Part II: Equity vs. Cash

http://www.sitepoint.com/blog-post-view.php?id=222721

Three addendums to above blog:

1. One reader asks whether to work for free on startups as a loan (cash paid later with interest), if the startup can pay. I’d suggest that you don’t work unless you know you are going to get paid — unless other factors are at work, like you want a chance to get a referral from a cool client, you want to do a really interesting project and increase your skills, etc. This is a basic part of qualifying prospects. Perrsonally, I never accept work unless I know I’ll get paid.

2. Options sound exciting, but are meaningless until you exercise them. You get no dividends or other shareholder benefits until you convert them to real shares of stock. Meanwhile, stock is very real and comes with dividends (a share of any cash/income distributed to shareholders). So don’t get too excited about options until they are “in the money” — that is, worth more than their exercise price — and until you have actually exercised them to get liquid or to become a real stockholder.

3. Think of taking stock/options as a lottery ticket. It is unlikely that one will pay off, but a portfolio of a few equity deals could indeed pay (if you choose them wisely). That’s why I want you to learn about this form of payment — so that you can evaluate companies and equity deals and know when you have an attractive opportunity for equity before you.

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  • http://www.designity.nl peach

    Its an interesting concept. Webdesigners these days are amongst the first people that start-ups engage. Taking equity would be a good way to take advantage of this.

  • jon

    im in a situation now where the client has engaged me in a startup project at about 1/3 my normal rate. there have been other factors that contributed to my accepting half my rate, but those factors have started to diminish.

    i recently informed him that my rate would be increasing, and he replied with a message about passion and taking a risk and the project soon being very profitable – and promises of sharing in that profit. is there any acceptable way to demand a contractual share in that phantom profit, or to somehow insure that i will receive a share if/when his project becomes profitable? i can see myself being involved and getting the shaft once the $ rolls in. also, what type of insurance can be made for “performance-based” equity? like everyone, i just want mine. thanks.

  • Olila

    The business owner of the startup company seems to be a poor business man/woman.

    1. I don’t think a web-bureau is the best bank to lend money from. The business owner should use a regular bank. Or you could make an arrangement with your own bank so they supply the cash for your customer – That’s normally only possible with bigger projects. The benefits are, you get the cash up front and can focus on your core business.