offerings to small businesses, especially an estimated 830,000 in Australia.

“Having payroll as part of the Xero platform is what customers are telling us they want so we’ve listened and we’re now meeting their needs,” says Chris Ridd, a Microsoft veteran who serves as Xero’s managing director in Australia.

Payroll will continue to be sold as a stand-alone product until early 2012 when it will be fully integrated with Xero software. McLeod and Freeman will continue to work on Paycycle software – what to them is an “ever-evolving, ever-improving art form” – and integrate it with Xero.