When you're starting a business you want to attract the best people. At the early stages you may have a big giant dream but you're probably not thinking five or ten years down the road.
When I first started in business my dad advised me to never give up equity. If you want to incentives for people, you can do it in other ways. (Incentives are important.) But unless your intention is to go public one day equity can become a headache.
Early in my career when I had no money it was tempting to say to someone, "Ill pay you half of what you need but I'll give you X% of the business." I can site dozens of people who I considering doing this with at the early stages of my business. I was in love with most of them and their ability. Most I hired anyway, without equity, and today three decades later only a couple are still working for me. People move on, people don't work out, sometimes people are bad news.
If I had given equity to these people I would have had to buy them out before they left. Many who promised to be superstars were not. Unless that equity had been performance based it would have been a disaster. Not only would I have to pay an attorney to unwind their equity, I'd have to pay to have the stock managed. Not a burden a small company needs.
Most of the people I would have given equity to at one time would not be people I want to have as share holders today. There are exceptions. I've been fortunate to have some brilliant people. But everyone moves on at some point and unless there is a liquidation event (sale or going public) you end up paying them back for their shares at current company value. Sometimes it happens when you can't afford to put out the cash even if your value is higher.
I've watch friends do it and regret it. One friend gave up 49% to someone who turned out to be a deadbeat. He went away but they never solved the stock issue. Years later when my friends company was valuable the guy showed up, took 49% of his business value and the cash out essentially killed his business because he could not afford to put out the cash, which he needed to run his business. He lost the lawsuit, had to put out the cash, which he borrowed against his company, and he had high legal fees. Ultimately it destroyed him and his business all because of his initial good intentions. They were great friends at the time but he gave equity to a guy who never pulled his weight. Big mistake.
Equity is great for companies with a fast path to going public, great for venture funded businesses, but in a small business environment where you intend to build, grow and operate the business its not the best idea.
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