Steve JabaraPresident at Grand Rapids Gold, is a driven and innovative entrepreneur.
Ideally, everyone wins when a company enters into an equity services agreement with an entrepreneur. Those on both sides of the equation are all in it. Their goals are aligned. The entrepreneur receives a valuable service and if the supplier does his job, he too will reap the benefits in the long term.
Everyone is locked. Everyone benefits from the “human, emotional element of building something great together,” as Alain Sylvain, CEO and founder of Sylvain Labs, once wrote for Inc. Sylvain calls it “a great equalizer” because “it changes the way companies value their time.” He emphasizes a “partnership” where the two parties must succeed together rather than treat it as a “transaction”.
Perhaps the most extreme example of how a service provider can benefit from such a partnership is that of David Choe. The Los Angeles-based Korean-American artist was hired by Sean Parker, then-President of Facebook, in 2005 to create murals on the walls of the company’s Silicon Valley headquarters at the time. Instead of taking $60,000 in cash, Choe chose stock options instead, even though he would later say that he considered Facebook “a joke” at that moment. He would learn differently, as many of us would learn. And when the social media platform went public in 2012, its share was worth $200 million.
Again, that’s certainly a best-case scenario. But as the CEO of a Detroit-based advertising agency I learned, many companies can reap the benefits of a services-for-equity approach. My company invests a certain amount of resources in a startup in exchange for an agreed upon percentage of their company, with the belief that if you do your job well, both parties will benefit.
Others have the same mindset. Dan Hussain, founder and president of the American Patent Agency, wrote in a 2019 piece businessroundups.org that he invested “just over $1,000” in his company when it launched in 2006. Thirteen years later, his portfolio was over $1 million. He added that he finds it particularly inspiring when he comes across a startup that shows promise for the future (as opposed to one that’s stagnant in the present), admitting that while there will likely be initial growing pains, “exponential success” is a very real possibility.
Best practices for an equity services business model
In a piece for Score.org, investor and author Hal Shelton emphasized that suppliers must do their due diligence by reviewing the brand’s data to determine the current financial position and assess the business plan and financial forecast. To that end, I have always found that a capitalization table is invaluable in this form of business arrangement as it provides an overview of ownership percentages between investors and the entrepreneur in start-up companies. It is also a useful tool to determine the correct valuations.
It is also important to keep in mind that most startups that use services for equity are typically low on cash, so it is critical to get all the necessary information in a company’s financial forecast to ensure its profitability, since this model is designed for the big picture.
Furthermore, it is essential to gain a full understanding of the brand’s management structure and decision-making process so that the service provider can be sure that its interests are protected. The only real decisions you can make in these types of models are marketing, so if the organization you’re trading services for stocks with doesn’t have solid leadership, it’s usually best to avoid making such an investment.
Another caveat: having your own team lined up and providing services (i.e. fulfilling your part of the bargain) is also important, as showing the contribution to the big picture is vital to not losing future profits.
The thing is, this is a two-way relationship. There is a give and take between the brand and the service provider. Both parties need to understand that and enter into the partnership with eyes wide open. If both do their homework, chances are it can turn into a productive relationship, and both can reap the rewards over time.