Once in a while (actually every few weeks, give or take) somebody asks me if I’ll do a project for equity instead of cash.

My immediate response is “what’s your exit plan?”.

Usually this is met with a blank stare, which is when I follow my question up with “what I mean is, how do I sell those shares, and when?”. At this point, in 90% of cases, the other party is already starting to look panicky. I then usually politely excuse myself and leave.

It isn’t that I’m opposed in general to holding equity in a project that I’m working on. Far from it. The lack of an exit plan, however, implies a number of things about the person doing the asking though:

• No business plan (if they had one, they would probably have an exit plan)
• No cash (this makes launching a business an uphill battle from the start – I know this from bitter personal experience)
• No idea of valuation (and in turn probable lack of general business know-how)
• Possible utter lack of respect for the developer (more on this bel0w)

By asking a developer to work – possibly for months, or years even – without cash, the person isn’t paying much attention to how the developer will pay their bills in the interim, and how the developer will ever get paid for the project (i.e. by selling their shares).

What they’re saying is that they want the developer to assume all of the project risk, in exchange – maybe – for some pieces of probably worthless paper. Even worse, if things go completely pear-shaped, the developer might even wind up on the hook for company debts or legal issues. Even with paper, the developer can also still wind up with their equity diluted or out and out taken away – contracts can be tricky things.

Aside from all of the above, they also clearly haven’t thought through what happens when the developer runs out of cash (i.e. they leave, or they become unmotivated).

The converse to this situation is one in which a business has a clearly defined plan, cash on hand to pay contracts or salaries, and wishes to align staff with the overall goal – this is the only time when I would ever want to be holding equity in somebody else’s company.