Should You Take Equity or Shares from Clients?

Take-Equity-Or-Shares-From-Clients

I was recently in New Orleans sitting by the pool at our villa when a coaching client sent me an email.

New Orleans Pool Villa
The pool at the villa we stayed at

His question “I have an early-stage prospective client and they really want to work with me. Before any pricing, he said that they might pay part in cash, part in equity. Good? Bad? What else could I offer?”

The reality however is that very few companies that issue shares end up going public.

I’ve received this same question over the years from other consultants too.

I thought I’d take a few minutes right now and share how you can deal with this too.

Where’s the Value?

The first thing to recognize is that when a private company gives you shares they are essentially giving you a share of their business.

In almost all instances you’ll receive shares or a percentage of the company with non-voting rights. Which simply means that you can’t have a direct say or influence on the company, how they pay dividends, etc.

Essentially, your shares have no value to them at that time. They are a piece of paper and that’s really what they are worth.

Taking Off

If you believe that the company has exceptional growth prospects than those shares may end up having great value to them.

In order for this to happen you’d either have to find a buyer for those shares if the company is still private. Or, the more likely case, sell those shares once the company goes public.

The reality however is that very few companies that issue shares end up going public. I have share certificates from companies who gave me hundreds of thousands of shares. They told me they were going public. And because this happened many years ago before I knew better those shares ended up being worth nothing. The companies never went public.

But if you see a company that really does have that fast growth potential and you’re willing to wait a 1-5 years those shares could be worth a substantial sum.

Imagine if you’d received early shares from Apple, Tesla, Salesforce.

Cash Counts

My suggestion to my coaching client was to ensure that the cash amount they receive from the buyer is sufficient.

That he’d be happy with the cash payment regardless of what happens with the shares.

You might take slightly less than your full fee in return from some shares. Ultimately you want to ensure that the cash amount you receive is enough to make you feel good – that you’ve still received value for the time you’ve put in and the value you’ve created for the buyer.

This is important because you should realize that the shares you receive MAY or MAY NOT be able to convert to cash at some point.

Early-stage companies often burn more cash than they should. Show them how to redirect some of their resources to the work you’ll be doing with them. How they’ll be better off. Why doing so is the right move for them.

If they can, great, and you’ve won on both fronts.

If they can’t, at least you’ve receive fair compensation (even if slightly lower than your usual) and you still come out ahead.

Change the Conversation

Another strategy you can use with an early-stage company is to change the direction of the conversation.

If they tell you they don’t have money or they are tight for cash and want to offer you shares instead start asking them questions.

Find out how much money they are currently spending and on what kinds of things. You can often find ways for them to lower their costs or get quick wins. Giving them more cash to pay you your full fee.

Early-stage companies often burn more cash than they should. Show them how to redirect some of their resources to the work you’ll be doing with them. How they’ll be better off. Why doing so is the right move for them.

When you can clearly make your case and demonstrate the value they’ll receive they are more likely to invest with you at a higher level.

Would you like to earn higher-fees? Want to ensure you’re getting paid top dollar for the value you’re creating? If so you’ll be interested in my coaching program for consultants. You’ll learn how to make more money with every project you take on and how to land more clients than ever before. Full details and get in touch here

  • I completely agree! Never took stock, nor did I ever agree to work for free on proposals, with the idea that I would get the business if the company won the project (sometimes suggested by defense contractors.)

    If asked, I simply explain that I’m too small to carry anyone for free. Better to pursue paying jobs than to lose opportunities being tied up with freebies. Besides, if they really need you they will find the money.

    While I have a soft spot in my heart (or maybe my head) for startups, I’ve avoided them and pursued Fortune 1000 clients instead. Even then I’ve been burned (bankruptcies), but only twice in 28 years. Great post!

  • I think the biggest problem with taking equity in a client company is the perception that it impedes your independence, and as consultants that’s critical to our profession. A lot of really well-known firms got themselves into hot water during the dot com boom for taking equity in lieu of fees – some of them are no longer around, and a few of the others have had to change their names and branding to try to recover their reputations. As Michael said, shares in a private company are essentially worthless anyway unless the company goes public, so what they are really asking for is a significant discount on your fees – and again, that’s a no-no. I’d reject the share offer, and tell them why – and then be quiet and wait to see how serious they are about engaging. There are ways to work out a deal without compromising your independence or giving away your services. Taking non-voting equity in a private company amounts to doing both.

    • Great addition and comment Jeff! Appreciate the thoughtful responses from both Daryl and yourself on this topic. It’s one that many consultants face – especially when they are new to the business.

  • Uber Genie

    Just found your site and podcast and thoroughly enjoying both!

    95% of my work is fee for service but I have “voting rights” ownership for two clients. Equity positions in both are in the 3-5% range. Didn’t need cashflow and companies were both in startup rather than early-stage. I had my lawyer review and negotiate amendments of the business and operating agreements. His services including modifying the Restrictions on sale or transfer of membership interests clause.

    Upside in one is low 7-figures (startup failure rate of 90% in this particular industry), the other is an order of magnitude more upside (startup failure rate of 65%). That said, failure rates of all startups range between 75% and 90% on average. How I look at the potential value is FV the consulting revenue. Say 3-weeks engagement initially equals $30k. Plus 2 days per month or 4k/mo. times average exit (either buyout or IPO) 7 years. $442k is the future value of my services fees, assuming 5% interest, etc. Average startup exit is ~$250mm. 5% is $12.5mm. But of course if only 1 in 10 exit my $12.5mm has to be divided by 10 (the no-frills calculation method) giving me an upside of $808,000. Annual return of 26% and total return of 183%.

    You get the picture. If you have cashflow, and it is consistent with your financial goals to add a small amount of risk to your overall portfolio of project work to increase total project margin, then jump in.

    I personally have a blast working on startups as opposed to the typical big-5 projects I worked on most of my adult life.

    One advantage is that one of the companies above allows me to represent myself as a part-time executive of the company and if asked, pursue strategy consulting opportunities if they are not in conflict with any of my commitments with the startup.

    Because projects with this startup are generally in the $40mm+ range, I often am led into the C-suite of Global 1000 companies. I have gained 3 new clients in two years using this method. All three times over dinner with an executive who gets around to asking what I do with “the rest of my time”. That said, this is a highly unusual arrangement and not likely to be accepted by most startups.

    Thanks again for your post. Will explore your site further.

    • Great comment and the way you’ve broken this down. You’re correct, for most this arrangement won’t work. However, you’ve made it work beautifully and I hope the paper shares turn into a successful investment return. Thanks for sharing your approach here!

  • wizardofid

    My firm has equity in 5 ventures, but both of these were the equivalent of sweat equity, given to us at the time of incorporation. But how do you structure payment in equity, in return for a service? Seems substantially more difficult, especially when (1) they have other investors, and there’s dilution of some sort happening each time they transfer shares when you to hit a milestone, and (2) their supposed valuations keep changing as you go along.