DCA Q&A – SHOULD I ACCEPT SHARES AS PAYMENT?
Q: I’m working full-time in IT. I’ve been approached by a family member to help out with a new venture. It involves probably six weeks of development, working evenings and part of the weekend. He’s said that he doesn’t expect me to do this for free – but he doesn’t have the seed capital to pay me. So, he’s proposed that I do the work and take a 20% stake in the business as payment. I’d like to help out, but I’m reluctant to put my personal life effectively on hold for so long without getting anything for it. What should I do?
A: Firstly, you should be aware that start-ups can fail. Often, that’s because they lack initial capital. If this is the approach he’s taking with you, you’d be right to wonder how the business is going to pay for anything else that it needs. In other words, this is a high risk investment.
To evaluate it properly, you need to figure out what the ‘opportunity cost’ of this development work would be – how much would you charge someone to take on the project if they had an actual budget? That’s the amount of investment this family member is effectively asking you for. And would you put that into his business idea for a 20% stake in the company?
Remember when you’re considering this question that you won’t be able to cash the stake in over the short – or even medium – term. You’ll only get a return on the investment if the company or a third party buys your shareholding. You’re entitled to know exactly what exit strategy this family member proposes.
This clinical approach may not sound very familial. However, rash investments made because of family ties that go wrong cause a huge amount of friction – failed investments of time and effort, in fact, often cause far more grief than money alone. So you need to evaluate this clearly and, if you’re not comfortable with the scale of the investment, the business idea, or any other aspect of the proposal, say no. Of course, if you’re genuinely confident that this will come good, it is a great opportunity – however, you need to see the business plan, revenue projections and all the other things that an investor would expect.
You can, of course, come back and negotiate on the matter, and there are alternatives to taking a stake in the firm. For example, you can do the initial scoping for free to let him get financing sorted out, or you can defer your fee for an agreed period. Both of these would be hugely helpful to a new start-up, and should be appreciated. They also limit your exposure if things go wrong.