My co-founder and I worked each in his own home for about 8 months, meeting face to face one per week or two. That worked OK, but it was obvious that we'd be more productive if we both worked in the same place. Recently we stared hiring more developers (3 so far), and it became clear that we just have to have a central place where everybody spends at least some of the time. We keep the hours flexible, and anyone can work from home as much as they want, but still, getting face time with each other a few days per week is priceless. You can't really coordinate a team's work efficiently when you're completely distributed IMHO.