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Start ups at the beginning have no money.
And their only currency that they can use to get services or hire employees
is with their equity. Now, start ups need to realize that their cap table is
the most precious thing, and they can't have any issues with it, because if
they do, it's going to seriously be an impediment to a subsequent financing or
an acquisition. What I often see clients do is, they don't have any money, and they
need to outsource their IP development, and so they'll go to the developer and
say "I don't have any money," or "Can you give me a discount, and I'll give you five
percent of my company for that." And that's a real dangerous thing to do.
Anytime you're giving equity away, it should be done on an objective basis where
someone has to earn it over a period of time. If you're giving your equity away
on a subjective basis -- i.e. "If you give me this deliverable, I'll give you my
equity" -- what you're leaving yourself open for is a situation where, if you have a
dispute over whether or not they've given you that deliverable, you now have
a question on your cap table. And a tie is going to go to the person who is
claiming that they own your equity, because any investor is going to step back
and say, "I'm not going to invest before you clean this up, so go clean it up."
And that's the last situation you want to be in, in terms of going out to someone
and saying, "Can you please sign this and clear up this issue for me and give away
all the equity that you were promised." They're not -- it's not going to happen
like that.