There’s a new type of legal tender in the marketplace that is an outgrowth of the new dot-com economy, and it’s being used in nearly every type of industry from retailing to insurance. Companies are using their own stock or promise of stock instead of cash to pay for everything. From rent deposits to legal fees to headhunter fees, these deals have become a standard in the high tech business. Put three service providers and one tech company in a room together and the question is invariably asked, “Have you begun accepting equity for services?” More and more the answer is “yes.”

It’s long been a practice for companies to use stock options as a means to attract and keep senior employees. But it has been the advent of the fast-moving dot-com companies who are looking to get to market as soon as possible who have learned to use equity as a valuable tool. They use equity to lure senior employees from established organizations to join their startups for a fraction of their former salary. They use equity to retain employees in a competitive job market that is unprecedented. They use equity to motivate employees to meet important product development milestones. The fact that these shares could shortly be worth 20 to 100 times their pay-in is a powerful motivator. And now these high-tech executives, no fools they, have reasoned that equity could also be an effective currency outside of their four walls.

And a more receptive market would be hard to imagine. Long have attorneys and other service providers helped shape startup companies, but then sat on the bench and watched as their clients hit the jackpots. By taking equity in lieu of partial or full fees, companies create partners in their businesses. Partners that have vested stakes in seeing these companies succeed will go beyond the call of duty to see that they do. And these tech companies, most of which are startups (i.e., cash-poor), can conserve their dollars and provide a currency that many find more valuable. In many cases, vendors will value one dollar of stock at a higher valuation than one dollar in currency. And while the odds do not favor the company becoming the next Yahoo, all it takes is one hit to erase many prior mistakes.

But proceed with caution. Companies considering the use of equity as payment for services need to be aware of the issues that can result from this practice.

Startup Perspective