Equity Issues at a Glance
If you're thinking about taking equity instead of cash as payment for services, here's a checklist of things to consider.
Taxes: If your company is a C corporation, you run the risk of facing double taxation on appreciated stock held upon the liquidation of your company. Look into setting up an LLC or S corporation for your equity transactions.
Risk: You should evaluate the risk involved in taking equity the same way you would a normal investment. Liking a start-up isn't enough; determine whether you're getting a fair deal.
Cash flow: Decide how much cash per project -- and per month -- you're willing to forsake for the sake of taking equity. Would you be satisfied with taking only enough cash to break even? Does that break-even number include your own salary? What will taking equity do to your cash flow?
Miscellaneous what-ifs: Say you take equity in a hot high-tech start-up, and then its biggest competitor seeks your services. Would being a shareholder in the former create a conflict of interest for you? If you take equity in a customer's company, will your workers demand options? Will customers in which you don't take shares feel as if they're flying coach? The bottom line: Consider who else will be affected if your company takes equity in its customers.
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