Paying with Shares

“Elements” – Paying with Shares: Entrepreneurs often offer shares to pay for services as the cash resources of start-ups and new ventures in general are limited. Such deals are especially offered to consultants; the argument being if they are good as they say they are then the shares will be much more valuable that the monies owed. If the consultant is truly an entrepreneur then such compensation should be acceptable.
The argument sounds good in principle but there are problems with it. The role of the consultant is to increase the odds of venture success, but there are too many issues outside of their control or even influence. The starting point is the innovation being commercialized and the value proposition behind it. Entrepreneurs can be mesmerized by the brilliance of the innovation, but even a brilliant discovery does not directly translate into market need. A consultant must be able to recommend against the venture if the fundamentals are flawed without risking their own compensation. More importantly, control and decision-making remain with the senior venture management. Luck is also a factor, which really means being at the right place at the right time. Overall, the odds of success are low.
There is also a practical negative side. It is not easy to pay bills with equity. Even worse, taxes have to be paid on the value of the shares given as compensation. With many consultants, if they had accepted all such opportunities, they would be a partner in over one hundred ventures by now.
There is also a downside for the entrepreneur, as there has been a dilution of the shares. Also, the new shareholder is still there after the job is done, whether they want them or not.
At Sixth Element Sustainable Management, we understand the limited cash resources. We have adopted our own value propositions to work around this as much as possible, but equity in your venture is not part of our program.