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Under what circumstances is pay-to-play appropriate and/or customary?

Scenario: A founder with an idea recruits a team of co-founders who will work for equity. When it is appropriate and/or customary to expect cash from such co-founders in return for company equity?

4 Replies

Jaeson Cardiff
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Jaeson Cardiff Entrepreneur
Cofounder at CleanO2 Carbon Capture Technologies
I would suspect that every circumstance is different. For us, it was after the shares were transferred upon completing the initial service agreement.
Simon Chatfield
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Simon Chatfield Entrepreneur
Owner at The Chatfield Group
So you've recruited co-founders and promised them sweat equity and now you're saying they need to purchase that same equity? If that's the case, then shame on you for doing a bait and switch, and look out for law suits. If you've given out the equity and are cash poor, then you can ask for an infusion of cash from each owner, and if they cannot pony up their share of cash in proportion to their ownership in the company, they can see their shares go down while others who can put more in effectively 'purchase' the other owners shares. You'll need an attorney for this.
Karl Schulmeisters
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Karl Schulmeisters Entrepreneur
CTO ClearRoadmap
As Simon said
are you looking for investors?
CoFounders?
Both?
be clear up front
Jaeson Cardiff
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Jaeson Cardiff Entrepreneur
Cofounder at CleanO2 Carbon Capture Technologies
Perhaps I should have better clarified my earlier comment. We approached two people we wanted as part of our team. We offered them each an equity stake that would give them equal partnership in our firm. By law, the transfer of shares must be given in exchange for something. Enter the servuce agreement. We agree to give said equity in exchange for an agreed service. We also agreed that the work already performed would act as the sweat equity in exchange for the shares. The deal was completed and the papers signed. As we move forward, there are obvious costs associated with the tail end of R&D as well as a few minor corporate costs which we now all share equally. If the OP is referring to a single large ask from the new team members then that is different. If the ask is in reference to ongoing costs associated with getting the venture off the ground then why shouldn't they pay? As I mentioned earlier, every circumstance is different.
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