What should I know about equity as compensation?

I am considering doing some work for a start up for equity only. I know next to nothing about this kind of thing and I'm wondering what specific things should I ask before entering into any kind of deal?

The critical question is the one you ask yourself:

If you received compensation for this work-- would you turn around and invest it in this company? From this question you will determine if you want to be an investor in the company. My assumption is that you will want to know all of the same type of questions any other investor would, like:

• How reasonable is the plan?
• How feasabily in the plan?
• How risky is the plan?
• What equity do i get? When?
• What valuation is that equity based on? What is the basis of the valuation?
• Who is the management team?
• Who am I sharing equity with?
• How does this investment compare to my other investments?
• How is my investment secured?

The list of course goes on, but you are being asked to invest your time, lost opportunity to earn other revenue, and dip into your other savings/investments to pay your bills while you work for equity. Choosing to work for equity means that you believe that his is the best source of your investment at this time.

• Is equity based on number of shares or percentages ?
• What is the vesting structure ?
• What are the other conditions ? based on performance ? success(definition of success) ?
• No Cash payments down the road ?

Are you entering in as a co-founder? You may want to check out the co-founder equity calculator.

Welcome to the Co-Founder Equity Calculator! It is based on almost 3
years of one-on-one discussions with entrepreneurs through the
co-founders meetup, the founder conference and advising various
founders.