Tips: Five guidlines for exchanging services for equity

Being a services business, we’ve always been lured by the forbidden fruit of developing a SaaS product, selling it to a bunch of users, and then sitting back and watching the revenue pour in every month. Over the last few years, we’ve been approached a couple of times by people looking to have us serve as the engineering team of a company in exchange for equity which would eventually begin generating revenue. Despite this situation being relatively common, there are relatively few guidelines on how to approach receiving equity in exchange for work as a services company. With that in mind, here are some guidelines we use in these situations. Also, these suggestions are probably also equally applicable if you’re a services company looking to develop a product in house.

Treat the project or company like a billable client

An issue that we’ve repeatedly noticed is that equity or internal projects are often treated as “second class” citizens within service companies. Since they aren’t billable, companies end up doing things like leaving them off the planning schedule, pushing the work off until Fridays, or only assigning interns to the project.

One strategy to help combat these issues is to on-board the project like you would any billable project. Depending on your process, this might mean doing things like creating a Basecamp project, adding the project to your time tracking software, and holding a “kickoff meeting”. Whatever your process may be, the takeaway is to treat the non-billable project like a normal one throughout your organization.

Set a budget and stick to it

Budgets are important for any project but they’re especially important when equity is involved or it’s an internal project. When dealing with a non-billable project, you’ll want to avoid the “equity guilt” where you’re guilted into “doing just a little more” since you own a measurable % of the company as well as eventually be able to calculate an ROI for your investment. A proper budget will help you do both since you’ll be able to know when you’ve contributed your fair share and hopefully one day calculate your ROI against the budget.

Developing a budget in these situations is relatively easy, just take how you’d normally bill and decide on a number for the version one of your buildout. If you bill hourly, pick a number of hours, if you bill by the week then pick a number of weeks. Since the project is already set up as a “first class” project you should be able to just add a budget against it.

Someone needs to “own it”

One of the problems that arises in equity deals and internal project is that there isn’t really a client and subsequently there often isn’t a single person responsible for making key decisions. Having a single person that ultimately “owns” the project will mitigate “design by committee” issues and also help keep the momentum of the project going.

Fair warning though, “owning” a failed project carries a heavy emotional and psychological toll so as an executive you’ll have to be ready to support an employee that accepts this responsibility.

Clearly define responsibilities

Clearly spelling out who is responsible for what is important when a services company is being brought in for equity. Detailing responsibilities will help you avoid a situation where your team started off as the marketing team but then ended up fielding support issues and ultimately resenting the project.

Agree upon KPIs and know when to quit

Knowing what you want to track and how you’ll measure success is important when money isn’t being exchanged because it helps keep everyone accountable and prevents the project from slowly stagnating. Having a good handle on your KPIs also helps motivate the team if things are going well and they’ll ultimately be a primary factor in deciding if you should continue the project.

Unfortunately, one of the hardest aspects of any project is knowing when to quit. This decision is usually harder in equity only or internal projects since there’s no pressure of burning capital and there won’t be the finality of the money running out. Despite this, knowing when to pull the plug will help you facilitate an orderly shutdown of the project and also give everyone involved the chance to debrief.

So should you do an equity only project? Well it depends. Given the the reality of startups, chances are you’ll not going to enjoy an eight figure exit and retire a millionaire. But chances are, if your team gets involved with an interesting project they’ll get a chance to learn a lot, experiment outside their comfort zone, and maybe even leverage the project into new business. So my answer would be a “maybe” depending on where your business is and what sorts of opportunities you’re being presented with.

Posted In: General, Tips n' Tricks

Tags: