Equity-based pay is often used by the founders of young start-ups who want to grow their businesses but cannot offer big salaries to qualified professionals. Typical arrangements seek to either partially or fully compensate service providers with stock in the company in exchange for hard work.

Depending on where you are at (career- and age-wise), as well as where the company is at –and where it is going– this offer could either be an amazing opportunity, or it could be a total waste of your time and potential. Below are some helpful tips and suggestions to keep in mind when contemplating whether or not to take an equity-based position.

Gauge The Company’s Ability To Sell

Equity compensation can be a lucrative investment of your time if you work for the right business. When deciding whether to accept such an offer, you must perform a sort of risk assessment of the company, including their ability to become profitable, access funding (if necessary), and eventually, to sell.

In business, the most common type of risk analysis one can perform on a company is known as the SWOT analysis. QuickMBA defines a SWOT analysis as examining an organization’s Strengths, Weaknesses, Opportunities, and Threats. A firm’s strengths and weaknesses are determined by factors inside the company, whereas opportunities and threats refer to environmental factors (such as competition and alternatives) outside of the business. After fleshing out this analysis, you should have a better idea of the risk level of the company offering you the position.

You are even are justified in requesting to see some financial reports in order to judge the health of the organization. Run from any executives offering equity-based pay who have a problem showing candidates evidence of company financial success, as they likely have something to hide.

Has This Company Been Funded?

As part of your risk assessment of a company, determine whether the company has been funded. Funded companies are typically a safer bet than bootstrapped ventures for two important reasons. First and foremost, a funded company has more money to work and compete with. Developing a cutting edge product and marketing it effectively is not a cheap process, and having investors to make sure the bills get paid is a great asset for any new business to have.

Second, funding is a seal of approval from a professional investor. This is not to say that all funded companies are bound for success, however venture capitalists are trained to assess businesses by their strengths and weaknesses. If the company was funded, it mean that a professional evaluation was performed on every aspect of the start up and it was determined that they were likely to do well.

Sweat Equity Or Equity With Compensation?

The arrangement of pure equity without additional compensation is considered a fairly risky agreement. The potential pay-out could be quite large since you will likely be offered significant equity if no money is involved. However if the company does not succeed, or takes very long to start making money, you might squander years of time on a botched investment.

A less troublesome arrangement is that of equity with compensation. In this scenario, your expected salary is reduced and augmented with equity. Online start up resource GrowThink.com gives an example of this, stating that if your services are worth $80,000/year, you might be offered $60,000 in salary and $20,000 worth of equity.

Equity As a Performance Incentive

Equity pay can be an powerful motivating force for those working in areas that directly affect the revenue of the business. If your special skills and knowledge have an impact on the sales of goods or services, an equity stake with compensation (as discussed above) is sometimes preferable.

The harder your work the more your equity will be worth. At a certain point, your stock might be valued at far more than your full salary could have ever provided you.

Is The Equity Appropriate For Your Position?

Another way to sniff out a good deal is to see if the equity you are being offered is appropriate for your position. Exceptionally high offeres may be indicative of a hurting company looking to lure in a rescuer without having to pay them money.

Guy Kawasaki, a technology venture capitalist, compiled a list of typical equity amounts for common positions. These are:

• Senior engineer: 0.3% to 0.7%
• Mid-level engineer: 0.2% to 0.4%
• Product manager: 0.2% to 0.3%
• Head Architect: 1.0% to 1.5%
• Vice presidents: 1.5% to 3.0%
• Chief Executive Officer: 5.0% – 10%

If your equity offer falls within these figures, Kawasaki’s research would deem it a reasonable offer. This is not to say you shouldn’t still proceed with caution, however it does give you guidelines to help you spot unreasonable or suspicious requests.

Vested Equity

Before accepting an equity-based pay arrangement, you should determine if the equity is vested, or granted all up front. Vested equity is paid out in increments over time. If you are to receive a 2% equity stake vested over the course of four years, you might receive 0.5% per year along with your regular pay. GrowThink.com reports that this strategy is often used as an incentive to keep employees in their positions for that period of time, with the promise of more equity as a motivating factor to continue working hard.

In order to intensify this motivation, some companies have even taken to offering scaling equity, such that you earn progressively bigger stakes per year until you earn your total amount. Under this arrangement, a 4.5% stake vested over two years might be paid out as 0.5% in the first year, 1% in the second year, 1.2% in the third year, and 1.8% in the fourth year.

What Stage Are You At In Your Career?

Equity-based pay (especially full equity pay), must be considered in the context of your current career. If you are a young professional who has the time and energy to work lots of overtime hours to effectively grow your equity stake, this sort of pay arrangement might be best for you.

