Do Due Diligence before Taking Equity
How do you determine whether to take a chance on a customer by accepting stock or stock options as part of your fee? The same way you'd judge any potential investment. "The fact that you're exchanging services for the stock doesn't mean you should look at it any differently," says Elizabeth Horwitz, partner at law firm Cors & Bassett in Cincinnati.
One due diligence method is sharing the start-up's business plan with your professional confidants. "Most new ventures have nondisclosure agreements that they'll get you to sign, but these typically allow the signer to share the business plan with a CPA, attorney, or investment adviser," says Linda Gill, managing director of the Cincinnati office of SS& G Financial Services. Second opinions, she adds, can keep you from succumbing to a start-up's evangelism. "It's infectious sometimes -- that emotional charge that entrepreneurs have. It's easy to get in over your head, overcommit, and say, 'I'm on board with you."
You also want to stay clear of start-ups whose managers you don't get along with. That's because taking equity for services often means a commitment rather than a one-job stand. Which is why Sandra Gassman, CEO of MarketingFuel Inc., in New York City, pays careful attention to "the relationship side" of things. "It's still a business decision, but the relationship is really important, since you'll know them a lot longer than one project," she says.
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