As a freelancer, you may get clients who will ask you to take an equity stake in their company in lieu of payment. In this episode, I discuss the pros and cons of such an offer.
Hey guys, Mike Volkin here, thank you for joining me for another episode of Freelancer school. And today we’re going to talk about accepting equity in a company, you know, every now and then I personally, and I’m sure a lot of other freelancers are in this position, they get asked to take on equity in a company in lieu of a payment, either hourly fee or monthly fee. And there are some positives, and of course, some negatives that come with this mostly negatives, the people who usually asked us or people who want your services but can’t afford them, right? That’s a reason why they want you it’s a great way for them to get them get you to work for their company without paying for it. So in my case, you know, at $250 an hour, a lot of small businesses can’t afford me. So they might say, Mike, we really need somebody in a senior leadership position here, can you would you be willing to take a percentage of equity
in many cases and all but one, which I’m about to tell you about soon? I said no. Because what happens is that a lot of times the vast majority of small small businesses fail, and even ones that do, don’t get sold. And that’s usually where an equity position would be fruitful for someone in that position, like me, who took on maybe a small portion like 10, or 15%, of a company, right. So here, I would be working for free for years, for a small percentage of what may never be a buyout, an exit of a company, you know, and on an a very aggressive scale, a company would exit in three years, that’s a company that just slam dunk homerun hits it out of the park, positive return on investment after three years and somebody wants to buy them out. I mean, just the sake of a usual normal sale usually takes a year. So that is on a very fast track. The companies that do sell usually do so that least ones with value, not like you know, selling a website or something, usually sell between seven and 10 years. So realistically, they’re asking you to work for seven or 10 years, with no money for maybe a portion of of equity, right? And then realistically, how many relationships have you had that have lasted seven or 10 years where everybody’s happy with you all the time, right? It is, it’s just realistically, it’s a very, very difficult concept to put your arms around as a freelancer because there’s a lot at stake. Not only are they gambling on you, but you more are gambling on them, you’ve got a start up here, who has little to no traction, if any in the market, they have a maybe a proven concept or product, maybe not. And they’re asking you to work for them free indefinitely until they may or may not sell the company for what may or may not be a profit, right. So there’s so many things that are at stake here for you, the freelancer, that don’t necessarily equate to be a good value of your time. And a lot of times it’s specs, especially in the beginning of my career, when I got these offers, I get really excited, wow, I get a piece of a company, right. And if I got 10% of this company, and and then I worked for nine other companies and I had 10% of 10 companies, that would be like owning my own company. Well guess what, in reality, that sounds great, you would own a company, but you don’t really get any income. That way, you’re just spending a whole bunch of hours working for free. And if nine out of 10 of those businesses fail, you still really only own 10% of a company. So there’s a lot of things that don’t match up there. But I recently went ahead and took on equity position in a company and I was surprised that all the things that were up for negotiation, you don’t have to work for free. Okay, somebody offered me 10% of a company in exchange for a half of my bill rate, which is allows me to still, you know, pay my bills that I would my normal quote, I would give myself every month, it would allow me to give the necessary times to the company, and the company has an explosive growth already. And me and the business owner just melted very, very well. And that’s the most important thing out of everything I’ve mentioned so far in this episode is that you and the person you’re working with, especially the one who has direct company ownership has to work together very, very well on all levels on a personal level. on a professional level, you really have to respect each other, give each other space, the management style has to be the same, right? So there’s a lot of play there. When you do or if you do decide to take on a equity position in a company, be sure you have an attorney because there’s a lot of things that are open for negotiation here. You can just take straight equity with no pay, you could take straight equity with
with a little bit of pay. There’s the also the amount of equity that’s at stake, right. There’s also cacheable events that are at stake. So what exists, what exactly can you cash into
Your equity? Could it be on a monthly basis? Could it be only when you sell or when your company sells? And then also, you should consider your voting rights on the board, your board of directors? What type of what type of rights do you have? Does the owner of the company that gives you equity have the right to assign others equity? Do they have the right to dilute your position of equity, there’s a lot of things at play that could affect your equity stake that you may or may not have any control over. So that’s why you need to hire an attorney. Just because you’re hired attorney doesn’t mean that there’s going to be some, you know, disagreement between you and the other party is just a way to document everything and for everybody to come to an agreement with all things that should be considered. Alright, so there’s a lot of things at stake. And there’s more than just price and the amount of equity. Okay, so if you do want to take an equity position, which I do not recommend, unless there’s very, very specific circumstances that come into alignment, I highly suggest you get yourself an attorney which you can find on Upwork. Just type in a corporate attorney, any corporate attorney will be able to draw up an equity position for you. And then if you do decide to do that more in the future, you have a good template to work off of from that first contract. You just modify the terms for any future ones that you take on. So I hope this helps. Good luck.