Offering equity instead of pay -- yes or no?

Question

I don't know if this is the right place to ask, but I was wondering if it is a fair exchange to offer equity instead of payment for services in business.

For example, "John" signs a contract stating that he will receive equity in the revenue of whatever industry/company/etc. he is contributing to, instead of paying him for doing it. It isn't "free work" because equity stake can be worth a lot of money should the business grow big -- and a contract guarantees he/she gets their cut. In such eyes, equity stakes can be more rewarding than a single payment for a service. Here's an example:

Bob is trying to start a company, but needs suppliers. He offers the suppliers equity stake in his future earnings indefinitely should they provide him with the supplies he needs to start his business. It may not be that he can't pay nor doesn't want to invest himself. Perhaps he has faith in his business expanding and will fairly share the stake he offers to the service provider for the rest of his business.

In other words, he would rather his investors take their chances like him, but have the ability to earn their share of the company's/etc. success continuously, as opposed to only a one-time exchange.

In general, is this bad practice? Would this be a good or bad thing to offer to high-quality freelancers looking for work: an equity stake instead of money/benefits directly?

Answer 1

Whenever offered equity I have informed potential clients/employers that accepting equity would make me an actual investor, meaning I will need to perform due diligence of their company's financial state, be informed of the business model and strategy to a much larger degree than a mere employee.

This usually makes the owner back down and either offer actual payment - or look for another person who is less demanding.

Answer 2

It's not exactly bad practice, but most suppliers will not be willing to take that risk.

Some startups make it big, many more fail disastrously. So unless Bob has a previous and strong business relationship with a supplier, I would tell Bob not to count on any suppliers accepting the offer.

Answer 3

Equity, stock options, health insurance... these are all benefits. They should not be used as a substitute for actual compensation. It's poor business. Get a line of credit to enable you to pay your employees, and/or seek out investors who will give you money in exchange for equity share in your company. Asking people to be part of making your company run (whatever that may be), and giving them "I can't pay you now, but if the company makes money, you'll finally get money based on the equity I give you" is NO way to run a business or treat employees. People seek work to get paychecks to pay their bills. Your equity means zippidydoodah as a replacement for money in the bank.

Answer 4

Bob's perspective

If Bob is providing equity as a PLUS to the actual payment, it can be a good strategy to draw attention of good freelancers.

Bob has to concern two main factors here:

• social aspects
• legal aspects

In countries, where society has a strong feeling for social justice, Bob may be perceived as exploiter, because equity based wage creates a strong dependency between company and the workers.

If equity is the only thing, Bob is providing, he may even get in trouble in some countries, due to regulatory limits, where such contracts are prohibited.

John's perspective

In some countries, Bob may also bring John into a troublesome situation, because maybe John's legal freelancing status suddenly becomes a profession status. This is because he is by contract now officially an investor with a completely new and different taxation rate and documentation requirements.

Providing equity only can make John and his freelancer buddies very angry at Bob and lowers the reputation of Bob dramatically.