I bet the first thing that comes to your mind at the mention of the word "financing" is money, right? However, in this article I would like to share some ideas about intellectual capital financing. I can't offer you a magic dust, i.e. start-ups will need the support of Friends, Family & Fools, but being an early stage business does not exclude the possibility of having a slightly more sophisticated financial-legal structure than most start-ups and, in turn, you can save yourself from future conflicts and impact investors.
Have you heard of "sweat equity"? Sweat equity, as opposed to an equity contribution, is the contribution of a person in the form of effort and labor to build a business and increase its value, in exchange for compensation in the form of shares in the company. In general, a business has co-founders. One of them can provide capital and attract investors; the other one, the main idea, his knowledge and professional capacity, manage paperwork, place the product, etc. without being rewarded for months for building the business.
Who finances the company: founder A with his capital, or founder B with his work? Consequently, who is the owner of the company? I would like to remind you of a saying by Benjamin Franklin: "Remember that time is money". I recommend this lecture to understand more about the topic in question.
What is the value of sweat equity? Searching for the answer to this question puts founder A, who considers himself as the sole owner of the business (no doubt), in the shoes of a future investor. Why? Because if he opts for this type of compensation in favor of Founder B or in favor of a key collaborator of the business, then he has to ask himself at least: How much do I need his work? Can I and do I want to project my business with this person in the long term? Undoubtedly, the added value of "sweat equity" should be valued and measurable in the long term. (In the U.S. even legal advisors and accountants participate in this type of compensation; in Mexico, we have recently started with this practice).
The type of legal entity Sweat equity as a form of compensation requires an appropriate legal entity, I recommend either the S.A. or the S.A.P.I. The rules on how to grant this compensation should be included in the articles of incorporation or bylaws. A word of advice: do not accept pre-written bylaws. In addition, it is advisable that these contain, among other essential clauses: the possibility of redeeming the shares granted as part of the compensation, an anti-dilution clause, as well as considering the tax consequences depending on whether the compensation is granted when the company is incorporated or after its incorporation.