Brian Geisel recently featured on Entrepreneur.com.
Brian Geisel, CEO of Geisel Software, has answered a burning question for anyone who wants to work for a startup or build an app: Should you work for equity? In a front-page Entrepreneur.com article, Geisel explained the pros and cons of working for free in the hopes that you’ll get paid – big-time – down the line. He shares his personal experience with a “work for equity” arrangement, how that experience influenced whether he would choose that path again, and how he views working for equity as a founder of his own business
Here are a few of the article highlights:
WORK FOR EQUITY PROS
Opportunity to cash in
The main reason people agree to work for equity is to try to become part of “the next big thing” before it strikes gold. Hernan Charry should know. As the marketing director for the Scottsdale, Ariz.-based software developer Split One Technologies, Charry has worked with several companies in exchange for equity.
“We have seen a number of clients become successful after having built their site for a few thousand dollars,” says Charry. “With a work for equity share, we also can see a portion of [a client’s] profit.” More often, though, a project doesn’t make it big, so, Charry says, it’s important to carefully assess each opportunity. “Evaluate the marketing team, evaluate the business plan, and be careful of getting into business with friends,” he cautions.
Potential for a full-time job
Geisel wound up working full-time for the company where he’d started in a work for equity arrangement. That’s not uncommon, according to Gharakhanian. “A lot of people will try to build into their agreement that if the company does raise money, they would have an opportunity to earn an actual salary.” He also has seen people who initially worked for equity in a startup later return to it and earn a paycheck as an employee.
WORK FOR EQUITY CONS
Lack of money to pay the bills
Even if your equity pays off in the future — and there’s a reasonable chance it won’t — you clearly can’t pay bills with it now. Bootstrapping “treps sometimes cut costs by living together or in their parents’ basement, but they may still have expenses like student loans to cover. While working in exchange for equity at a startup, Geisel stayed afloat financially by spending half his time consulting with clients that paid him cash. For those with a mortgage or a family to support, working for equity may be an even bigger challenge.
Increasing work demands
When you’re willing to work for equity, time is a precious commodity. “Entrepreneurs often think they have a partner who will work for free and constantly add to the scope of the work prior to even attempting to go to market or reach profitability,” says Charry.
Shrinking value of your equity
Future investors may reduce the value of your stake in the startup. Setting a valuation before the company sees any revenue is a vague proposition at best. For purposes of paying in equity, the founders might set a $10 million valuation and create a million shares, each valued at $10.
But when an investor gets involved, he might disagree with that valuation and want to pay $2 million for a 25 percent stake. The founders just might agree to avoid losing their investment. “Because investors have much better leverage than a single developer, they’re likely to push the valuation down which, of course, reduces the value of your shares,” Geisel says.
Read the full article “The Pros and Cons of Working for Equity” at http://www.entrepreneur.com/article/228566
