Discount in exchange for equity

I am on the tail end negotiations with a new account. They are wanting me to build their brand and be their agency of record as the company grows. Since this is a startup with limited capital, they asked if I would be interested offering a discounted rate in exchange for equity in the company.

I’m not exactly in the business of investing into other companies for profit, but the idea is rather intriguing because there are some big players in the mix that are ready to grow this thing.

Anyone ever been offered a deal like this? What would you do here?

(should note that this offer is simply an option for me, and they are ready to move forward either way)

Can you buy enough groceries on the discounted price?
You can’t eat Equity.

I have. I passed. I’m glad.

In the company I was offered the equity in, I did not have confidence in the partners. The last time I checked their website, it said “Safari can’t connect to the server.”

On the one hand, you could be getting equity in the next Amazon. On the other hand, how many businesses fail within the first couple of years?

I think you have to have 100% confidence in the partners, their skills and experience, the product, and that the product is providing a unique solution the marketplace will respond to.

None of us can really advise you without knowing all of the details.

If you feel it’s worth the gamble and the details work out for you, go for it. But go into it with open eyes and don’t be intoxicated by the prospect of being an equity partner in a company that could make it big. Because it could crash and burn, too.

You’re going to have to pay a lawyer to draft a contract to make sure that the equity is actually worth something and you can extract it at some point.

Instead, I’d suggest they pay me by credit card. Then I get paid everything I’m due, and they can carry it as long as they need on their credit card, paying off a little at a time.

This kind of thing is a gamble. Most businesses fail within a few years, and a business that starts out without enough money or cash flow to pay their contractors would, in my estimation, have a higher-than usual rate of failure than one sufficiently funded to do things right from the beginning.

Also consider that their offer to exchange equity in the company is, in some ways, a bet they’re making against themselves. They’re making a decision to exchange a relatively small design fee for a potentially huge stake in a sucessful company that they could otherwise keep for themselves. Why would they even consider doing this if they felt confident of their own success?

Also, starting up a business involves all kinds of expenses: insurance, taxes, equipment, rent, licenses, attorneys, accountants, and the bills pile up from there. Are they making similar offers of equity to every vendor they need to buy something from? If so, they’ll soon give away the company and have nothing left for themselves.

If you were dealing with a solid company with a solid business plan, they’d have enough money to cover basic start-up expenses since the bank or an investor would have been confident enough in their business plan and chances of success to make the start-up loans. That didn’t happen, though or, maybe, your clients didn’t even bother to find out.

What you’ve described, points to amateurs on a shoestring budget, without a well-conceived business plan trying to get others, like you, to finance something they can’t find the cash to do themselves. From a purely statistical perspective, this whole thing will likely fail and you’ll be out whatever time you put into it.

On the other hand, I could be wrong, but if it were me, unless I felt strongly about their chances of success, I’d turn it down. For that matter, when working for start-ups having cash flow problems, I insist on cash in advance or I don’t do the work. Worthless equity in a currently worthless company, um, nope.

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Thanks for the feedback everyone. They seem to have a pretty solid team, and have a couple other successful brands. While this is kind of low risk for me since its only a reduction in margins, its also kind of like I’m throwing money away because I’d probably only benefit if the company does well and/or sells… I’m still thinking all of this over.

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