Would you be prepared to work for a small company for a share of equity instead of a cash payment?

Many small businesses require additional support to grow their business, but may not have the funds to pay for specialist help:

To some this may seem an outright risk strategy, with little or no guarantee on a financial return for their investment of time, knowledge, resources, and skill. In contrast there are many great small and start-up business ventures with fantastic potential for development and growth with enough help and guidance to lead them on their way. In this case any shrewd businessman might see a proposal for shareholding an opportunity in the making?

The pro’s and cons of such a strategy are comparable to that of equity financing. There is a degree of business risk taking for you the person working for shares instead of payment. With no cast-iron guarantee that your shares will be profitable in the future you can only rely on your ability to weigh up the likelihood that this is a venture worth becoming involved in. In the event that the business goes into liquidation later, as a part ‘owner’ you will be last on the list of creditors due their share of monies owed. However as an ‘investor’ subsequent financial development and growth can bring greater returns than debt financing.

One of the hurdles to be considered is the business relationship. As a shareholder of a company you become part owner. What is the level of commitment that the company is looking for from you, short and long-term? Are you able to meet it and is it likely you can build and maintain good working relationships?

It shouldn’t be forgotten that the business themselves aren’t without risks in this form of contract. Giving up a percentage of ownership is no easy feat. Likewise it can be costly to enlist accountants and legal advice for the contractual requirements. In the event that you sell your shares they are once again at the mercy of an unknown quantity taking ‘part – ownership’ of their business.

Admittedly this is a very brief insight into the concept and there is much more to say given time and an urge to be wordy! But in the vain of blogging it seems a fair starting point, and hopefully food for thought for those of you out there looking for capital or guidance, and those of you wanting that extra challenge equally.

Matthew Clayton AIBC

Ambassador – Chartered Management Institute (CMI)-Institute of Business Consulting (IBC)

28th April 2010