Working for Equity: A Practical Guide for Early‑Stage Startups

Sweat Equity

(The above photo was taken at the top of Victoria Peak in Hong Hong. My walk up there was a metaphor for the content of this blog post. Started off full of enthusiasm. The climb was a lot harder and took a lot longer than I imagined. I reached the top literally drenched in sweat - but made it in time for the sunset. Worth every step!)

In the early stage of startup life, cash is always tight, or even non-existent. I’m often asked if I would be willing to exchange part or all my fees for equity. My answer is ‘potentially yes’, but it depends on a few things. I also have a finite amount of time to work – so with my available time for equity-based working being very limited – I will naturally pick the projects that feel like they will give me the best return.

I have put this guide together from my experience and a few other independent sources so that you can consider carefully these important factors before we discuss the specifics of your startup.

Why Consider Working for Equity?

Working for equity can be a powerful way for both startups and experienced advisors to collaborate when cash is limited. For founders, it provides access to commercial, technical, or operational expertise that would otherwise be unaffordable. For advisors, it creates the possibility of longer‑term upside and the satisfaction of materially contributing to a company’s journey.

However, early‑stage equity is inherently risky. Most startups do not reach a liquidity event, and even those that do often experience significant dilution along the way. Advisors exchanging services for equity are therefore taking on a level of uncertainty that far exceeds normal fee‑for‑service arrangements. This imbalance underscores the need for transparent, fair structures that acknowledge both the value being provided and the risks assumed.

When thoughtfully designed, equity‑based arrangements can: - Align incentives between founders and advisors - Enable access to high‑value expertise during capital‑scarce periods - Build committed, longer‑term relationships

But they must recognise that advisors are deferring guaranteed income in exchange for an uncertain future return. As a result, equity should be priced to reflect its risk profile, vest over time, and be proportionate to scope and contribution.

Why Equity Is Not the Same as Cash

If a consultant or contractor would ordinarily charge £10,000 for a piece of work, it may be tempting to assume that £10,000 of equity is an equivalent exchange.

However, equity: - Is high‑risk — most startups fail - Is illiquid — it may never be sold, or only after many years - Is uncertain in value — future dilution reduces ownership – may be vested — not earned immediately

Because of these factors, £10,000 of equity is not worth £10,000 of cash today. The equity represents both higher risk and delayed/uncertain value.

This is why a direct £‑for‑£ exchange is rarely fair for the contributor.

Introducing the Risk Multiplier

To reflect the risk and timing involved, many practitioners apply a risk multiplier to the cash value of the work being exchanged for equity.

This multiplier accounts for: - Probability of failure - Time to liquidity - Expected dilution - Stage of company - Dependency on the contributor

By applying a multiplier, both parties recognise that early‑stage equity carries substantially higher risk than cash.

Rule‑of‑Thumb Multiplier Ranges

Stage Typical Multiplier

Idea / Pre‑Product 3×–5×

MVP / Early Traction 2×–4×

Seed / Revenue 1.5×–3×

Series A+ 1×–2×

These ranges reflect that the earlier the startup, the higher the risk — and the greater the adjustment required.

A Blended Approach: How to Calculate Fair Equity

Below is a simple, practical 3-step approach that many contributors and founders use:

An illustration

1)        Determine the foregone fee
Example: £10,000

2)        Apply the risk multiplier
Example: ×3 → £30,000 (risk‑adjusted value)

3)        Divide by the company’s valuation
Example: valuation £2,000,000
£30,000 / £2,000,000 = 1.5%

Proposed allocation in this example: ~1.5% equity in return for the project work delivered

Summary

Offering equity in exchange for commercialisation support can be mutually beneficial, but only when structured thoughtfully. Equity is not equivalent to cash and must reflect risk, illiquidity, and time‑to‑value.

The core formula: > Foregone fee → apply risk multiplier → divide by valuation → check against market standards

This approach keeps the process fair, transparent, and aligned with common market practice.

If you’d like to discuss a work for equity arrangement for your startup, please get in touch.

References

• Bhandari, A., & McGrattan, E. (2021). Sweat Equity in U.S. Private Business. Quarterly Journal of Economics, 136(2), 727-781. DOI:10.1093/qje/qjaa041. This paper develops a theory of sweat equity—the value of business owners’ time and expenses to build intangible assets—finding that aggregate sweat equity in private business equals roughly 1.2 × U.S. GDP. OUP Academic+1

• Marquis, C., & Margolis, J. D. (2012, December). How Much Is Sweat Equity Worth? Harvard Business Review. This case-based study explores the negotiation of equity stakes based on non-monetary contributions. Harvard Business School

• Hendricks, K., et al. “Distributing Start-Up Equity: A Theoretical Foundation for an Entrepreneurial Refined Model” (2015). Journal of Small Business Management. (Note: citation approximate – the article discusses distribution of startup equity considering both monetary and ‘sweat’ contributions.) Taylor & Francis Online

• SeedLegals. (2021, October 21). Advisory Shares: How much equity should I give an advisor? This is a practitioner guide with actual equity-allocation benchmarks (e.g., ~1% for advisors) supporting typical ranges. SeedLegals

• Carta. (2025, June 5). Advisory shares: A complete guide for founders. This resource describes structure of advisory shares, vesting, dilution and non-cash compensation in early-stage companies. Carta

• FoundersNetwork. Advisor Startup Equity: What you need to know. This article states a typical advisor gets between 0.25%-1% equity and discusses how stage / involvement affects the grant. foundersnetwork.com