In an era where start-up culture and entrepreneurialism are increasingly the lifeblood of the business world, the world of investment is changing dramatically.
Business owners are turning to alternative sources of backing from crowdfunding to customer-driven schemes. Brands are seeing the value in people over property, and humanity is being prioritized over inflated profits. Modes of investment are adapting, with the need for external expertise and specialist services often exceeding the desire for cold, hard cash. And here lies an exceptional opportunity: equity for service.
What is equity for service?
Equity is a critical, yet mysterious part of startup and vendor culture in particular. Why would a company be interested in issuing equity to a supplier--be that a startup, consultancy, accountant, attorney, creative or so on--rather simply than paying them for their services?
It may seem like service providers get the short end of the stick given the impact on cash flow, but the real benefit comes from the human, emotional element of building something big together. Equity deals are huge because they provide an opportunity to get involved with the bottom line. How better to incentivize than by sharing a stake in the end result?
The concept is a great equalizer--it changes the way companies value their time. It puts everyone on the same page, building something out of a partnership, not a transaction. And with that, both sides are going in with a clear idea of what success looks like. Through a shared emphasis on performance both parties understand they must do their part to perform well and succeed, together.
Advantages for you, the entrepreneur
From a brands perspective, the advantages of releasing equity in exchange for service are twofold.
Firstly, the emotional investment ensures a long-standing bond and a deeper sense of value. When we engage the services of a consultancy or specialist there are many unknowns; engaging them as partners helps resolve gray areas that can arise in a basic client-vendor set up.
Equity for service sees both parties pursue the same long-term end goal--success for the business. Any complacencies or detachments are removed when there is a mutual ambition; when a vendor is really focused on success, they're more likely to produce top-quality, effective work and take bigger risks due to working relationship. Those involved will always go that extra mile. Longer term ambitions can offer a more meaningful goal than what might be proposed against a performance-based task.
Secondly, there is less pressure on cash flow; instead the burden is on performance, in many ways like bartering. That said, equity for service should not be a default move if finances are an issue. All too often fledgling businesses dive straight into the equity conversation in order to avoid paying for goods and services, but this shouldn't be the deciding factor. Don't give away chunks of your business as a quick fix. The reason for entering into an equity for service agreement is much more holistic and built on the benefit of relationships and emotionality.
Advantages for the service provider
As the supplier, the idea of giving away your services for something with a variable return can seem daunting. However, equity provides a lot of leverage. You are not subjugated to the owner of a company you work with. Equity is different. You don't need to do the job--you want to do the job.
We all pride ourselves on our work, but the sense of achievement possible when the end result is greater than the job itself is immense. You put your money where your mouth is, and contribute to something bigger than the brief. What's more, there is huge potential for collaborative learning. Both the supplier and entrepreneur are embarking on something together, learning how to create something that works, together. You are partners in the truest sense--and this isn't something you see from the service side. It's a privilege.
This ongoing, non-transactional relationship creates a more fruitful pipeline. The connection remains beyond the completion of a project, creating bigger opportunities and ensuring the brand can always come back to the service provider when the need arises.
In sharing ambition, you also share reputation. This is the most important advantage, and the one that has proven most beneficial to Sylvain Labs. It's one thing to say "I work with Nike," but it's a different thing entirely to say that you started working with a brand from the get-go, building something together from scratch. Forget financial gain, instead reap the benefits of the psychology behind equity partnerships, where successful associations become the most valuable currency.
As with the brand itself, equity for service shouldn't be something entered into as a solution to bigger problems. Don't do it because you're desperate or crying out for work during lulls in business. Evaluate equity like investors do. Will there be growth? Is this a differentiated project? Will it succeed?
Lastly, and actually the last reason you should consider this approach, there is potential financial gain. Ultimately, in an equity for service arrangement, your success is tethered to the company's success. And because of the commitment and shared risk, the likelihood of achieving that success, and in doing so financial reward, is higher. Win, win.