Robert raised a few valid points, especially when he
mentioned that many companies offering equity in lieu of cash end up
overpaying. It’s probably due to the fact that equity in development-stage
companies is notoriously difficult to value and that service providers who
accept equity as a form of payment must be prepared to wait for their payday
for extended periods of time. Perhaps even more importantly, they must be
prepared to assume the risk that the company never lives up to its expectations
and thus, their equity share will hold only little or no value.
I’m not sure I’d need “a dozen points to ponder” when
exploring a potential partnership with a vendor or services provider. If the
service is a big-ticket item, which is critical to the launch or execution of
the company’s business plan, and the business lacks the liquidity to pay for
the service in cash, it simply becomes a “do or die” type of issue.
I’m also not sure what a service provider could do “to cash
out before the company is ready”. Unregistered/restricted stock is illiquid,
meaning that even if the provider could find someone who’s willing to purchase
the equity stake from him, it will be next to impossible to consummate such a
transaction without violating state and federal securities laws.
Depending on your capital requirements, you might be better
off reserving a certain tranche of equity for paying services providers (for
the argument’s sake, let’s say 15%) and structure these deals as promissory notes,
which will accrue interest and mature, let’s say within 12, 18, 24, or even 36
months. As a kicker you could add an option to convert the note into equity at
a significant discount and at the discretion of the holder in the event the
company contemplates an equity round, merges, or gets acquired. That way the
holder of the note would (i) enjoy the more secure status of a creditor of the
company, (ii) have a definite timeline within which he can expect to get paid,
and (iii) even participate in the company’s upside potential in case of a
so-called capital event.
For you this could mean that you don’t have to issue
straight equity to your services providers, you can probably pay off some notes
when they mature, and the whole process becomes much more manageable because it
most likely doesn’t require compliance with state and federal securities
I hope this helps.
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