Don't Take a Share in a Business That Doesn't Exist Yet

I have written nine or ten posts that circle the same idea from different angles, and a reader pointed out that I had never actually said it in one sentence. So here it is. Don’t take a share in a business that doesn’t exist yet, and don’t give one either. Pay people money for work. Grant shares to owners of something that can be owned. Those are two different transactions and almost every bad arrangement I have watched comes from treating them as interchangeable.

This post is the rule, not the argument for the rule. If you want the case that early equity is worth close to nothing, The Equity Tell makes it: the exchange only ever runs one direction, people trade labor for early equity constantly, and almost nobody trades cash for it at the same valuation. I am not going to re-litigate that here. I am going to say what to do about it.

The rule runs both directions

Equity and salary are not the same thing. They feel like alternatives because they both appear in the compensation conversation. They are not alternatives. One is payment for work performed. The other is a share of ownership in an asset, which is a claim on something that exists.

If you are the person with the idea, this means you cannot use shares as a currency to buy work. Not because it is unethical, but because it does not function. The people who would be worth hiring can price a lottery ticket and will decline, which leaves you selecting from the people who cannot, and that is the adverse selection problem at the heart of the whole cofounder search.

If you are the person being asked, this means the percentage is not the negotiation. Whether there is anything to have a percentage of is the negotiation, and it comes first.

Cash is for work. Shares are for ownership of something that can be owned. Almost every bad deal I have watched treated those as interchangeable.

What “a business that exists” actually means

This is the part that never gets defined, which is why the rule sounds harsher than it is. A business exists when it has customers who paid money for something, and when the thing keeps producing revenue with the founders behaving like normal people rather than heroically.

That is a low bar on purpose. It is not profitability, it is not a Series A, and it is not scale. It is evidence that somebody outside your circle will pay.

Here is what does not count, in order of how often it gets presented to me as though it does:

• A waitlist. Signing up is free.
• Letters of intent. They are free too.
• A pilot that nobody is paying for.
• A funding round. That is somebody betting on the business, which is not the same as the business working.
• A finished product. Building is the part you control, which is exactly why it proves the least.
• Press, awards, an accelerator, a demo day slot.

If you’re the one with the idea

You have something you want built and no money, or not enough. That is an ordinary position and it has ordinary answers, none of which involve giving away a third of the company.

Make the thing smaller until you can pay for it. This is the whole discipline. Most first versions are three times bigger than the test they need to run. Cut until the number is one you can cover, and take it seriously as a design constraint rather than a defeat.

Pay for scoped work instead of buying a partner. You need something built, which is a purchase. You do not need somebody committed to your vision for a decade, which is a marriage. What you actually need at this stage is usually a few weeks of somebody’s attention with a defined outcome at the end of it.

Validate before you recruit. Every month spent looking for a partner is a month not spent finding out whether anyone wants this. The search has a real cost and it is mostly paid in time you cannot get back.

Understand what you look like from the other side. Here is a builder reading your message, which is uncomfortable and useful in roughly equal measure.

If you’re the one being asked

Someone wants you to build it and the payment is a percentage.

Charge money. Even a reduced rate. Even a small first piece. The moment cash is involved the relationship becomes legible to both of you, and you find out immediately whether this person can pay for things, which is the single most predictive fact about the next twelve months.

Apply the strip-it-out test. Remove the equity from the offer entirely and ask whether you would still take the deal. If yes, the equity is upside on an arrangement that already works. If no, it is being asked to make an unacceptable deal acceptable, and it cannot do that.

Don’t do the work in advance. Not a free prototype, not an unpaid estimate that requires real analysis. Spec work is the same currency paid in a different denomination.

Notice when you want it to be true. The offers that get people are the ones arriving when they most need a reason for optimism, which is the mechanism in Take the Bait, Eat the Poison. Wanting the offer to be real is the thing that makes you skip the questions.

The longer version of all of this, written for you rather than for them, is You’ve Been Offered Equity to Build Something.

