Would you accept a % ownership instead of payment?

by Dexx
17 replies
Hey guys,

So I might start working with two unique offline clients. One is two partners who invented and patented a new type of wheelchair accessory which may greatly improve the ease and use of wheelchairs in difficult terrain...

The other is a fashion designer who is truly talented and has done several fashion shows here in the City and across Canada. She was recently in Europe to check out fashion ideas and a local merchant approached her to sell her designs in Italy...

So both of these companies have huge potential...but right now they are both starting at zero.

Now on one hand I "could" charge them a typically monthly marketing fee to help get them exposure and credibility etc, but I'm thinking that instead giving them the option of providing me a percentage of their companies (would need to get them both to incorporate to do so) would make more sense.

For those that have watched the movie The Social Network, when Facebook's offices were first getting setup, they approached one well known artist to do the murals for their interior walls. So they offered an artist the option of $60,000 in cash or shares in the company instead of payment...in order to do the wall art etc. for the office...

Well the artist chose the stock option and 5 years later those stocks were worth $200,000,000 million dollars:

Facebook's Graffiti Artist David Choe's Life Unchanged by $200 Million - ABC News

So that is what has me thinking now...

What do you guys think? Anyone made such a deal with a start up client before?

~Dexx
#accept #ownership #payment
  • Profile picture of the author Pierre!
    Get em on Shark Tank, then see what they are worth!

    So cut a great equity piece out for yourself, then represent em to 'The Tank'...

    As long as they take you with em! Shucks, just the exposure on Shark Tank could be worth it...

    Would I do it? Really depends on how much actual time would need to be invested for 'no pay'.

    I am still in financial rebuild mode, so I would be less likely to do this type of deal unless there was only 90 days to ca$h flow... and I would still hear alot about it from my better half if you know what I mean!

    If you are a successful 'strategic gambler' with a solid track record of good intuition (should be easy for you to know) then Go For It - Sure would make a great WSO

    Make a Great Decision!
    Patrick
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  • Profile picture of the author Dexx
    Ya the plan is to actually get them on Dragon's Den / Shark Tank to get in front of some bigger manufacturer types. They have already asked if I'd be willing to help with recording a demo video and even doing the pitch if they got on the show (since they aren't great pitchers themselves)

    Good point on the turnaround time vs energy required tho!

    ~Dexx
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    • Profile picture of the author EricGuimond
      Would I? Problably, but a little research would be required.

      Right now I have agreements with several companies for monthly fee + % of sales(and this is diferent then actually owning) I bring in, although there were established companies and I'm making quite a bit more then if I would of for gaving out a flat fee.

      Now these are the questions I would ask

      1) Can this product succeed? Is there a market for it?
      2) Is this the first business these people haved owned or do they show a track record of sucess?
      3)Do they have the income to expand and follow through, if not did they secure investors already?
      5) Are they already in debt or is everything on top?

      For example my last client already owned a dozen physicall stores + online ones with expantion plans in the works that he wanted me to work on, a proven track record so when they offered it was easy for me to see success.

      Even if your are the top marketer in the world if the product is a complet dud or they don't have capital to follow through & expand it will be tuff times.

      Anyways, good luck and I hope it all works out for you, let us know!

      -Eric
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  • Profile picture of the author Dexx
    Great points you bring up Eric, I'll need to take a look at that. This is all still in the early stages, so that's why I figured who better to see if they have similar experiences than my fellow warriors

    Quick question for you: When you setup your agreement for monthly fee + % of sales...how did you ensure you didnt get screwed on the % of sales portion?

    Did you have a lawyer review the contract and make an agreement to have access to their sales numbers or...?

    ~Dexx
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    • Profile picture of the author EricGuimond
      Hi Dexx,

      Yes, I did make a contract but it also helped I had aleady built a solid relationship with them prior. I use trackers for all the sales I bring in + statistics to show increased traffic/sales etc every month.

      EDIT: For physical business just flat fee(some % of increase bonus,some % of profit/net sales) as hard to track, as long as they see growth in sales monthly + enhanced customer service experience they are happy.