Conversely, those have already established themselves in their careers and earn strong salaries might have trouble taking a serious pay cut and working more hours for an equity share. Since equity is only a wise investment if you plan to put long, hard work into raising its value through your actions, these sort of arrangements are befitting of those seeking to establish their career and begin building wealth.

Passion is an unbelievable thing. It’s often what motivates me to get up in the morning, and it definitely what fuels me to be exceptional at my job. You need passion to start something new, to go above and beyond, or even to approach something in a completely original way. Passion is what differentiates a “Financial Analyst II” at Fidelity from Ryan Smith, the founder of TimeOff (a young innovator who works 9-5 to pay rent and 5 to 9 because he is an entrepreneur).

However, as great as passion is and as far as it can take you…you have to be careful. Sometimes this energy and excitement can be blinding. Some people are so tremendously passionate, yet lack the ability to take ownership and really get things done. At times this can even result in overlooking an obstacle so simple, and right in front of you. Coming from someone who is so passionate that he earned the title of “Ambassador of Buzz”; I wanted to share a few insights and common mistakes I have seen entrepreneurs make when trying to take their idea and grow it into a business:

1. Trying to be interesting, and not imperative

I wish I could take credit for this one, but I was lucky enough to learn this lesson from Michael Troiano, a brand/advertising expert here in Boston. People tend to think that because their ideas are interesting they will sell – but that is often not the case. Maybe 10 years ago interesting would have been enough, but consumers aren’t buying just to buy anymore. You now need to be imperative. Your end user might be more worried about if they are going to make payroll next week, or how they are going to pay their rent. Make your value added proposition short, clear, and jump out at them. And if all else fails remember these wise words from Troiano:

“Startups fail because the dog won’t eat the dog food”.

2. Hiring the best technical fit

Seth Godin makes a really interesting point in his new book “LinchPin”, that I think really helps drive this idea home

“In a factory, doing a job that’s not yours is dangerous. Now, if you’re a linchpin, doing a job that’s not getting done is essential”.

A linchpin is a single person or thing that is critical to the whole; a central source of stability and security. As you grow your company you will need to hire people who can help you accomplish your goals. It’s not always hard to find someone who is a technical fit for the job…but remember you are an entrepreneur not a factory owner.

Read the rest of Jonathan’s guest post at Young Entrepreneur.com

This Thursday, July 29th, the Chargify team will be at the Microsoft NERD Center in Cambridge, MA for the 4th annual Boston TECH cocktail event.

As one of the “Showcased Startups”, Chargify will have a table set up to answer questions and network with other entrepreneurs from the area.

Be sure to watch Twitter as they live tweet the event using the hashtag #teckcocktail. As a bonus, anyone who takes a picture with the Chargify bull head and tweets it to @chargify, will get a free t-shirt.

For more information check out the Chargify blog or visit the TECH cocktail EventBrite page.

If you are a marketer in the Boston area and haven’t heard of Future M, you will soon.

Organized by MITX in conjunction with several local companies (Hubspot, Inbound Marketing Summit & MassChallenge to name a few), the goal of the organization is to further business innovation through “a world class experience of events and dialogue”.

What does this mean? Future M intends to bring together some of the best marketing minds in the area and show the world that Boston is the center for discussion.

What makes this special? They intend to do this not through the traditional conference structure or the same old content…but a unique, collaborative effort from the great minds that are here. That could even mean you!

The first event will be taking place October 4-8 but in the meantime, if you have an idea for an event or just want to see the great things they are doing, head over to Future M. Grasshopper Group will be involved in the near future so be on the lookout for more information.

Entrepreneurs often struggle to determine the best state to incorporate their business in. Each state differs in their incentives and penalties for doing business, which makes the decision of where to set up home base an especially weighty one with consequences that apply over the lifetime of the business. Thankfully, this decision need not be arduous to make when one considers the tax and legal climate of several of the most business-friendly states. In order to help you choose where to incorporate your business, we have explored the tax laws and various perks of 8 corporation-loving states in the U.S.

States Without Income Tax

South Dakota

South Dakota is ranked by taxation think tank Tax Foundation as the top state for incorporation in the country, and it isn’t hard to see why. Incorporation authority MaxFilings.com reports that in South Dakota, incorporation provides the owners with legal protection such that personal income and assets cannot be sought to satisfy corporate debts or liabilities.

The state is also known to have to low ongoing filing burdens. This is a big help to early companies who are still firming up their business, as frequent filing requirement can distract focus early on and put a drain on inexperienced executives.

