Back in 1997, Randy Parker was staring at a blank whiteboard, wondering where he'd find the money to hire the employees and consultants he needed to build his new product. "We had a rough time early on," says Parker, president and chief technology officer of Roving Software Inc., a 50-employee provider of e-marketing solutions to small and midsize businesses, based in Needham, Mass.
To grow his cash-strapped start-up, Parker ended up sharing equity -- not only with employees, but also with consultants and vendors. The advantage? Parker found that equity as compensation helped build loyalty to his company -- even among consultants. "Sometimes consultants are a tougher sell because they frequently like cash up front," Parker says. Nevertheless, he finds that equity is generally "a great tool to use before you can line up enough cash to pay people."
But sharing equity can have pitfalls, too. Parker, for example, often sealed his agreements with a handshake rather than on paper. Before Roving Software could receive its first round of financing from professional investors, in early 1999, he had to put all the stock arrangements in writing. That cost him accounting fees, legal fees, and time because the financing round couldn't close until the arrangements were formalized.
These days, start-up entrepreneurs like Parker do sometimes use equity not only to motivate key employees but also to help pay for consulting and other services. Should you use equity to pay for professional services? "I advise my clients that you offer stock only after you've searched your heart and soul and can't come up with a way to pay with anything else," says Thomas H. Durkin, managing partner with the Boston-based law firm Lucash, Gesmer & Updegrove LLP. Chip Morse, cofounder and partner with Morse, Barnes-Brown & Pendleton P.C., based in Waltham, Mass., agrees. "I happen to think equity is the most precious commodity, so I'm pretty chary to give it out," he says.
Generally, both Durkin and Morse view compensating consultants with equity as a last resort. "The $10,000 or $20,000 you give out in equity could be worth 10 or 20 times that amount in the future," Durkin says. Besides the future potential earnings you're forgoing, you're also diluting your own ownership in the company
Admittedly, there are situations in which equity can secure critical professional services that a start-up might not otherwise be able to afford. "If you have to [ use equity] , you have to decide whether the service provider is really worth it," Morse says. If the consultant is, make sure you take the following points into consideration before you sign an equity-as-payment deal.
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