Giving up equity in your company, as an alternative to paying cash, often sounds like a good idea to start-up lack of liquidity. But give up equity in your company is often a very important decision, and can come to a long-term price, both financial and operational. This post will help you determine when to negotiate equity for services, and when you should avoid. In addition, some potential pitfalls along the way.
How Easily Can You Source Capital investment professionals?
If you can raise capital from a third professional investor is always preferable. You always want to raise money from investors in equities with experience in creating start-ups, often with a rolodex of potential business contacts and lessons learned from their past investments.
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Taking money from a service provider is often just that. . . Cash only. But if you have no other alternatives to professional investors, service providers can be a perfectly acceptable financing resource for you, if that's all you need and is structured fairly.
How Big of a cash requirement is the project at hand?
I will not give equity to any and all service providers. You should now be your equity and short-dear to your heart, and only give it when absolutely necessary. The higher percentage of your business that you can maintain over time, the higher your salary will be when you hit big on the backend. So when considering the negotiation of equity for services, I limit these scale equipment projects (for example, a financial benefit of more than $ 50,000 in cash savings).
Are long-term services or short-term in nature?
And on a similar note, I would limit conversations shares for service providers that will be long term in nature, help you build your business over time. For example, your development firm technology that will help you build your website and maintain it over time, is a much better financial partner that the company that will design your logo in a quick project once.
deficit How are the terms?
Now that we understand that service providers, we are willing to have conversations with fairness, next we need to understand how to structure these transactions. This usually comes down to security, voting rights and the assessment of the transaction. For safety, pull convertible to shares or joint offers tickets where you can; say no to the purchase requirements of preferred shares that may hinder your ability to raise future capital.
For the voting rights, it should be capped at their pro-rata ownership of the company, and generally, it should not require seats on your board (allowing you to run the business as you see fit).
For evaluation, whatever money savings you should be invested at a reasonable business assessment. For example, we will remain your startup is worth $ 1,000,000. If you get $ 100,000 in cash savings from the service provider, they should get about 10% of the company.
So make sure the percentage they charge is fair, compared with your assessment. And always be sure that the project is well defined and the project size is limited, so project creep does not give you twice as much equity you originally planned.
Are there strings attached?
Finally, make sure there are no strings attached and avoid other potential pitfalls known. Things like:
(i) it is difficult to keep a managed service provider in time and budget when they are as a share owner who needs to be treated with kid gloves for children (so make sure that both parties are clear about their role as a service provider, where the time and meeting budgets come first);
(ii) make any promises about fundraising opportunities, potential buyers or future expectations of recovery (let them make their own assumptions, understanding they invest in a very risky way where future is unknown) and
(iii) ensure that there is a clear plan in case things do not go well together (for example, a medium to buy back the stock, keep a copy of the code or technology exchange on service providers, in all scenarios).
There are many other issues to consider here, but I hope this is a good high-level education to get started. Be sure to read my accompanying document :. How to protect your equity and checkpoint Financing
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