We are a start-up and cash is tight. Can I pay suppliers with stock instead of cash?

The short answer, in attorney-speak, is "Yes, you can pay suppliers and contractors with stock (i.e., "stock-for-services", BUT...."

Under the federal securities laws, when you issue stock for services or to pay for products, you are considered to be selling stock. So either the stock has to be registered with the Securities and Exchange Commission ("SEC"), or you must qualify for an exemption from registration.

If cash is tight, you probably are not in a position to incur the cost of a registration of securities for public sale. That means you will need to comply with the requirements for an "exempt sale" under the Securities Act and the relevant Rules. You can do this by means of a contract that includes the same disclosures that you would make if you were selling unregistered stock for cash.

Often, a supplier or vendor who believes in your company and is optimistic about its future prospects will be willing to accept at least part of its payment in stock. Most often, the vendor will want to receive a cash payment for some or all of its out-of-pocket cost, and will accept stock for the portion of its bill that represents profit. The vendor is betting on your success and hopes eventually to realize a gain in excess of the value of the goods or services rendered. If the vendor is really high on you, it may accept stock for the full amount, especially if your company's stock is already listed on the over-the-counter market ("OTC", or Pink Sheets).

But "unregistered" stock is subject to a minimum holding period before it can be resold, so the vendor is taking a substantial risk that your company will thrive and that at some future point there will be a market for the stock so that it can liquidate the shares, hopefully for more than their value at the time it accepted them as payment.

In other words, the vendor is taking a risk equal to the risk of investors who may buy your unregistered stock for cash. So according to the federal law, you must disclose to the vendor adequate information about the company's management, finances, and investment risks so that the vendor can make an informed decision before agreeing to accept your stock in lieu of cash payment. Failing to make adequate disclosures will leave your company vulnerable to the vendor's claim for rescission of the contract, and perhaps even for securities fraud or negligent misrepresentation.

Issuing stock instead of paying out cash can be a great way of financing a start-up business, but you need to be careful. If issuing stock-for-services or stock-for-goods is part of your business plan, be sure to call us and have us draft an agreement that will protect you from adverse claims in the future.