If you work with enough startups and other small companies, one of them will, at some point, present you with an offer of equity in exchange for work. It's a sign that you've truly arrived as a freelancer.

Startup folks use the term "equity" to describe an ownership stake in a company, along with the terms of that ownership. Companies will structure equity in different ways, but you will often hear these three concepts

• Points or Shares: the percentage of the company you'll own once fully vested.
• Vesting: the terms or timeframe under which you'll earn the equity.
• Valuation: the company's estimated value at a specific point in time. A valuation is often determined before—or shortly after—a company takes a round of investment.

It's is an embarrassing over-simplification of a complex topic—people can spend entire careers understanding and structuring deals like these. But at a high level, these are the essential things to know: how much you're going to get, how much it's worth, and when you're going to get it.

Understanding the Offer

Equity can feel enticing on a few different levels. It holds the promise of some massive, life-altering (if vague) payday, and speaks directly to all of our 21st-century, unicorn-startup dreams. Hell, even the word itself sounds savvy, glittering like a glass-and-steel Succession boardroom.

A charismatic founder knows all of this and can sweep you up in the potential of their business. That excitement is palpable, and FOMO is powerful. Those two forces can make equity feel like a sure bet, but it's not.

If you find yourself on the receiving end of this pitch, I can't stress how important it is to take a step back and understand the offer's broader context. When a founder offers you equity in exchange for your work as a freelancer, that offer likely comes from one of two places:

• You are so uniquely skilled at what you do that a founder cannot envision their business succeeding without you involved.
• They don't have money to pay you because they would use it if they did.

If you fall into this first category, tremendous! Make a mental note to ask for more money, and please keep reading. Regardless, we find ourselves in a situation that will require an uncommon level of trust. The founder trusts you to do your best work without the near-term motivation of money. You trust the founder to shepherd their business to a liquidity event against overwhelming odds, so that you can cash in on the promise of that equity.

After all, you're not only foregoing payment for your work—you're also donating the money you might have otherwise made by selling those hours to somebody else. As with any traditional investor, you're making a bet, and the return has to justify the risk.

To help decide whether you should take the offer, consider these three questions:

Do I genuinely believe this business has the potential to succeed? Why does this business resonate with you? Why does it excite you? Can you easily identify the target audiences? Is there documented evidence that the business satisfies a need? Does the business model suggest a logical and concise path to revenue?

Do I genuinely believe this founder has the potential to succeed? Is the founder uniquely qualified or well-versed in the problem they're trying to solve? Do they have industry connections, talent, and capital? Do they have skin in the game and motivation to succeed? Are they building a skilled team around them?

What do I want from this experience? Is your hope to go full-time once the company can support you? To help the founder build a team that could exist without you so that you can continue freelancing? Have you communicated that goal to the founder, and have they acknowledged that goal?

Accepting the Offer

If you have answers to those questions, and you can comfortably take the financial risk, your next step is to translate the promise of that equity into a concrete, mutually understood, well-defined scope of work. You already know what your time is worth, what the equity is (theoretically) worth, and how many hours per week you can contribute, so build your participation around those three facts.

Taking equity isn't just a business transaction but an emotional transaction, as well. You are embarking on a relationship with the founder, and clear communication will be the cornerstone of your success. You must have a shared understanding of what work you'll be doing; without it, you risk time, money, reputation, and a founder who feels abandoned, cheated, or worse.

While it may feel overly formal, a scope of work is an excellent tool to invite this level of communication. Don't be afraid to bring more specificity to the scoping process than you might otherwise. Build lists, write user stories, draw pictures. Be wary of sweeping language like "build our MVP" or "support our go-to-market strategy" without pausing to articulate what those activities entail. Remember, your goal is to get you and the founder on the same page—don't be afraid to employ whatever tools you need to make that happen.

As a final step, make sure that your attorney reviews the terms of the equity and the scope document you've put together. If you don't have an attorney yet, this is an excellent reason to find one. Do not sign anything without an attorney reviewing it first.

Declining the Offer

If you don't have answers to those questions, or you can't write the hours you'd spend off as a loss, then you absolutely should not take the equity.

It's an awkward conversation to have, and it might feel as though you're rejecting not only the company, but the founder personally. Keep your response high-level and concise. Focus on where you are with your business, not where the founder is with theirs. For example:

"I'm flattered by the opportunity, but with other client commitments, I'm not in a place right now where I can dedicate the time that your company deserves. I hope we can find a way to work together in the meantime, and can perhaps revisit this conversation down the road."

The founder will likely be disappointed, but they should hear you. If, after that, they try to coerce or bully you into participating, that's a red flag that the founder may not be a client worth keeping long-term.

What to Read Next

• Hubspot has an excellent overview of startup equity distribution that goes into more detail than I did here. Written from the founder's point of view, but a great place to start if you're not super familiar with the concept.
• VC Fred Wilson has written about the unique role that equity plays in tech/startups, as well as the pros and cons of offering equity as compensation.
• There are a myriad of Reddit threads asking this exact question. Take them all with several grains of salt, but they're a helpful demonstration of other freelancers' experiences.