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If you are a startup founder, you may likely find yourself struggling to pay debts when they fall due. Unless you are already fabulously wealthy, backed by someone who is, or have just completed a successful raise, you are probably going to find your business cash-strapped at times. One of the biggest costs to your business is inevitably going to be people. This includes employees, contractors or professional advisors like lawyers and accountants. When it comes to the latter, you may be tempted to offer them equity to save on fees. Or perhaps they have proposed this to you as an alternative to up-front payment. This article explains why you should think carefully before you pay an accountant or lawyer with shares. Most of the time, it is probably not worth it!

Employees vs Advisors

A handy way of paying people without spending any money upfront is by issuing them with equity. Startups often do this to compensate employees, contractors, co-founders and directors. Payment through equity is usually via an employee share scheme or option plan. Doing so helps attract talented people to work for you, while also giving them an ownership stake in the business. This option can incentivise them to work hard and help your startup succeed.

However, professional advisors like lawyers and accountants are not comparable to employees or co-founders. They are generally not deeply involved in the regular day-to-day running of your business. Further, you and your business are likely to be just one of many other clients to them. Instead, professionals such as these provide you with a specific service, like helping with your tax return after the end of the financial year or drafting an employment agreement for a new employee.

Tasks like these may only take a few hours of their time. Therefore, having an ownership stake in your company is not really going to transform the service they provide. By contrast, it is going to be very hard to find great quality employees who are willing to work long hours for little pay over a period of years unless they have an ownership stake in your startup!

In the case of lawyers, accepting equity in your startup may also give rise to a conflict of interest. Once they become a shareholder in your company, your interests may no longer align when it comes to preparing corporate legal documents like your shareholders agreement, or they may no longer be able to represent you in litigation.

Expensive Fees Now vs Very Expensive Fees Later

You may find yourself with a large bill after engaging with a professional advisor. However, it is not a good idea to save finances in the short term by sacrificing equity in your startup. If and when your startup eventually takes off, even a small percentage of shares will be worth a lot more than initial accounting or legal fees. 

Do you think Jeff Bezos regrets not saving on accounting fees back in the 1990s by giving away even a fraction of a per cent of shares in Amazon at the time? With the company’s net income at almost US$12 billion at the time of writing, probably not! While your startup might not necessarily be the next Amazon, this example gives you a sense of how you should be thinking about the longer-term value of shares in your startup.

Ultimately, before you even start your business, you should be considering the start-up and ongoing costs you will incur. Professional fees on lawyers and accountants are comparable to insurance, utilities or supplies and equipment. They are unavoidable costs associated with running a business. Hence, you should think carefully before you pay an accountant or lawyer with shares. It is probably not worth giving away equity to pay for these professional services. 

Does It Ever Make Sense to Do It?

It may be a good idea to have a trusted advisor who you can rely on to devote their time and attention to your business. This will depend on the industry your startup is in or the types of goods or services it provides.

For example, suppose your business is going to have an unusually high number of legal needs. These can include a large number of patent applications or considerable contract negotiation requirements. In that case, you may consider bringing on board a lawyer to be a key person in your business. Consequently, incentivising them with equity can make sense in the same way as it does with any other key employee.

However, if this person or their firm is going to be providing fairly typical accounting or legal services, paying them in equity is almost never going to make sense. If money really is tight and they see potential in your business, then ask whether they can provide a deferred fee structure. For example, you could agree to defer payment until the successful close of your next raise. Otherwise, save your equity for investors, co-founders and employees!

Key Takeaways

Professional advisors have a different relationship with your business to employees or co-founders. You should think carefully before you pay an accountant or lawyer with shares. Paying these sorts of advisors in equity is not necessarily going to motivate them to perform their work any better or provide you with a different outcome. The money you save on fees today will far outweigh the long-term cost of sacrificing equity in your startup. If you are having difficulty financing your startup, contact LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page.

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