Start-ups facing equity headache

Agency and supplier start-up bosses are being warned of the danger of paying staff or contractors with an equity stake, as it could seriously affect the eventual sale of the business, according to a top lawyer.
The move follows reports that graffiti artist David Choe, who was paid in stock rather than cash for decorating the start-up Facebook’s offices, is now worth more than $200m (£127m).
Not that this will affect Facebook, but if start-ups do give their shares away, they should make absolutely sure that the recipient will be with the business for the long term, said Andrew Hornigold, partner and head of technology sector at law firm Pinsent Masons.
“Promising shares to people is dangerous because it is very hard to get them back. The equity is, in many ways, the most valuable company asset. Start-ups are too quick to do that when they’re trying to get the business off the ground,” he said.
“If your business is worth £20m, along the line, somebody will want to know you have ownership of that,” he said.
He also warned that it was essential to ensure start-ups secure the intellectual property rights, especially if parts of the business – such as IT and web development – are outsourced.
Finally, when it comes to gaining funding, Hornigold advised: “Don’t go too high. People will not look at pre-revenue businesses. If you can demonstrate people are willing to buy your product or services on a repeat basis, it is going to be much easier to get funding.”

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