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Should you give away equity without financial investment?

While investing money in a startup is the traditional way of getting some if its equity, it can happen that individuals or organizations get startups’equity against education, networking or media.

Even though I can’t say I’m against these practices, I always remember entrepreneurs that equity represents the future value of your company. When you start, your company is worth nothing and 5% of nothing is a pretty good deal. But what will your company’s valuation be in 5 years? In 10 years? Millions? Well, 5% of millions is a pretty good sum of money.

Moreover, after giving away equity, you might be stuck with an unwilling fellow that has no power in your company but whom you have to continually chase to sign board meetings or investment papers (remember, he’s now an investor).

The rule of thumb I recommend in those situations is to really consider how much the non-financial investment you’re receiving is impacting the future of your company. Maybe this person or this incubator that helped you in your early days, put you in touch with THE customer that made your business happen. Fair. Or maybe he’s still, many years later, a trusted advisor that really helped you go through the roller coaster of entrepreneurship along the way.

But maybe, he only helped you for some time and is no longer involved in the company. If, 10 years after its creation, your startup is now worth 100M€ and you gave away 5% equity to a 6 or 12 months accelerator that you are no longer in contact with, you literally gave them 5M€.

As of media for equity, the same rule applies. If your business is highly media dependent (say you sell ringtones or on-line dating), then go for it full force! But if you think media can help you acquire customers, remember it’s only a channel (unless Google starts offering AdWords for equity).

In conclusion, always remember that equity is future value of your company and sometimes, it’s better to pay someone or an organization for the help they give you (e.g. giving away commissions on business they help you get).