Is it reasonable to disclose historic financials when paying for services in equity?

Wow...don't have advice...but not surprised by CEO's attitude.

Since the company asked the contractor to accept equity as payment, it's akin to asking them to "invest" in the company. I would say the contractor's request is reasonable, because, were I to invest in a company, I would need all those 3 documents to be able to gauge the financial strength of the company I'm committing to.... Just my two cents...

The request is reasonable.

But up to the CEO whether to accommodate it, and up to the contractor whether to accept work if the request is not accommodated.

The contractor position is reasonable. He will provide work, and accepts equity for payment. He must have all reasonable elements to evaluate the value of the equity and the risk it represents.

If the CEO refuses, it certainly mean he/she has something to hide. Or he/she is afraid of the contractor final decision. If he/she does not want to disclose more documents, there is a simple solution: pay the contractor with cash. A bank can provide cash... but will request all financial document before lending it. So if this CEO proposes equity, it is certainly because no bank would accept to lend money.

Hi there,

4 X founder. (2 fails, 2 wins). Spent 2 years as consultant between.

Like anything, supply and demand. But when I did consult and equity was a portion of the compensation, I conducted due diligence as if I were investing. And more, I would charge a higher daily rate (to try and compensate for the risk) when there was equity involved. That higher percentage changed based on the perceived risk I saw in the business. As did my ration of cash and stock.

Also, to be clear, a note is NOT equity yet. As a consultant, if you are playing a major role in the increase in enterprise valuation between note and actual equity financing, the terms or your note need to be massively better than other investors at that time. Sometimes being added into the founder cap table if that valuable.

Note, as a founder, I never hired anyone but counsel for equity. Everyone else was either cash, or brought them on full time.

All supply and demand, but hopefully useful two cents.

I don't agree with most of those commenting on this topic. My advice: dump the contractor immediately and have a talk with the CEO about trading equity for services.

I'm a Silicon Valley based founder of multiple start-ups, had a few successful exits, and I'm an active angel investor.

First, the contractor doesn't know what he's talking about. If he did, he'd be asking for a cap table instead of balance sheets, P&Ls or historic financials.

The fact you've been asked to mediate an agreement at this early stage is a bad sign and evidence the contractor will be a problem in the future.

Tell the CEO to find someone who understands risk. There are contractors large and small out there who can do the job, understand equity exchanges, and will work with the company.

Second, don't equivocate the contractor's risk with that of an investor. Investors put their money up and bet on the team scoring a win. They don't have the ability to change the outcome of their investment (this applies even to VCs). Conversely, a contractor has work product and input. He can help shape the success or failure of the company - he should be part of the team, not an "investor".

Finally, the reason any of us take risk with a start-up is because of excitement. We get excited about a team committed to making the venture succeed against all odds. We get excited about growth, the market potential, the user base. I've yet to find a VC or investor get excited about historic financials.

Closing point: Slack just raised $180 Million at a $1.1 Billion valuation. Started in February, the tech press says they have about 125,000 users and a phenomenal growth rate. I doubt any of those involved talk about Slack's P&L or balance sheet - obviously Slack is too new to have historic financials.

Slack isn't successful because of the valuation, the valuation is because many believe the company will succeed. This applies to all start-ups.

If a contractor doesn't have this kind of faith, find someone who does.

(from OP) Thanks for the helpful responses.

It appears that nobody here feels that the contractor's request is unreasonable in the context of normal due diligence for an investment.

It also appears that deals involving "no questions asked" equity as compensation are not uncommon either, possibly due to the naivete of the receiver or purchaser of such equity.

It's possible that in this situation the CEO assumed that this would be a "no questions asked" scenario. The contractor, though not a professional investor, is not a naive investor and the CEO's claim that the due diligence request is extraordinary is what ended up bringing the issue to me.

It may be best for the parties to renegotiate the terms of the engagement at this time now that both sides are more aware each other's expectations and concerns.

The CEO should re-evaluate and formalize the information rights of the equity they offer to contractors. If necessary, and the CEO can't pay cash to this contractor, the CEO should find a resource who will contractually agree to accepting equity compensation with specific limitations on information rights.

The contractor, on the other hand, should not accept a promise of equity without reasonable information rights agreed to in writing. It may not be productive or beneficial to the relationship for the contractor to continue to pursue equity compensation with this client given the CEO's challenges around the disclosure issue (the contractor feels like she was misled), so the contractor is probably best off negotiating for cash or finding a new client.

Sounds like a tough position for the contractor. Agree that it is very reasonable for contractor to request for financials (historic) as part of the due diligence to accept equity as payment for services. I think the question now is if you accept equity, what do you legally give up. Meaning, if the company does go belly-up, are you better off legally as an "unpaid contractor" under your service terms or and "shareholder", which basically puts you at the bottom of the liquidation process.

I agree with the commentary above that asking for financials is somewhat not reasonable. The primary reason I would see for that is for said consultant to get an idea if the company is going to at least survive for a while.

I do agree that accepting equity for consulting work requires investigation just as if investing, but I will say that cap table is something I wouldn't give out.

Cap tables aren't published for a reason - many investors - particularly at the angel level - do not want their involvement made public except on their own terms. Doing so exposes them to incredible amounts of spam much like being published as a lottery winner.

I will further add, though, that acceptance of equity in lieu of cash explicitly trades potential upside for short term cash gain. Questions which allow the investor and/or equity recipient to understand the potential upside/downside being exchanged for said cash are reasonable, but should not over-ride other concerns like investor privacy or take up ridiculous amounts of corporate officer time.