Small Business

Making Stock-for-Pay Plans Work Well


This week: Rules for making stock-for-pay work well, solving PowerPoint fatigue, the Wikipedia of business theory, and a definitive "un-textbook"

Rules for Making Stock-for-Pay Work Well

That funny money you have called "stock" can come in handy to engage that Web designer or direct-mail marketer you've been lusting after but whose rates seem out of your league. Early-stage entrepreneurs tend to have a lot more stock than cash, and sometimes that counts for more than they realize.

But how do you actually make it happen without giving the company away? As someone who has both given out stock and received it as payment for consulting services, I have discovered a few rules that help make stock-for-pay work well:

1. Be sure to establish a value for your stock before you begin offering it as payment, such as via a stock option plan or having attracted investment.

2. Negotiate hard on the dollar value of the engagement. Just because you are paying in stock doesn't mean the consultant's fee should be inflated more than 15% or 20%.

3. Always pay at least some cash to consultants who receive stock—anywhere between 10% and 50% of the total due. As much as consultants say that receiving stock doesn't affect their responsiveness, the reality is that cash has a present value, and thus carries more weight when you're trying to get yourself to the top of a consultant's priority list during crunch time.

4. Use the offer of stock as a way to determine a consultant's commitment to your early-stage company; put another way, you should rightfully wonder about a professional's real interest in working with you if he or she won't at least entertain the possibility of accepting some part of payment in stock.

Then there are the legal issues. These include "rights to liquidity, anti-dilution, information, board observation, and other rights that are to be accorded the paid consultant, as minority stockholder," says Robert Adelson, a partner of Engel & Schultz, a Boston law firm. In addition, he says, consider the matter of vesting—making shares official as work is completed, or offering options that vest on a schedule that is coordinated to completion of consulting work—and the tax implications of each.

Because of the potentially substantial legal bills for the preparation necessary to use stock instead of cash, don't go this route unless the consulting work is extremely important or you see multiple consultant opportunities…or you can get your lawyer to work for stock.

Solving PowerPoint Fatigue

Prospective investors, like most executives, tend to have PowerPoint fatigue from viewing one too many mind-numbing presentations (see BusinessWeek.com, 6/02/06, "How to PowerPoint Like a Pro"), so entrepreneurs in search of cash should try something different, advises Carla Kimball, a public speaking coach in Belmont, Mass.

Because PowerPoint is "a very clumsy tool," she suggests software from Inspiration.com, which "lets you easily map your thoughts and outline your ideas." She encourages entrepreneurs to use diagrams and pictures or single words rather than lengthy written descriptions to communicate important ideas.

She also encourages entrepreneurs to question themselves hard about their presentations: "The next time you are putting together a slide show, ask yourself on each slide: Is this slide for me or for my audience? Will it really help them better understand my message or just serve as a distraction? How can I remember what I'm going to say without putting the entire text on the slide? What can I do to simplify the slide so that only essential information is displayed? What do I really need to do at this point in the presentation to engage the audience and enhance my message? Is a visual the best way to convey the information, or could a story do a better job?"

And because what people want to see in a presentation and read by themselves are so different, she suggests that entrepreneurs make a second, more text-heavy package as a take-along for investors. (For an article Kimball has written on this subject, see www.riverways.com/articles/tao-12.htm.)

The Wikipedia of Business Theory

There's a new site, www.bizbigpic.com, that hopes to be the Wikipedia of business theory. The site, founded by Cristian Mitreanu, introduces its theory in 10 chapters, which are open to comment.

It already has its own lingo, as in "Ofmos Portfolio Alignment," and to a reader who complains that it doesn't seem applicable to startup businesses, Mitreanu insists that it "encompasses a wide range of entrepreneurial initiatives," such as adding new products and entering new markets. You be the judge.

Books: The Un-Textbook

It's a new school year, and there's a wonderful new textbook on pretty much everything you can think of about starting or running a business. It is Entrepreneurial Small Business by Jerome A. Katz, an entrepreneurship professor at Saint Louis University, and Richard P. Green, an entrepreneur.

What makes it so un-textbook-like is that it combines lucid explanations with real-life case examples featuring illustrations of complex tasks like financial analysis and accounting. There is a great description of the unsuccessful dessert product that preceded the introduction of Clif Bars as a way to illustrate the vagaries of turning ideas into real companies. And the book includes a step-by-step for determining discounted cash flow that even I can follow. At 600-plus pages, though, this isn't something you breeze through in a couple of hours.

David E. Gumpert covers business/health issues and also writes the biweekly What Entrepreneurs Need to Know column.

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