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Below you’ll find an unedited chapter from my upcoming book 40 Rules for Internet Business Success. To receive updates about the book and get a free digital copy of my book in its current form, enter your email address in the sidebar to the right.
When you’re first starting your Internet business, you probably won’t have a lot of financial resources to pay for the professional services that you’ll need to build your business. Depending on your skill-set, you might need a freelance graphic designer to create your branding or a website developer to create your website. You might need a software developer to help build the software system that powers your business or a freelance to help write the copy for your website. If you don’t have any meaningful start-up capital, it’s hard to hire people to do the work that you need to have done to grow your business. Some cash-strapped entrepreneurs will pay for professional services with equity in their business in lieu of paying cash for the services that they need. Equity in their business is the only asset that they have, so that’s what they use to pay for the various projects they need to complete to get their business off the ground.
Paying with equity is expensive
Paying with equity is the most expensive way to pay for for graphic design, website development or content creation services will be the most expensive way to hire out for these services if you’re successful. Let’s imagine that you give a website developer 10% equity in your business in exchange for creating your logo and building your e-commerce website. Five years later, you have a business that generates $1 million in revenue and $600,000 in profit each year. The website developer is long gone and you’re not even using the website that they built for you when you were first getting started. Should that person get $60,000 of your profit every year because they built you a website five years ago? That’s exactly what you’re signing up for when you give away equity in exchange for project work like freelance writing or website development.
Good freelancers don’t want equity
Most high-quality freelancers won’t entertain the idea of accepting equity in lieu of cash unless it’s the offer is from someone they already know and trust. They know that entrepreneurs that are willing to give up equity easily don’t place much value in the equity of their business. They also know that equity isn’t likely to every be worth anything meaningful. Usually when a freelancer gets offered equity in exchange for their services, it’s from an “idea guy” that wants them to all of the work to build his business in exchange for a small equity stake. When you try to pay for professional services with equity, you’re going to have a very difficult time getting any high-quality, experienced freelancers to work with you. You’ll end up working with second-rate freelancers, because high-quality freelancers can easily fill up their schedule with clients that are willing to pay cash.
Consider free and cheap alternatives
If you don’t have much for startup capital to get your business off the ground, that doesn’t mean that you can’t get graphic design, website development, content creation or custom software development done. You just have to be aware of the various free and cheap alternatives to paying a freelancer’s full hourly rate. Instead of paying for a logo and a custom website design, go without a logo for a while and use a pre-built theme from a site like Theme Forest (www.themeforest.net). Use WordPress (www.wordpress.org) instead of having a custom website developed. Instead of having paying a freelancer to write content for your site, write it yourself and have a friend or family member check over the grammar. If you need software development done, consider working with a more affordable developer from the Philippines in lieu of paying a U.S. firm. If there’s a professional service that you absolutely need done but don’t have the money for, it’s better to go out and get a part-time job to pay to have that work done than to give up equity.
When to give up equity
Is there a time that you should ever give up equity in your business? That depends on the type of business that you want to build. If you want to build a large company with an office building and few hundred employees, you’ll probably need to raise venture capital money and give up equity to pay for that growth. If instead you want to build a profitable Internet business with a small remote team, you don’t need to give up equity. If you build a business that grows organically and is profitable from the start, you can pay for growth-related expenses with the profit your company generates. I put $100.00 of my personal money in my business checking account when I incorporated my company in 2008 and every expense since then has been paid with the profit my company generates. My company currently has two employees and another five contractors that regularly do work for my company, but I own 100% of the equity in my business. My business generates more than enough revenue to pay my team members well and provide for my family and I don’t have to be at an office building all day or share my company’s profit with a venture capital firm. If you have a team member that’s been with you for a while and want them to participate in the success of your business, consider offering a profit sharing plan or giving them a large bonus at the end of each year in lieu of giving them equity.