South Dakota hits a real home run when it comes to corporate income tax. In fact, the state enforces no income tax of any kind, corporate or personal. This is an obvious plus to those seeking to avoid draconian state taxes on high-earning businesses. Furthermore, investment guide TheREIBRain.com reports that South Dakota does not enforce any capital gains tax, making it the ideal environment for incorporating.

Wyoming

Similar to  South Dakota, Wyoming’s government website reports that the state has no corporate or personal income taxes of any kind. Owners of Wyoming corporations are responsible only for federal income taxes, the rest is theirs to keep and distribute at will. Wyoming also offers tax exemptions to business purchasing raw materials for production. Business-to-consumer transactions on gasoline and groceries are exempt from state taxes as well, which is a big benefit to entrepreneurs in these areas of business.

Wyoming is another state that TheREIBrain.com reports does not enforce capitals gains tax. Entrepreneurs in real estate investing and debt collection can thrive on deals performed in-state without worrying about the often high capital gains tax that many states require.

Nevada

Nevada is often discussed as one the most popular places in the country to start a business because of their extremely low taxation and commitment to privacy. Nevada is one of the three states in America to enforce no corporate or individual income tax, nor any tax on corporate shares. The Nevada Secretary of State points out that their business court system is one if the best in the country, minimizing time and cost to those summoned.

Nevada’s legislation for issuing shares is one of the nations most permissive, allowing businesses to offer them for capital, services, personal property, or real estate — allowing a high level of creativity. State law grants directors control over the value of these stocks, and as the Secretary of State himself says, “their decision is final.”

Florida

Florida ranks high in a study performed by the Tax Foundation, primarily due to the fact that it lacks lacks the state individual income tax. To help some companies avoid additional corporate income tax, Florida exempts “S” corporations from state taxation. GimmeLaw.com, an online resource of various state laws, reports that Florida’s online business infastructure is the best in the country, offering a search-able database of documents and online filings in seconds.

Software businesses especially benefit from incorporating in Florida. According to Tax Foundation research, Florida is one of several states that provides exemption from taxes for business-to-business software sales. This act allows both software users and retailers of businesses to save big on bulk purchases of expensive software licenses.

States Without Sales Tax

Alaska

If you can stand the climate, Alaska offers a blend of business hospitality that is specifically set up to attract new companies to the area. First and foremost, GovSpot.com reports that the state enforces no individual income taxes, so when the business begins to pay you, all you need to concern yourself with is the corporate and federal income tax.

Perhaps just as important is the fact that the state does not have any sales tax, which allows businesses to decrease costs by buying materials and supplies in-state.

Alaskan LLCs  are reported to offer some of the best protection to their owners in the country.  As reported by AlaskaUSATrust.com, the revised legislation makes it impossible for a court to order the dissolution of an LLC unless it can prove that the company cannot continue to carry on its purpose in business.

New Hampshire

The website of the government of New Hampshire reports that the state does not enforce an individual income tax on earned money. The only state income tax that business owners in the state must pay is on income from interests and dividends, assessed at a flat rate of 5%.

This unique structure is largely why New Hampshire was listed among the best states in the country in terms of individual income taxation. The lack of a sales tax helps to keep costs even lower for businesses in New Hampshire. Companies buying supplies from other companies pay substantially less without the additional sales tax added on.

New Hampshire does tax business profits at a rate of 8.5%. This rate isn’t especially low, considering several states already discussed have no such tax at all. However New Hampshire redeems itself in this aspect by enforcing no capital gains tax.

Montana

Tax Foundation lists Montana as having the sixth best business tax climate in the country. The state offers business owners an escape from sales tax, which is an excellent way for Montana to spur its own economy by encouraging business to do their materials shopping in-state. While having no state sales tax is certainly a perk, it is not the only reason why businesses should consider incorporating in Montana. The state is home to the 10th best property tax and 16th best corporate income taxes in the nation.

Businesses in Montana are eligible for a high number of tax deductions not seen in other states. These credits and deductions include job credits, research and development deductions and credits, investment credits, and deductibles for the cost of goods sold by the business. Additionally, Montana lacks a gross receipts tax (tax on the total revenues of a company), which can further decrease a company’s amount of taxable income.

Delaware

The tiny State of Delaware is the legal home to more than 850,000 businesses, 50% of all publicly-traded companies in the U.S., and 63% of all Fortune 500 companies. What is it that makes Delaware so attractive to corporations? Besides not charging any sales tax, the state offers a comprehensive package of incorporation services including thorough and easily accessible legal guidance from their well-developed legal courts.

Delaware’s relaxed laws, which includes a high cap on the amount of interest lenders can charge borrowers, makes it an extremely popular state especially for banks. But there’s something good for any type of business that is considering planting its roots in Delaware – as long as it’s legal.