I was offered sweat equity by a tech start-up recently: within 15 minutes of the start of the meeting. That has to be a bad sign, right? Why would equity be offered so readily, so quickly, to a stranger? Just because the start-up has no money and want to get something done? The real issue for me is that its really difficult to evaluate the prospects of a start-up. There are simply too many things to consider. I'll explain the main ones:
1) The business plan: I'm not a VC. Even if they showed me the plan (which they offered to do) I still wouldn't understand it. I know my limitations. I know a little about business. I know that I don't know everything. How can I evaluate their plan?
2) The management team: investing in a start-up means investing in the management team. It follows that research needs to be done into the management team to determine their quality, their focus, their track record and so on. Can I afford that research time? Would I ask Kroll Associates to step in a verify their background. Nope.
And as sub-point: start-ups who don't have a Technology guy in their founding team are facing an uphill struggle from the start. They will not be able to ascertain what can and cannot be done, in what time frame, for what cost. Nor will they understand how to compose a solid technology team, motivate them, and achieve outstanding results. This may count against them when they are being reviewed by a potential capitalist.
3) Sweat equity is going to hit my bottom line & I don't know 'when' or 'if' I will ever get a return. That's just bad for my business. Period.
Summary: sweat-equity is wrong for me and my company. Actually, I think its an out-dated concept, harking back to 1999 and the boom of the dot.com years. Perhaps then it was worth a punt so see whether a couple of weeks of simple technology work would return "millions". But let me ask you: do you know any technology guys who got rich on a sweat equity deal? I don't. Maybe that Facebook designer guy did…