Let's face it, opportunities like Snapchat or facebook come very rear and chances of having a startup fail in its first 18months is very high!
Gregory, I had gone through similar situation many times over. We have assisted a lot of pre-funded startups sharing their vision and invested in them with an expectation to earn equity and cash over the period of time. Invariably, unless there is a certain portion of cash exchange that happens at the onset of the project, chances of failure is just a matter of "when". As Mike suggested, if you are sharing the vision with a startup and offering services in exchange of equity; you are in a way an Angel investor.
For us what has worked in past few years is doing a mix:
- Get some cash portion in exchange. Let's say you believe the investment to participate in a given opportunity is $150K then get atleast 20% of it in cash paid as 50% of it as mobilization cost and balance in couple/few months once you hit certain milestones. Put some timeframe in mind when you expect full recovery of your deferred cash component.
- Whatever be the valuation suggested by the startup; consider 80% of it and based on your deferred cash component and the value that you bring to the team, calculate the equity component. Should the startup come even 80% close to what you suggested then I would say it is a fair deal.
- Always keep an exit strategy; in case the startup is not able to generate enough cash in a given time frame - either negotiate on higher equity stake or certain portion of cash component be paid with a proper payment schedule.
This will help you control your risk and yet participate properly in any startup opportunity. Just don't make a 100% equity participation.