Beware of services in exchange for equity

Johanna RobinsonFinance, Legal

It seems like a great idea, and we have heard many many stories of people who have tested this model. But it usually does not end well.

First, let’s clarify. It’s a great idea to have a technical co-founder and equity should be allocated equitably.

But it’s not a great idea to give equity to people who are providing one-time services. For either party.

Why? Equity does not have the same value as cash.

From the service provider perspective, whether the equity will have future value some day is a risk that’s very different than an unpaid invoice.

From the founder’s perspective, your equity may have future value that far exceeds the value of one time services. Sharing equity (a portion of all the work the team does for the life of the company) is usually forever.

If you missed the most recent episode of Tech School, tune in to hear me tell a story about a real founder that tried this and how it turned out. I also recommend this book to help you think through equity decisions.