How Much is Too Much? 4 Step Formula For Trading Startup Equity For Professional Services

How Much is Too Much? 4 Step Formula For Trading Startup Equity For Professional Services

We’ve all seen it.

The over-enthusiastic startup founder who hands out equity with the same discretion as a pre-teen using their parent’s credit card to buy front-row Bieber tickets.

*sigh*

And I totally get it.

In the early phases of your startup (especially the idea stage) you might not have the cash on hand to cover the major expenses related to developing your MVP.

Even then, there’s an art and science to extracting the highest amount of value for your equity, without selling your vendors short or setting yourself up for a legal nightmare down the road.

In this week’s video, I cover the 4 steps to setting up win-win equity deals that allow you to get big projects done without giving away too much of your company in the process.

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At a high level, here are the steps you want to take to guarantee a fair deal for both sides:

  1. Set a valuation
  2. Quantify the work
  3. Give a bump
  4. Allocate the equity

The second step is often the most ignored.

Before you even consider handing out equity, you should be asking your vendors for the actual cost of the services they’re gonna be providing.

Meaning, if they were to draft a proposal and you were to write them a check, what would that look like?

Without that information on hand, you’re essentially flying blind, giving up leverage, and narrowing your options.

Give the full episode a watch here, and then let me know in the comments if you’ve ever exchanged equity for services, as well as any hard-earned lessons you learned along the way.

 

  • Alex Shalkin

    I guess conditional options would work better than transferring little portions of shares…

    • http://twitter.com/danmartell Dan Martell

      Alex, exactly.

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