Appendix F. Sample Position Paper: Accepting Equity for Your Services: Or Why the Craps Tables Suddenly Look Good
Consultants (and a raft of other professionals, including carpenters and plumbers) are increasingly considering equity participation in place of old-fashioned cash on the barrelhead. Sometimes it's because the clients can't (or claim they can't) come up with the cash, and sometimes it's because the allure of the client's potential payoff is so great that thoughts of vast riches clog the consultant's synapses.
Equity offers exist in two basic situations: In the first, the company is a start-up, usually high-tech but not always, which is so cash poor that it can apply their precious venture capital only for R&D and marketing. Anything else is superfluous, so everyone from accountants to gardeners is offered a stake. In the second case, a legitimate going concern offers a consultant the chance to participate in the fruits of his or her advice, usually because the client thinks the chances of reaching the goal are slim, doesn't want to pay for anything but tangible performance, or is simply cheap.
In either case, there is a strong and rare potential upside, and a strong and frequent absolute downside. Let the equity seeker beware (caveat equitus, or something like that).
What You Need To Know
Before you jump to accept an equity position, you should make sure that you possess the basic information about the client and about yourself. In any given instance, equity can make sense ...