1. Stock options in exchange for a lower retainer
More than a few startups offer stock options in exchange for a lower retainer. At first, the idea of getting a piece of the action, especially with a promising early stage startup, is appealing. Some freelancers report positive experiences with this business model. Others do not. Here are ways it can go awry.
The start-up fails
While many of us want to be part of the next big thing, the reality is that tech startups have a notoriously high failure rate. Depending on the source, the startup failure rate hovers around 75 percent, sometimes higher.
The valuation gets diluted
After several rounds of funding or any missteps in product development or marketing, for example, and the value of the stock might decrease.
The company gets acquired
When it comes time to settle the terms of the acquisition, the freelancer holding on to a few options might not get the big payout that they anticipated. It all depends on how much the acquiring company is willing to pay.
The freelancer's contract isn't renewed
Also, it’s can be challenging to compare the value of your time with the company’s perceived value of their equity.
Let’s say you lower your billing rate. How much is a fair amount in exchange for options? That’s not to say it can’t be done, but you need to be in full agreement with the client about the terms and have it in writing. And you need to have enough income to take the risk.
It can be flattering when a client offers options. Yet many freelancers would say the options should not replace earnings.
One way that the stock option or equity scenario can work is if it’s a bonus on top of being fairly compensated for the work you’re doing, and you have legal and binding documentation.
It’s wise for the freelancer and the client to engage in a short-term contract to see how things go before signing a longer-term commitment. Yet there are three scenarios to be wary of and if you’re presented with any of them, seriously consider how badly you want the business.
One way the audition plays out is when a prospect tells you they’ve been burned by an agency or freelancer before and don’t want to repeat the situation. They propose you tackle a small assignment for free to show off your skills and then they’ll be ready to talk about a budget and contract.
You might be presented with a barter deal where a potential client offers their product or services in exchange for yours. Bartering can work for some freelancers, but it’s hard to compare the value of the exchange. In the best situation, you can work out a barter plus payment.
A Stalled Contract
A third way the audition can go is by the client holding up the signed contract by saying it’s stalled internally yet continuing to give assignments to the freelancer under a verbal agreement. In an effort to make a good impression, the freelancer does a bang up job while waiting for the contract. In this scenario, the client can get a free test drive and could refuse payment. Without a signed contract, there’s nothing protecting the freelancer. While the freelancer will likely get the signed contract after they’ve proven themselves, it could feel like a hollow victory.
3. The potential future raise
Organic client growth is one of the best ways to increase your revenue. Once you prove your value to the client, many of them will extend your contract, add on new responsibilities and increase your retainer. It’s all good, especially since you didn’t have to spend non-billable time hunting down new business. Yet there is an exception to this rule.
If a prospect promises future raises at the early pitching stages – especially when you don’t have a contract in place – be very careful about moving forward with the engagement. We’re not talking about an expanded scope down the line. Rather, it’s the prospect’s dialog about underpaying for your services today to inspire you to knock it out of the park so you earn that raise in the future. Think about it: If the client doesn’t want to pay fair market value for your services today, why would they pay you more in the future?
The situations outlined above are based on real world experiences that aren’t widespread, but do happen often enough that they’re worth addressing. It’s not to dissuade you from pursuing these types of opportunities if they’re otherwise interesting and you need the work. Just remember to keep your eyes wide open and always negotiate for a mutually beneficial arrangement. If you can’t come to an agreement with the prospect, spend your time focusing on new business development and securing clients that are more aligned with your skills and values.