MONEY

Earning Back Your Equity

By inviting venture capitalists to bet on their ability to perform, company owners raise capital without losing equity.
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For company owners who just can't bring themselves to sell more equity than they want to, here's an intriguing variation on traditional venture capital: instead of letting the venture capitalists buy 50% or 60% of your business outright, invite your investors to place a bet on your ability to perform. If you can't meet your plan, give them a bigger stake in the business than they otherwise might have gotten; but if you can, ask them to settle for less (and let you keep more).

This approach to investing is being used by Ideas Inc., a $30-million telecommunications and computer company based in Columbia, Md. In recent years it's done performance-based deals with four smaller companies. "If the owners of the companies we invest in achieve their plan," notes president Don Barrett, "they can end up with more ownership than they'd have with most other venture investors."

Strata Group, a $4-million software company in Earth City, Mo., has embraced this financing game plan. Last winter, after reviewing Strata's five-year plan, Ideas agreed to provide about $2 million to help the company market its already-developed products. While most of the investment is in cash, some is in infrastructure (use of Ideas' accountants, engineers, and personnel specialists). It's too early to know how the Strata deal will work out, but CEO Cathie Layton says the approach focuses her and her 60 employees (each of whom owns equity in Strata) on their strategic plan. Though they now own less than 20% of the company, she says that as a group they have the chance to earn back almost 30% more by meeting revenue and earnings goals over the next few years.

-- Bruce G. Posner

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Last updated: Mar 1, 1993




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