Most companies seeking angel funding need far more than investment capital and angel investors are more likely to be successful if they take an active role in their portfolio investments. Working for equity can be a great way to add value for both entrepreneurs and investors, but it certainly has its trials and tribulations. To find out how to make working for equity more effective, I spoke with four people well versed in start-up investments:

DuWayne Peterson, founder of the Pasadena Angels/Colorado Angel Investors and mentor at the Rocky Mountain Innosphere

Max Shapiro, longtime angel investor and founder of People Connect Staffing/Employees Without Paychecks

Brandon Smith, managing partner at Whitefield Capital

Peter Edwards, partner at Sage Law Group and former partner at the Altira Venture Capital Group

Q: How would you suggest structuring an equity agreement?

For consulting agreements, most of the respondents recommended working for a predetermined project-based compensation structure with outlined key deliverables and milestones, as opposed to working on an hourly basis.

“The key suggestion I would give anyone who is interested in working for equity is to make sure you have a clear understanding of your deal with a written agreement that you have reviewed with your lawyer,” said DuWayne Peterson. “All possible situations should be clearly spelled out so there is no misunderstanding on what your arrangement is. A handshake won't cut it. As we all know in the start-up world, ‘stuff happens.’”

Q: Do entrepreneurs value employees/consultants who are willing to work for equity less than those they pay with cash compensation?

Three of the respondents said no. As Peter Edwards said, “If the entrepreneurs are well-advised, they think through the implications of their awards carefully against the backdrop of their growth and fundraising plan. If they understand the value of their equity, they don't take equity compensation lightly.”

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