How to Get Rich in America

A look at how companies like Palo Alto's Lunar Design are seeking the long-term payoff by taking equity instead of cash for their services.

Cover Story

True wealth doesn't come from working for a paycheck. A new generation of service companies, like Lunar Design, have figured out that it's all in the multiple

By most outward measures, Lunar Design would be considered a success. A Silicon Valley-based industrial-design firm, Lunar employs 40 people and last year generated more than $8 million in sales. The company's austere Palo Alto headquarters, with its starkly curved lobby walls, showcases its inspired labor for the likes of such techno-heavyweights as Xerox, Silicon Graphics, Hewlett-Packard, and Motorola. The firm played a key role in the design of Apple's PowerBook and recently gave shape to an ergonomically exquisite $5 toothbrush for Gillette's Oral B division.

But for all the firm's high-toned, West Coast cool, Lunar's success is, in part, more surface than substance. Industrial design is a competitive business, especially when you locate yourself in downtown Palo Alto, where office space goes for $4 a square foot per month (as opposed to half that in an industrial park three miles outside of town). "Margins are thin in this business," concedes Lunar's president, Jeff Smith. That has pushed Lunar into generally accepting whatever jobs walk through the door. "You're always doing someone else's work," adds Smith wistfully, rather than having the freedom to pursue independent projects.

When the firm opened its doors, in 1986, drafting tables were pretty much state-of-the-art. At the time, it cost Lunar about $2,000 to equip a single designer. Now, with the latest CAD software, the cost of setting up a designer can run as high as $50,000. The high cost of keeping current ensures that Lunar will have to continue to accept whatever work walks through the door--just to cover operating expenses. For all its apparent success and cachet, Lunar Design seems to be running in place, albeit with plenty of style.

The Power of the Multiple
The sense of running in place was the conundrum that bedeviled Smith, one of Lunar's three founding partners, back in the late 1980s, when he began talking up meaningful change with his two partners, Gerard Furbershaw and Bob Brunner. What would it take to change Lunar's business model to give the earnings statement some upside pop and the design team a creative lift? Brunner, who left Lunar in 1989 to become Apple's chief designer, recalls having conversations with Smith about how they spent a fair amount of their time giving counsel and strategic advice to start-up clients, almost as if they were venture capitalists. If that was the case, then why not partake of the spoils?

So Smith and Furbershaw set out to liberate Lunar by hitching its fortunes to something more hopeful than the fee-for-service treadmill. Stock, not cash, would become the energizing and value-building force, the coin of their realm. The partners knew that $1 in cash taken as payment for design services would never amount to more than $1 in sales--and a lot less than that in profit. On the other hand, a dollar in equity taken in exchange for services rendered could someday multiply into $5, $10, or even $20. The value of a share of equity is limited only by the ultimate valuation of the company. By setting up deals in which Lunar would receive equity-based compensation from its clients, the founders could tap into "the power of the multiple"--the ability to turn what might have been simply a fee-for-service payment into an equity stake worth much more in the long run.

While Lunar Design is ahead of the curve in thinking about how to supplant cash with the exponential possibilities of holding equity, it is far from alone. It is simply at the advance of a powerful wave that represents a radical new way of thinking about how to transact business. Tapping into the power of the multiple is, in fact, becoming more apparent every day as an efficient way to operate. As the stock market approaches the once seemingly unreachable 10,000 level, as employee-stock-option grants explode, as mutual funds proliferate, and as Social Security begins its slow migration toward inevitable privatization, a broad understanding that equity is the path to enduring wealth has taken hold.

Leveraging an equity stake becomes a means to take better advantage of skills and to build wealth. It becomes a way for a company not just to control its destiny in a chaotic economy but to simply do a better job in a world where quality and timeliness count all the more. It amounts to more than just taking stock in lieu of cash. It's about integrating a company's fortunes with its customers'--and, ultimately, making work more creative and meaningful in the process.