When equity is exactly the right instrument

I am not against equity. I have granted it and I would again. It is the right tool in a narrow set of cases, and being precise about them is what keeps this from being dogma.

There is a business, by the definition above. Revenue arrived from people who are not your friends.

It is on top of pay, not instead of it. Reduced cash plus a share is a normal arrangement between adults. Zero cash plus a share is a request dressed as an offer.

Both sides are giving something up. The founder is diluting real ownership. The other person is taking a below-market rate or putting money in. If only one side is exposed, the shape is wrong regardless of the percentage.

There is paper before there is work. Vesting, a cliff, what happens if either party leaves, what happens on a sale, and who owns the code. Written by a lawyer, signed before anyone starts. Not because you distrust each other, but because memories diverge and companies change shape, and the version of this you agree to verbally will not survive two years intact.

You have already worked together for money. The best predictor of a good partnership is a completed transaction, at a small size, where both people behaved well. Trust that accumulated beats trust that was granted.

Somebody is buying in with cash. Investors get equity because they hand over money. That is the clean version of the trade and it is worth remembering that it is the normal one.

What this rule costs you

An honest post has to name what the rule gives up, because it does give something up.

You will pass on something that would have worked. Somewhere out there is a founder with nothing but an idea who was going to build a large company, and by insisting on being paid you will not be part of it. That happens. I have almost certainly done it.

I am at peace with it for a reason that took me a while to arrive at: the cost of missing one is bounded, and the cost of the bad version is not. Declining costs you an upside you never had. The bad version costs you a year of your life, your savings, and the confidence to try again, and the founder loses the same year plus a product that doesn’t work and a partner who resents them. The distribution is not symmetric, so the rule should not be either.

There is also a version of this rule applied stupidly, which is refusing to work with anyone early-stage at all. That is not what I am arguing. Early-stage clients are most of my favorite work. The distinction is whether I am being paid for it.

Nobody has to lose

The reason this is the thread running through everything I write is that the alternative is not “be more careful.” It is that these arrangements are usually built by two people who both want a fair deal and neither of whom has said out loud what fair would look like.

A fair deal is one where each side can describe what the other brings without using the word potential, where both are giving up something they would rather keep, and where both are exposed if it goes badly. Those deals exist. They are more common than the horror stories suggest, and they are most of what twenty-five years of this has been.

Taking an idea and turning it into money is genuinely good work, and I would not be doing this if I thought otherwise. It just has to be real before you can divide it. Build the business first. Then decide who owns it.

Frequently Asked Questions

Is equity the same as salary?

No. Salary is payment for work performed and it is worth its face value on the day it arrives. Equity is a share of ownership, which is a claim on something that has to exist to be worth anything. They appear in the same conversation, which is why they get treated as alternatives, but substituting one for the other is how people end up working for nothing and calling it compensation.

How do I know if my startup is a real business yet?

It has customers who paid money, and it keeps producing revenue without heroics. That is deliberately a low bar and it excludes most of what gets offered as evidence: a waitlist, letters of intent, an unpaid pilot, a funding round, a finished product, press, or an accelerator slot. The one-question version is whether you could sell 10% to a stranger today, for cash, at a price you would both accept.

When should a startup give equity to a developer?

Once there is revenue, and as an addition to pay rather than a replacement for it. Reduced cash plus a share is a normal arrangement. Zero cash plus a share is a request dressed as an offer. Get vesting, a cliff, and terms for either party leaving in writing before any work starts, and ideally work together on something small and paid first.

Should I give equity instead of paying a developer?

It rarely works, because anyone worth hiring can price a lottery ticket and will decline. That leaves you selecting from people who cannot, which is the opposite of what you want. The better move is to make the first version small enough that you can pay for it. Treat the budget as a design constraint on scope rather than a reason to look for a partner.

When is taking equity actually a good idea?

When the deal already works without it. Strip the equity out entirely and ask whether you would accept what remains. If yes, the equity is upside on a real arrangement. Also look for both sides being exposed, a written agreement with vesting before work starts, and a history of having worked together for money. Trust that accumulated is worth more than trust that was granted.