      From MY EXPERIENCE there just super happy your bringning in these extra sales for them and making them a good chunk of coin and wouldnt want to risk messing it up, BUT of course this won't always be the case so I'd cover my bases(contract).

      -Eric
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  • Profile picture of the author Dexx
    Does the contract say they have to show you documentation veryifying current sales numbers should you request access?

    What kind of situation were they in when you proposed a % of sales? Struggling / Desperate (and just wanting to get back in the black)? Or just understanding that you wanted a % of your results?

    ~Dexx
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    • Profile picture of the author EricGuimond
      1) Yes they do
      2) They all had a proven track record of success, none doing bad. 1 was in dire help of proper marketing but was still on top of things. The main reason they wanted to do so is a) Saw a proven track record from me & B) Its an insentive, they give bonuses, success sharing etc to their employees so why not to someone that plays such a vital role in their business?

      -Eric
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  • Profile picture of the author Dexx
    So they just send you an additional bonus amount on top of your monthly fees each month? Very nice.

    I might need to work that into my agreements as well. I know Dan Kennedy and many copywriters request a % of sales generated from their marketing. I'll have to look around for contact examples of such so I can tweak my own agreements

    Cheers,

    ~Dexx
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  • Profile picture of the author Aaron Doud
    Dexx,

    I personally would given the following.

    1. The time required was reasonable for the equity given.
    2. The business made sense as an investment. Step back and ask yourself. If they were coming to you asking for $_____ for _____% would you invest? If the answer is yes go for it. You are just investing time vs. dollars.
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    • Profile picture of the author Dexx
      Originally Posted by Aaron Doud View Post

      Dexx,

      I personally would given the following.

      1. The time required was reasonable for the equity given.
      2. The business made sense as an investment. Step back and ask yourself. If they were coming to you asking for for _____% would you invest? If the answer is yes go for it. You are just investing time vs. dollars.
      Thanks Aaron.

      1) Time required: It'll be more of a consultative / guidance role. I won't be the one actually doing day to day stuff, but I would be sitting down with these businesses (and future ones) and ensuring they stay on the right path, are implementing the right strategies for growth, and ensuring their lead generation is effective etc.

      Maybe minimal control of their online marketing and offline marketing, but nothing to extensive. It's enough that I know I could rapidly get them growing, but without me, they'll most likely struggle and fizzle...hence my thoughts of getting a % of the pie vs just a flat fee

      2) I'd probably invest in both companies assuming they had a marketing wizard like myself behind the helm, haha. Which does present an opportunity for them to find investors once I get them moving forward enough.

      ~Dexx
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  • Profile picture of the author Seantrepreneur
    Hey Dexx,

    This is a great thread because there are actually opportunities like this all the time. I'll tell you my experience with doing this so far.

    We've been involved with 2 start-ups that gave us a percentage on the company to help them out. The only problem with that is start up businesses need soooooo much work that it starts to become a time suck.

    We couldn't give the time necessary because we needed to focus on our paying client base. We ended up pulling out of both start-ups because we just couldn't give them what they needed.

    Playing devils advocate on the Facebook story, the guy painted a mural, which is a one time thing, in 2005 and only cashed out in 2012. Of course, it was for 200 million (which is insane btw), but that's 7 years later. So if we are thinking in term of marketing for these companies, that's 7 years of free work. And you only actually get something IF they are successful and we all know the statistics on how many companies are successful :/ .

    I hate to be negative Ned over here, but I just want to give my personal experience on two separate occasions. We've since been offer this type of deal at least 3 more time and turned it down each time.

    With that said, I know you're a smart cookie and you'll make the right decision. Let us know what you end up doing.

    Sean
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    • Profile picture of the author Dexx
      Originally Posted by Seantrepreneur View Post

      Hey Dexx,

      We've been involved with 2 start-ups that gave us a percentage on the company to help them out. The only problem with that is start up businesses need soooooo much work that it starts to become a time suck.

      We couldn't give the time necessary because we needed to focus on our paying client base. We ended up pulling out of both start-ups because we just couldn't give them what they needed.

