Should Freelancers Work for Equity or Shares?
Recently, a Twitter friend asked whether anyone had worked for shares or equity rather than cash. I have, and so we had a chat about it.
I’ll bet some of you have also been asked. Here are my experiences and thoughts on whether you should consider this.
Let’s start with the interesting part first. I’ve done this twice. Once was a complete bust—I had shares in a company that never launched, so it came to nothing.
However, the other time was for a company that was already trading on a stock exchange (a very important point) but had not been successful to date. This was the third management team trying to turn the company around.
I got shares and worked part-time on this project for about a year and a half. I sold the shares on the exchange over two months for about $250,000 CDN. I was hoping it would have been more, but I was happy with this.
Accepting Equity? You Should Have Questions.
Let’s go through some of the questions you might ask before you decide to work for shares instead of cash.
The biggest question about accepting equity in payment is, when will shares be liquid so that you can sell them if you want to? You may want to hang on to them, but that should be your choice.
What exchange will they be on? If you’re being asked to take shares by a start-up, it’s not likely that the shares are already listed on a public exchange. That means your shares are in a private company that hopes to go public.
Many company founders hope to go public, but a large percentage of them never make it.
Shares in private companies are usually not liquid. Company owners have control over shares and who gets them, so they’re not easy to sell. In theory, the company owners could buy them back from you, but that’s highly unlikely.
You have to try to assess the odds of this company making it onto a public exchange within a reasonable time. It could be years, or never. That’s one of the risks.
In my case, the shares were already trading publicly but at a very low value.
The goal was to relaunch the company and increase the share price. But I didn’t have to worry about whether the company would ever go public since it already was.
Do You Believe in the Product and the Team?
The other big question is whether you believe in the product and the team behind it.
Do you think it will be successful?
Does the team seem organized?
Are they the team to pull this off?
Start-ups are notorious for scrambling, trying to do too much with limited resources. Also, they may not be great marketers.
You’ll find yourself getting mixed messages, going down many paths that don’t work out. Try to get a feeling for what it will be like to work with this group.
It’s a good sign if they have one person in charge of marketing who would be your client.
What Exactly are You Expected to do for Your Equity?
If you believe in the company and the team, and you think they have a clear path to the public markets, you should work with them to define the project(s) they expect you to take on.
Typically, these companies need a website, email campaigns, social media, and content for various outlets.
How much of this are you expected to do, and who else is on the team to handle some of the communications work that you don’t do? For example, if you’re a writer, who is doing all of the design and production?
Also, you want to determine if this is a defined project or whether they expect you to keep working on it. Take social media—who will run the ongoing campaigns?
You’ll want to have very specific talks about project definition.
Don’t Let it Take Up All Your Time
Remember, working for shares is highly speculative. You’re not getting paid, perhaps for many months or years (or ever). So, you can’t let it suck up all of your time.
You need to work on paying jobs to keep the cash flow flowing. Make sure there’s a clear understanding regarding your time commitment. It has to work for both parties.
How Much Equity Should You Ask for, Given the Risk?
Even as a private company, the shares are assigned a value. I’d ask for at least 5X in shares compared to what I’d get paid in cash.
Let’s say you’d normally charge $30,000 for the work you’re being asked to do. They’re valuing their shares at 25 cents each. That’s 120,000 shares. At 5X, it would be 600,000 shares. They may push back, but it’s your call. I wouldn’t do it for much less.
Also, ask whether there’s a lock-up period for your shares when they go public. Often there will be a lock-up for insiders (that’s you) of three or six months.
Make Sure the Equity is in Your Name
Be sure to get a written contract or certificate, signed by one of the company’s controlling officers.
Your shares should be in your name and control in their share ledger.
You don’t want someone to say, I’ll give you some of my shares, but you don’t have formal control over them. The shares need to be issued to you or your company directly.
Don’t Forget the Taxman
Lastly, if you get the shares, and sell them, you’ll have to pay capital gains tax on them. So, be ready for that. The good news is that capital gains taxes are generally less than income tax.
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Questions?
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