Contracting For Equity? Get a Lawyer

Contracting For Equity? Get a Lawyer(grouptalent.com)

9 points by superkinz 13 years ago | 5 comments

soneill 13 years ago |

I would think that the moment you're offered 40% of a company, your first thought would be "this guy clearly doesn't believe in this company himself, or else he'd never offer me that much of his company". There are so many options available, be it leaving no stone unturned to find some additional cash (bank loans, borrowing from family, cashing investments, etc), or offering a non-equity profit sharing arrangement, that there's really no excuse for giving up large chunks of equity until you're receiving serious capital in return. This just sounds like a stupid deal to offer, and a worse one to take.

superkinz 13 years ago | |

Maybe, but when you're being offered such a large chunk of equity I think folks tend to think of it more like a partnership. I mean 60% and 40% are relatively equal and generally on par with the kind of split many serial entrepreneurs think there ought to exist, whether you agree with that or not.

Well finding technically skilled people who are available and willing to work on your project isn't exactly easy. He may have embraced that a little sooner than other entrepreneurs and decided to go for something juicy enough that he could make headway.

soneill 13 years ago | | |

Well, that's kind of the point, isn't it? As a non-technical business founder myself, I just can't understand what that guy possibly would have been thinking. I'd never give up that much of my company unless the other party was coming on board as full partner, meaning they're also going to be sharing all the financial and legal risks (and yes, that means contributing money as well as time). If you value your company at all, 40% is a massive sum to pay someone unless they're sharing all the risks with you, not just spending some of their time. Just giving yourself a $1 million dollar valuation, that means paying someone $400,000 to handle just one element of your business...and you could probably get it done a lot cheaper if you just took the time to go through your options.

As for finding technically skilled people who are available and want to work, it's not easy, but nothing in business is easy. It's no harder than any other part of a business, it just requires persistence and knowing where to look (I should know, I've hired a bunch of them in the last 6 months). Taking a shortcut and throwing a bunch of equity at the problem just shows the kind of lack of foresight that should make you question whether you really want to work with that kind of person.

procyon 13 years ago |

Being the Chief Tech at Conceivian (and having the best job of my life), I can tell you that working with startup founder's is a thoroughly enjoyable experience, and I'd do it again. There were tons of learnings, innovation and fun in the project Andrew mentioned and several others we have done. BUT nothing beats getting fully paid for the work done!!

superkinz 13 years ago | |

Agreed. Thanks again for sharing the story, I think it's super helpful to other folks to see where things break so they can either avoid common pitfalls, or avoid the topic altogether!