Friday, October 8, 2010

Your Lawyer and 3 Other People You Should *Not* Give Equity To

The Hidden Costs of Handing Out Equity
Giving people equity has a number of hidden costs which may include everything from having to get them to sign off on an acquisition (depending on how it is structured, you may need 100% shareholder approval) to them having a variety of shareholder rights which may allow them to become a pain in the butt.

As an entrepreneur, I would suggest giving options/equity only to people that will be working full time at the company, and to your investors.  

4 People To *Not* Give Equity
Here are 4 people founders often give equity to, even though they shouldn't.
  1. Your lawyer.  Many lawyers will ask you to give them equity in exchange for deferring fees.  You should say no.  They will still defer fees.  If you really want the lawyer and they are unwilling to relent, give them the option to invest e.g. $25K in your next round of financing.  If they still say no, find another lawyer.  There are plenty of good ones out there.
  2. Your landlord.  Some co-working spaces are willing to allow you to defer rent with the deferred cash going into your financing round.  Space is cheap.  Equity is precious.  If you really need an early space to work besides your living room, ask a friend with a startup to crash there.  Or, look for a super cheap sublease on Craig's List.  Or meet at a coffee house and work from there.
  3. Contractors.  Unless the person will make or break your company, I typically advise against giving a contractor equity.  There are alternative ways to structure contracting work.  This one is less set in stone, but the basic question is - do you really want someone who spent 2 months with your company to own a piece of it?  There is a reason companies have vesting cliffs.
  4. Your accountant.  Not sure why anyone would do this.
People You May Want To Give Equity To
  1. Your family.  It is most tax efficient to grant stock to loved ones early, or to set up a trust in their name.
What do you think?  Let me know in the comments section.

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