Sad but true: most of the time professional service providers take equity instead of cash, it’s not a choice they make. It’s the only option for businesses that seem to have good prospects, but not enough money. And, attractive as the equity deals are when they work, startup equity doesn’t pay the mortgage, and it doesn’t buy shoes for the kids.
I very much enjoyed Steve King’s post Working for Equity Instead of Cash on Small Biz Labs yesterday. It is, first of all, a very practical and useful list. It’s also, for me, a good reminder of one set of "good old days" I lived through. I left Creative Strategies and went on my own as a business planner in Palo Alto, CA in 1983. I almost always wanted my professional fees paid with money, not equity. And lots of potential clients wanted to pay with shares, not money.
The problem in that is that mortgages, shoe stores, supermarkets, and the like need checks that don’t bounce. And then, as now, every entrepreneur in the Silicon Valley was sure that his or her deal was the best ever, that his or her company was the next Apple Computer. (That’s an anachronism. Nowadays they’re all the next Google or Facebook, but in 1983 they were all going to be the next Apple.)
It was really hard, sometimes, to walk the narrow plank between "that’s fine and dandy, but pay me with dollars" and "we need to work with somebody who believes in what we’re doing." I gather, from Steve’s post, that it still is.
He has four points, all worth reading. This is just my quick summary:
- Most tech start-ups fail.
- Not all start-up stock is created equally.
- Luck plays a role in high tech start-up success. I’ve had the good fortune to both work for and invest in successful tech start-ups. I’ve also invested in a number of start-up failures.
- I am very picky about the companies I am willing to take equity from.
Steve says the best one he took equity from went under. I was lucky. The best one I took equity from went public. It paid for all the other failures, and then some. But, like I said, I was lucky.
It’s a good post: Small Business Labs: Working for Equity Instead of Cash