Smart Answers

Swapping Equity for Services


How do I advertise and implement an arrangement to trade equity in a company for skills or work? I'm looking for a Web developer who wants a stake in my new business. —C.W., Mountain View, Calif.

Swapping equity for services became popular during the 1990s dot-com boom, when stocks in startup firms were a hot item, says Rohit Shukla, CEO of Larta Institute, a nonprofit commercialization services company based in Los Angeles.

Even after the dot-com bubble burst, such arrangements continued. And it is likely they will become increasingly common as emerging companies bootstrap their way into this economy, Shukla says. "Two factors will make this more prevalent: One, the number of unemployed service providers who are unemployable in this economy; and two, the fact that they are floating around, looking for something to sink their teeth into rather than do nothing," he says.

For instance, his firm posted an ad at Monster.com (MWW) for a Web designer and had 150 hits within 20 minutes, he says. "A cursory look at a broad sample of them shows they're all extremely qualified."

Of course, cash is king during a recession, and you might find some reluctance to an all-equity swap, says Peter Justen, CEO of MyBizHomePage.com. "It's great in theory, but it might be tough to arrange in this market," he says. Another approach he suggests would be a delayed payment schedule, where you'd either elongate the terms of the invoice (90 days rather than 30, say) or arrange to start payment 90 or 180 days after the project closes, when presumably your firm has begun attracting revenue.

Or you could use a hybrid model, where you agree to pay a substantially discounted fee in exchange for equity. "The issue is that the startups always think they're going to be the next multimillion-dollar success, and the odds are against that," says Rod Underhill, a serial entrepreneur, author, and law professor. "So the service provider is taking on a hell of a lot of risk, and [most] startups are trying to offer way too low an equity position for these people."

Making Your Case

Your first challenge is to convince the Web designer that your company is likely to grow and profit, making the stock that you're swapping valuable at some point in the future, Shukla says. "Obviously, the more inevitable the growth scenario and trajectory and the more compelling the value proposition, the more attractive the swap becomes to the recipient."

Your second—and probably tougher—challenge is to value your company so you can price the stock accurately. "This is difficult for a startup with no revenue. You have to look at your intellectual property, sustainable unfair advantage, and other factors, and reach an understanding on value," says Underhill. "It boils down to a mix of a leap of faith and a hard-headed assessment of the business prospects offered by the startup."

You can look for Web developers through social networking or professional job-hunting sites, such as Facebook, Dice, Craigslist, the Intuit forums, Elance, and PartnerUp.

But before you start looking, take a step back and consider whether there are alternatives to diluting ownership of your company so early on, says Rhonda Abrams, president of the Planning Shop, a publisher of entrepreneurial books and software.

"I'd generally be very careful about swapping work for equity," she says. First, if your company does become a runaway success, the stock you swap now could become far more valuable than the work being done. Second, if you're planning to raise money from private investors down the line, your job will be more difficult if you've given away stock before getting funding. "Investors like clean deals," she notes.

Taking on a Partner

Take the plunge into swapping equity only if you can find a designer who is extremely talented and with whom you intend to continue working for a long time, Abrams advises. "Remember, if yours is a small business and you're not going to raise a lot of money or grow very big, then the person you're paying with stock is becoming a partner with you," she notes.

If you do find such a person and want to move forward, make sure you check references and do all the background checks needed, says Barbara Poole, founder and president of Employaid.com. Have an attorney draft an equity share agreement that spells out expectations for the hours, activities, and deliverables required of the service provider as well as how much stock he or she is getting in exchange.

If you decide not to go the equity-swap route, you may be able to barter products or services with a freelance Web designer. "If you're solely using the Web site for marketing, raise cash for the project or start with some of the fairly inexpensive off-the-shelf Web tools that are available today and enhance or add to it over time after a revenue stream is established," says Nick Soggu, president of SilverTech, a national interactive agency.

"I'm a big fan of the crawl, walk, run philosophy," Justen adds. "Get something in process now, and you can refine and revise it over time. There's a lot of inertia in a market like this. If you find somebody good and you start talking, sometimes solutions come out of new referrals and new relationships."

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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