      Playing devils advocate on the Facebook story, the guy painted a mural, which is a one time thing, in 2005 and only cashed out in 2012. Of course, it was for 200 million (which is insane btw), but that's 7 years later. So if we are thinking in term of marketing for these companies, that's 7 years of free work. And you only actually get something IF they are successful and we all know the statistics on how many companies are successful :/ .

      I hate to be negative Ned over here, but I just want to give my personal experience on two separate occasions. We've since been offer this type of deal at least 3 more time and turned it down each time.
      Great points my good man. I do need to ensure I have my own cashflow rolling through in the meantime.

      I guess I need to look at this similar to investing in a piece of land with the belief that a few years down the road it'll be worth much much more to some developer...but in the meantime it generates nothing to survive off of (not to mention any financial or maintenance related responsibilities for it)

      ~Dexx
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      • Profile picture of the author Seantrepreneur
        Originally Posted by Dexx View Post

        Great points my good man. I do need to ensure I have my own cashflow rolling through in the meantime.

        I guess I need to look at this similar to investing in a piece of land with the belief that a few years down the road it'll be worth much much more to some developer...but in the meantime it generates nothing to survive off of (not to mention any financial or maintenance related responsibilities for it)

        ~Dexx
        Exactly, and in our case where we outsource a lot of the work we would actually have to basically put money up. The idea sounds good and it's cools to say you own part of the company, but at the end of the day equity in a company not worth anything doesn't pay the bills.

        Sean
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  • I personally would never do this because of the following:

    1. the hassle
    2. my lack of experience


    1. The Hassle

    When I think of the legalities and then enforcing any legal agreement... yeesh. I'd rather hunt for someone with cash and get paid.

    2. My Lack of Experience

    I lack any experience with evaluating businesses and business plans.

    Guys on shows like the Shark Tank and Dragon's Den... they look at businesses all day long, and they have the eye / know-how when it comes to evaluating not just a product / service, but those running the company, too. I don't have any experience with that sort of thing, so I wouldn't trust myself in discerning whether or not a company was worth my investment.

    I wouldn't take the risk. Not only do you lose time and possibly money in outsourcing any work and fronting the money yourself, but you also have the opportunity cost in losing out on other PAYING projects.

    Me? never.

    Really great question, though. I liked thinking through this one.
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  • Profile picture of the author Dexx
    Great feedback KFB!

    Keep in mind guys that I have no plans to front the cost of any of the marketing outside of my time consulting and possibly doing some website creation and video marketing on YouTube to get them promoted.

    Any costs such as press releases, graphic design etc. I would let them know would come out of the business's profits.

    But I think what I'll most likely do (if I do go down this road) is just stick to my own business and request a % of sales in my agreement as recommended in a previous post.

    The product invention is a trickier one since there isn't any direct sales...it's more of the hope that the product will be bought out / licensed by a major manufacturer...in which case I'm not sure a % of sales would work as opposed to a % of ownership (to receive royalties)

    Hrmmmmm...

    ~Dexx
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    • Profile picture of the author Irish Intuition
      I get offers to 'partner' with someone every week. I am teaming up with one
      Warrior as I think it has a lot of potential.

      My main problem is making the arrangement tangible.

      If I were you I would ask for a modest fee. If these businesses have as much
      potential as you say (and they believe they do), they should not have an issue.

      Let's not forget that you must legalize the arrangement.
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  • Profile picture of the author DaniMc
    I am an EIR at a large Tech Incubator so I can speak to this.

    You should evaluate the company as if you were investing in it. Sure, some guy painted for Facebook and is now a millionaire. This is the exception, not the rule. Thousands and thousands of companies are in the startup stage at any given point. The likelihood that these guys will pitch and get venture funding is very small.

    It doesn't matter if they have the best idea in the world. Ideas are worthless. Execution is all that matters. They could be awesome people with an awesome product and still not be able to execute. This game is damn hard. Everything has to be perfect. From the strategy to the pitch. I have worked with many guys in all these stages and it is simply impossible to predict the mood of the VC's or executives they are pitching.

    So...whatever you are doing for them, evaluate the company as if they were asking you to give them that much cash. Ask for an ownership % which corresponds to the value you place on the company. Ask them to give you a company valuation and to explain to you why the % should be what they are telling you.
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