How To Exchange Startup Equity For Services
If you consider exchanging startup equity for services - you should follow three basic steps.
At the beginning of their life, startups often lack substantial financial resources. In the absence of financing, they offer service providers equity in exchange for services. We have compiled several tips to help make the replacement right.
The exchange of equity-for-services that is done correctly helps the founders bring on developers, biz dev people, marketers, and other services providers and keep them to the end.
To do that, one must keep following three basic steps:
Step 1: What is the Valuation?
The exchange of equity-for-services is a deal that involves negotiating. Like any other negotiating, you must estimate the worth of what you give and the value of what you get.
Therefore, the first thing you need to do is figure out the startup's value.
many founders and advisors think that the valuations are
100% arbitrary, and the founders can decide about the value randomly. The truth is it is not random. A business valuation is a science with foundations more profound than any startup.
Valuation reports shouldn't be expensive these days, and they can be created fast using valuation platforms, such as equitest.
Suppose you find the value is 1,000,000 USD.
Step 2. How Much is the Services Worth?
To get a win-win deal for both sides, the founder should ask the services provider what the dollar cost of the service provided?
The founder must, of course, define the same job. For example - if the founder wants the first version of the product - he must characterize the features of the first version of the product.
For simplicity - suppose the provider estimate the job with a price of 10,000 USD.
It will let the two sides know that the service provider can get 1% of the startup's equity (10,000 / 1,000,000).
Step 3. Allocate the Equity
The final step is equity allocation. It would help if you created the legal framework of the distribution using a lawyer or a template you can find on the internet.
To avoid situations where the supplier does not provide quality work or does not complete the job, you must condition the provision of the shares on the progress and quality of the work.
