We just launched our startup with a designer helping us pro bono to spruce up the design of it. He's asking for compensation now (which is fair) and is willing to trade in his service for equity. Just wondering if it's better to pay than to trade equity for the service.
I've worked with over 1000 business start-ups and the same issues continue to rise to the top of questions entrepreneurs ask. When you are bootstrapping a start-up money is always an issue. Having said that non-essential work must be paid for from your existing capital. I'm amazed that yo car happy to pay for the designer after he agreed to work pro bono. That should not have escalated to a request for compensation.
I agree with William it is not a cut and dried question. It's easy to give away bits and pieces of your company for contract work but you need to keep as much of it as close to your chest as possible. It is also very important that any work is prioritized and price/payment is determined prior to the start of the work.
It's a different story when you are a software co and you need a head designer. I've had clients with this issue and the logical expectation is that the founder would bring the engineer on as a partner or major shareholder.
I think entrepreneurs must be careful with shares early in the process. Without expert help you could get into trouble fast by offering shares to everyone who shows an interest or does work for you.
Try to be careful this is only your First Round financing.