Brandon Smith was the exception. "We require at least some cash compensation because entrepreneurs take their cash-compensated consultants more seriously,” he said. “If you ask any entrepreneur, they'll tell you that finding cash can be far more difficult than finding a few helping hands in exchange for equity. Cash is generally spent as a last resort in most startups. As such, extraordinary value is placed on those investments."
Q: How should the amount of equity earned be determined?
Most respondents suggested having a clear idea ahead of time of the market rate for cash compensation for the work to be performed. “I think the best way is to determine what similar companies would be willing to pay in cash for the work to be done and then use a current valuation for the company assuming the company raised money with equity from outside investors,” Peterson said.
Edwards suggested gaining an understanding of how much a startup would actually pay. “Just because a financial person received $150 an hour at their last gig doesn't mean the company should pay that much. This is a startup!”
Max Shapiro says an easy rule of thumb is to give the person an amount of options or warrants equal to what their monthly base salary will be. “For example,” he said, “if Susie will be earning $8,000 a month once she goes on the payroll, she would receive $8,000 in options per month until funding or until she goes on the payroll as a full time employee.”
Q: Are there any key suggestions you would give to others interested in working for equity?
“Be sure that there is a strong likelihood that the company is going to get funding within three months or so,” Shapiro said. “Without funding in a short period of time, everyone will be wasting their time.”
“Working for equity is a very tricky area for founders and investors in start-ups to deal with,” Peterson said. “The best approach for entrepreneurs is to agree on a salary for an employee and pay what they can and defer the rest. This should be accrued as a liability. Therefore, it would be the first expense paid if the company goes out-of-business with some assets. However, the reality is there are situations where the start-up needs to hire employees or contractors and it cannot pay the going rate and deferring the compensation is not an option. It is only in these circumstances that equity compensation should be considered. “
Edwards offered a handful of tips:
• No anti-dilution. It gums things up later.
• Put a cap on ownership percentage or on shares to ensure that someone does not have the ability to amass a great storehouse of stock.