Stefan Georgi explains why freelancers should generally avoid taking equity as compensation. He argues equity rarely pays out (liquidation events are uncommon), distributions are intermittent and subject to owner decisions or dilution/capital calls, and profit-based shares are easily manipulated—so freelancers are better off seeking royalties, per-sale fees, or revenue shares (simple gross-revenue formulas) to ensure consistent payment.
Questions this video answers
10% equity.
Company sells for $100 million; 10% equity yields $10 million.
Company profit example: $500,000 with 50% distribution; 10% equity yields $25,000.
Company needed $86,000 put into the business; 10% owner should provide $8,600.
Chapters
The equity trap. So I want to talk to you about why having equity in the business is really not that exciting or even a good idea for most freelancers. Why? Somebody who offers you equity is at best, probably inexperienced and at worst, potentially just trying to rip you off. So what's the issue with equity? I think we've all been influenced by Shark Tank and things like that, and we see where the sharks take off for money and then get equity in the company, percentage of ownership, and it's exciting, like equity. Right. But in most cases, equity is pretty meaningless and even a burden and not something that you actually want. The reason why is pretty simple, actually. Think about it this way. Just because you have equity in a company doesn't mean you get money from that company. Right? So if you have equity in a company, you're typically going to get it paid out in, like, distributions or you're going to make money during a liquidation event. And I'll talk about both. So start with the liquidation event, because that's the easiest. Say somebody gives you 10% equity in their company. The company sells for $100 million, you get $10 million, you're set for life. And you're like, oh, my God, equity is amazing. Who wouldn't want that, right? But the reality is very few companies are ever going to sell, period, let alone for a really large amount of money. So for every one company you hear about that sells for some big windfall, there's another 10,000 companies that never sell at all unless the company sells. In that case, you don't get that big windfall. That's one part of it. The other part, though, is the distribution. What are distributions? Well, they're. When the owners of the company are going to take out money to pay themselves. That could happen quarterly or annually or monthly or whatever it is. Sometimes. Sometimes it's put into their operating agreement. So there's a clear kind of framework of at the end of each quarter, we look at our profit and take 50% of the profit, pay ourselves out. The other 50% stays in the business for XYZ reasons. Cool. Great. So say that there's. That is the setup. You've got 10%, company has a million dollars in profit at the end of the quarter. It's a lot. Let's say it has 500,000. Pay the quarter, you have 10%, they pay out $250,000. They pay out half of that. Right. As a distribution, you have 10%, you get $25,000. Awesome. So wouldn't you want that to happen? That Sounds great to me. Right? Well, here's the deal. Even in a case like that, this only happens if the company actually does pay out the distribution. So what if there's no profit? You may think company's super profitable, and it may be, but then one bad quarter comes along and they don't have any, you know, anything to pay out, so you don't get paid anything. Or it could be that the company, yeah. Even loses money. And if you have equity, like as a partner, then you potentially should be putting up money to help keep the company afloat. So, for example, one of my businesses was like, really nice profit, cash flow positive for several months in a row. And then like in May, I think we netted like 360,000, something like that. We've been netting money like every month before that. Awesome. Then June came, things completely changed. We were still, like, profitable. However, we were cash flow negative because we had some money go into banking reserves, things like that. And so instead of having any money to take out, we actually had to put $86,000 into the business. Well, if you own 10% of the company, then you should be putting $8,600 of that money that needs to come into the company. Right. Like a capital call. And really, ultimately for company, if you can't do that, then you should be having your equity diluted potentially. Now, you know, it may not happen that way. Maybe you have a cool owner, so you're not going to dilute your equity and it's going to be more informal. But either way, you're certainly not getting paid out on that. Right. And then say, even if you're like 50, 50 partners or somebody, and you get 50% equity, which you probably don't want, unless you really want to run half of a business, still have responsibility, but say you are even then let's say you guys profit $200,000 and you're like, great, let's take out that