One way to improve your income is to increase the ways clients can pay you — hourly, salary, full-time, part-time, contractor, percentage of revenues, percentage of profits, barter. (To name a few.) One method that can make you a fortune — or, more likely, pay you nothing — involves taking a piece of the client’s company as compensation.
You get involved in a project — a start-up, perhaps — where they need your help but don’t have much cash to pay you. If you’re going to be their sales rep, the answer is easy: a percentage of revenue from your sales. But if you’re a techie or administrator or accountant, it’s harder to determine how a cash-strapped operation can pay you. So you offer to take part of your remittance as equity: a small-percentage ownership in the business.
You might be tempted to ask for, say, one percent. It seems reasonable — not too greedy. And, in a going concern, it could easily amount to a nice little income stream for you.
The problem is that any ownership stake you receive early in the game is likely to become diluted as more people get involved in the project. To begin with, the founder is handing you a part of his or her ownership, and by the time new partners and banks and angels and venture capitalists have muscled their way in, the founder’s piece of the action has been reduced greatly. And your one percent shrivels to a few basis points.
Knowing this, you may wish to ask for five- or ten-percent ownership. Then you call up your favorite contract lawyer and get an iron-clad agreement that guarantees you a payout in the event of a major change, such as when the business gets sold.
Still, this method is fraught with dangers. An acquaintance got such a contract, with an elaborate payout clause in the event of a sale — but the company merged with another by buying it, which thereby canceled the clause. He received diddly.
You could ask, as the sales reps do, for a percentage of revenues. One problem here is that businesses often need bridge loans to keep going, and banks don’t take kindly to watching repayment revenues get tied up in employment contracts.
Another problem is exemplified by the way Hollywood does business. Moviemaking is inherently speculative, and talent sometimes negotiates pay based on “net profits”. But accounting standards permit studios to play fast and loose with the rules — and they pile every imaginable item into “costs” to reduce the net — to the point where major film successes often end up showing no gain. For this reason, movie “net profits” are sneeringly referred to as “monkey points”.
In showbiz (and everywhere else, for that matter) it’s probably better to ask instead for a percentage of “first-dollar gross” revenues. If the owner balks, try to arrange your pay in some other manner entirely. Avoid monkey points.
Once the contract is signed, don’t hold your breath, because most fledgling operations go nowhere. For example, of 30,000 Internet start-ups each year, a mere ten will soak up more than two-thirds of all the resulting value — and one will be worth more than all the others combined. So it’s a steep hill to climb.
Why not make this kind of offer to an established company? Well, nobody wants to give up ownership — or issue a long stream of payouts over months and years — unless they have to. Major businesses usually have plenty of cash to pay contractors, so they’ll likely turn you down. Worse, now and then a big corporation will sign the contract, then simply renege and dare you to sue them. After all, they have great lawyers and lots of time, and you don’t. I know of two instances of this happening among my immediate network, and neither ended well for the victims.
(It’s not that all business leaders are pirates. Okay, some of them are. But all of them do run into problems now and then, and they start tossing things overboard, including vendors. On the other hand, when a business — especially a B-to-B — gets into fatal trouble and crashes and burns, its customers tend to stop paying their bills. After all, why throw money at a dead thing? So, deep in the cold heart of the corporate world, there beat little fluttery pulses of moral compensation for the rest of us.)
1. Ask for more equity than you’re comfortable with — say, ten percent — because that will get whittled down to almost nothing by the time you see dime one.
2. Get a really good lawyer. Make sure the attorney has found every nook and cranny where the business can bury a contract bomb that blows up your takeaway, and seal off those dangers. Then cross your fingers.
3. Hope for the best but prepare for disappointment. Take what you get, forgive them their trespasses, and walk away.
Then: Onward! To the next job.