Businesses with strong growth ambitions often seek independent advice with the aim of accelerating their targeted growth and net worth scaling. Research by many different bodies over the years has shown that companies that use external expertise are more likely to meet their growth targets so it is a positive move to access this expertise.
The assistance sought is often "business improvement" based but can include some or all of the following disciplines: product/services development, sales and marketing, operations, finance, legal and business scaling services. The expertise required is by definition that which is not present in the current management team and as such the dilemma is often how to pay for it. The temptation for many ambition-rich but cash-poor businesses is to offer share allocations or directorships in lieu of a cash payment.
Whatever the services engaged there are some Golden Rules to apply when considering granting equity or directorships for such services:
- The name or reputation of individuals appointed is unimportant – your guiding principle should be will the individual(s) add to your Company's bottom line or net worth?
- Share allocations should not be given as an "entry fee"
- Share allocations should accrue as agreed company performance targets are achieved (revenues, efficiency/cost savings, profitability and net worth).
Allocating equity as a "gift" for services provided without performance measures will create issues for future investment. When companies seek finance funders will, understandably, want to know who the current shareholders are and on what basis their shareholdings were granted. Investors and funders will want to be sure that those allocations and the involvement and ability of the individuals in the team are fully aligned with the plans for the business both now and, more importantly, as the business expands.
It is also important that the external expertise brought into the Company accepts the same performance conditions and targets that are in place others for the sake of team harmony.
Article by Gavin R Form of Generate Ventures North LLP .
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