money as a distribution. I'll take 100,000, you take 100,000. Your partner's like, oh, no, I think the recession is coming. I wanted to save this money and put it into, you know, like a fund for a rainy day fund. And now you guys are at odds with each other because one of you wants to take a distribution, one of you doesn't. And unless you've got something in your operating agreement, which you may or may not, it becomes a huge source of conflict. And even if you do, it can still create a lot of tension. So given all of this equity really isn't that Great. As a freelancer, right now, if you're an employee, you're getting hired for some startup company, they're paying you a good salary and they're going to give you a little bit of equity. Sure, why not? Because you're playing with house money, so there's no real reason to not do it at that point. But in most cases, especially as a freelancer, you're better served not having equity. So if you're not gonna have equity, what would you want to have instead? Right? Like, what's better than equity? And the answer is just gonna turn on, go back this way now. Like royalties. So the best thing you could do is getting like a flat amount of money or a flat fee. So say, for example, for every sale of a physical product, you know, you get a dollar or dollar three or even for an informational product, a course, whatever it is, for every sale that happens, you get like a, you know, a couple dollars, because then you're getting paid no matter what. You know, the company can be making sales but not be profitable. And it doesn't matter, you still get paid. So it's significantly better for that reason. Right. Another option is to do a revenue share, because the same concept there, you're getting a percentage of revenue. It doesn't matter if the company is actually profitable or not, what they do with their profit. You're just getting paid out on the. On the revenue. So. So I would take a 5% revenue share over a 20% profit share every single time. Because the profit is really subjective. That's the thing, right? When you think about profit, it's like, okay, what is profit, right? So say you're getting a percentage of net profit. Super sketchy, right? Even as like a royalty thing, it's a percentage of net profit. Because net profit is very subjective. So if I give you 20% profit share and I have $300,000 in profit, right? And then I'm like, well, I really want to buy a Ferrari. I'm going to do it as a corporate expense, as an advertising cost. I'll put a big wrap around it that says Stefan's Ferrari on it. And you know, I think that's important for the business. So that then cuts out from the profit, potentially, right? I've then cut out all the profit. Maybe there's like 5,000 left. I'm like, hey, cool, you get 10% of 5,000. Here's your $500 check. You know, even though we actually did $300,000. So can you do a profit share? Yeah, for sure. But I would do it like a gross profit. So something really simple, the simpler the better. So for example, maybe it's just like gross sales minus refunds, something like that. Sure, if you want to do something like that, that can work. But overall profit share is not ideal either, really. Prefer just to get like a flat per sale, you know, like a flat royalty per sale. Or you can get a revenue share that works. So those are some of the reasons why again, I think equity is super overrated. It's a trap. People often use it for freelancers to try and get them to work for free for really cheap. Because if I was equity, we get excited about that. Like oh my gosh, equity, you know, that's amazing. I'm an own part of this company, I'm a business owner. But would you rather just sound cool and have a cool kind of title for yourself on paper or actually make money and you know, move yourself forward and improve your life? It's the same thing with revenues and other trap by the way too. Because people get all into like revenue numbers when they first start out as entrepreneurs and then revenue doesn't mean crap if you're not profitable and you're losing money and all that. So but we hear it first like, oh my God, I did a million dollars in revenue, or I did $10 million in revenue or whatever it is. Doesn't mean crap if you can't pay the bills and your company's going under. And for the same reason that entrepreneurs get stuck in that, then the people who have small amounts of equity find out really quickly as well that revenue doesn't actually mean very much. So equity trap for most freelancers, I really would recommend staying away from that, not being motivated by it and instead focusing on royalties and things that are going to actually get you paid consistently, no matter how the business is doing. And by the way, if you found this video helpful or useful, please make sure to like leave a comment with any questions you have or just let me know, hey, I appreciated it and subscribe to my channel, share up other stuff like that. Help me get my content out there. So cool. Thank you.
