Posted on May 01, 2012 by | 0 Comments
By Dug Campbell
Working with entrepreneurs in the early stages of a business can be addictive. Enthusiasm is infectious and it’s rare to meet a founder who isn’t the first cheerleader for a new venture. But it’s also important that founders don’t overlook a few fundamentals in those early days whilst focusing on future aspirations.
One area to be crystal clear on is exactly who your shareholders are and what rights they have going forwards. An obvious statement perhaps but it’s not uncommon for a founder to mention in passing that a third party has been promised shares as payment for services. There may be no paperwork yet but nevertheless the agreement exists in principle.
Being able to effectively negotiate terms is an essential part of an entrepreneur’s skillset and convincing anyone to accept anything other than cash in return for valuable work falls firmly in that category. Retaining 100% ownership of your business will count for little if it fails to get off the launch pad because you simply didn’t have the necessary time or knowledge to deal with critical tasks. Of course, this ties in nicely with Jean-Baptiste Say’s definition of an entrepreneur as being “one who undertakes an enterprise...acting as an intermediatory between capital and labour”.
Here’s a list of key areas that you should look out for if you promise to make payment in shares.
D. Future share issues
E. Sale of the company
F. Dividend rights
G. Alternatives to equity
Everyone has bills to pay and it can be difficult to find a supplier who is willing to set aside the ‘cash is king’ mentality that is necessary for success for as long as it takes to gamble on the promise of a startup that’s often at its most vulnerable stage of development. However, provided you’re aware of the issues, it could be an option worth considering to get the company through those early days. And for anyone worrying that it’s just a case of “jam tomorrow”, I suspect that a quick conversation with David Choe might change your mind.