Be Cautious in Making Decisions to Share Equity in a Start-up or Small Business

In my practice, it is not unusual for start-ups or small business owners to call me to discuss a deal they are contemplating which will involve sharing equity--even a significant amount of equity--with new business partners. In these cases, the client is typically considering this equity share either because of cash constraints or because they other party or parties are insisting that they must receive this equity to proceed with the relationship. However, in my experience many of the clients who are contemplating such deals have not really taken the time to seriously consider the potential cons of such a deal and to weight them against the obvious pros. If you are considering such a transaction, I would encourage you first to consider how you will feel about the equity grant if the party accepts paid compensation elsewhere and becomes unresponsive with respect to your company. In my experience, this often happens with the party who receives the equity grant, who was expected to provide unpaid services in exchange for the equity. Also, I would encourage you to consider the  possibility that the party cannot work with you or your business partners due to some personality conflict or other disagreement that is not yet apparent. This also frequently happens when new business partners are bought into a business relationship. This Tech Crunch commentator provides some additional insights on considerations that need to be made when it comes to sharing equity in the link below: