Accepting equity as payment for agency services

Agency Leadership Podcast

Start-up clients may not have the funds to pay you, but still need service, so why not consider receiving equity as payment?

In this episode, Chip and Gini discuss the potential pitfalls of that approach. They caution against exotic payment schemes such as equity or pay for performance, emphasizing the risks and complexities involved.

They also highlight the importance of legal and tax considerations when entering into equity deals.

Key takeaways

• Chip Griffin: “There is often a real desire for people with businesses that don’t have a lot of money to try to come up with really exotic payment schemes, whether that’s equity, whether that’s pay for performance, however they’re able to postpone or delay giving up cash to you.”
• Gini Dietrich: “Something like 95 percent of startups fail. So why would you take that risk?”
• Chip Griffin: “Anyone who is willing to give up a portion of the ownership in their business to you has to be, by definition, relatively desperate.”
• Gini Dietrich: “I couldn’t take the risk of potentially never getting paid because I was not in control of whether or not they were going to sell this new product.”

Related

• ALP 14: Non-traditional agency revenue streams
• 9 ways to price your agency’s services

View Transcript

The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.

Chip Griffin: Hello and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And Gini, you know, I think we need to, I think we need to do an equity deal with somebody for this podcast. I think that’s really… that’s really the way we can make some money.

Gini Dietrich: Absolutely. Zero of zero is a really good idea.

Chip Griffin: Yeah, absolutely. I mean, you know, why not? I mean, it is something that a lot of, agencies encounter from time to time where you’ll be talking particularly with a startup or something like that. And they say, Hey, you know, wouldn’t it be great if you could do some PR work for us and we will pay you in equity.

We’ll give you shares of the business or we’ll give you options or something like that, that allows you to benefit from the upside because you’re coming with us from the ground floor, and we want to reward that kind of faith in what we’re building.

Gini Dietrich: Just a few months ago, I had a prospect say to me, We really want to work with you.

We really believe in your process. We really have a great chemistry with you and your team. Would you be willing to postpone payment until after we sell our first customer from the work that you do? And I was like, no, no. And I mean, he pushed me really hard. He’s like, okay, well what if we did this? What if? I was like, listen, I have a team, I have payroll to make.

They have other clients. If we can’t figure out some sort of way to do this, where you’re paying us for our work, then it’s not going to work. And it didn’t work. We had to walk away. because there’s, I can’t make payroll. I can’t pay our bills. I can’t do the things that we need to do to run the business.

If I’m doing something like that. If I’m doing an equity deal or… not to say there aren’t areas where this might work, but in this instance, I was like, no, I mean, you could not sell a customer for a year. And that has nothing to do with us. That has everything to do with you. I am not in control of that. If it was something that I could control, I might consider it, but I don’t control any of that.

So no, absolutely not.

Chip Griffin: Yeah, I think there’s, and we’ve talked about this on the show before, but there is often a real desire for people with businesses that don’t have a lot of money to try to come up with really exotic payment schemes, whether that’s equity, whether that’s pay for performance, all sorts of things where they’re able to postpone or delay in some fashion, giving up cash to you. But as you say, you can’t do the same. You can’t just say to an employee, well, here’s the thing, we’ve got some equity and whenever that equity comes to fruition, whenever we can actually cash that in for something, which by the way, is probably going to be about 10 years from now, because most of the time, if you’re dealing with a startup and you’ve got equity in them, I mean, you’re talking a minimum of five to 10 years before that even potentially turns into something. If something happens before, then chances are, it’s that it goes bust and turns to zero faster. Yes. And even after 10 years, it may still turn to zero at some point, if it hasn’t already cashed in. So, so you’re talking incredibly long time horizons. So you’re talking about a lot of risk that you are taking on.

So I would say that 99. 9999999 percent of the time that is something that you should not only say no to, but run away from. And it’s probably the kind of thing where it’s not likely to be a good fit, even if they do offer to pay, because the likelihood they’re going to have the cash to pay you in a timely fashion on an ongoing basis is frankly pretty low.

If they’re trying to pay you in equity, anyone who is willing to give up a portion of the ownership in their business to you has to be by definition, relatively desperate, because it’s not the kind of thing that you do or should be doing without very careful consideration. So be really, really careful about these, both because they are complex and difficult and risky, but also because it’s generally a signal that, that that client, you know, may not be a particularly good fit anyway.

Gini Dietrich: Yeah, I have a friend who always says that he has a guest room wallpapered in well intentions. It’s well intentioned, but to your point, I think something like 95 percent of startups fail. So why would you take that risk? Now, I understand that you’ll be, you’ll be walking away from a client, but if it’s a non paying client, then it’s completely different.

So like with us, we, we really wanted to work with this guy. His business is interesting. He was pivoting a little bit with a new product. It was, it was really interesting. It fit our wheelhouse perfectly, but I couldn’t take the risk of potentially never getting paid because I was not in control of whether or not they were going to sell this new product.

Chip Griffin: Right. And, and it is, you know, it is, it’s not just the risk of the cash because I think that the other challenge is frankly, most agency owners are not well versed in these kinds of startup equity issues. And so you have to, in order to go down that path, you have to understand what all of the legal and tax implications are of doing a deal like this. Because otherwise you can end up creating all sorts of problems for yourself.

So. It’s, it’s not just that your payment is going to be delayed. It’s also that how these things are structured matter. I mean, even the, the startup could really succeed, but if you don’t have your equity deal structured in the right way, you may not end up winning. You can also create all sorts of bizarre tax consequences for yourself, depending on how this is done.

And a lot of the startups who offer equity are not well structured to give it to you in a proper fashion, because there are right ways and wrong ways to give you equity in another business. You don’t just, this is not just a one size fits all. You know, it’s not like writing a check where there’s just a standard document that you use to pay somebody.

When you’re doing equity, there are all sorts of different pieces of paperwork that are involved. And the, the actual structure and form of that paper makes a huge difference in the outcome.

Gini Dietrich: Yeah. So I think one way to think about it is, let’s say that you have a minimum retainer of 5, 000 a month. And you’re going to work with this company for 10 years.

So at the end of 10 years, you will have invested 600, 000 plus interest, plus, you know, growth, whatever, have inflation, all those kinds of things, whatever happens to be. So let’s just evenly call it a million bucks. If the equity that they are offering you is at least a million dollars that you would eventually get.

Maybe there’s something there. Again, you may not see that cash for 10 years and you may not see that cash ever, but like, those are the kinds of things that you have to think about. And in my experience, The equity that has been offered would never cover the, the, like I wouldn’t make a million dollars.

Now there have been things that I have done where I have done sort of a combo where I serve on the board and I get equity as the board member, but then my agency does the work at a discounted price. So they’re not, we’re, we’re still getting paid and every, we’re still making a profit and we’re still being able to, able to run the business, but they’re not –

they’re also invested in the communications piece of it because they’re paying for us. Right. So they’re not seeing it as like, Oh, this is done over here and we don’t really need to pay attention because we’re not invested. So it’s a two way street and those have been, those have worked out. There have been three times that I’ve done that.

And the company has sold all three times and we’ve made some money from it. So it has worked out from that perspective. But when I started doing this, I got screwed a couple of times before I figured out, Oh, wait, this is not the right way to do it. So I would really heed the advice and take, take our experience as a lesson in, in how to do it the correct way.

And to your point, to make sure that you’re covered from a tax perspective and from a legal perspective, and we are neither tax accountants nor attorneys. So you would have to bring those professionals in.

Chip Griffin: Right. And even if we were, we wouldn’t know your specific circumstances because these deals are very contingent upon the specific circumstances of the business offering the equity as well as yours as a potential equity holder and the owner of an agency.

And so you need to make sure that you are getting the very specialized and personalized advice that’s necessary to come out on the right side. I do like the idea of if you’re going to go down an equity path to do it in a hybrid fashion where you’re getting paid some amount of cash so that you’re at least, and I would, I would look to get enough cash that, that at least you come out whole, right?

So it covers all of your actual costs and really what you’re putting at risk with the equity is the profit side of the equation. It’s still very risky and it still may not be a good idea for you, but at least then you’ve mitigated the downside risk of not being able to pay your employees, contractors, vendors.

You know, whatever that’s involved in performing the actual work. And so that can be a more viable option. Then I’d say the same is true if you’re doing some kind of a pay for performance deal with a client. If you’re, if you do it in such a way that that becomes a bonus effectively, but you’re getting a fixed amount of money for the underlying work, that as long as that’s covering your actual costs, then, then you’re doing it in a more balanced way. The challenge is most people who want to pay on performance or pay with equity generally either don’t have or don’t want to part with the cash. And so very few want to do it in a hybrid fashion.

Gini Dietrich: Some of you may have already heard this story, but back when I started the agency, I worked, we worked with a client who actually was a friend of mine before all of this happened.

And we set up, I was naive and young, but we set up a deal where we would take, we would get bonus based on the profitability of the, customers that they closed based on marketing communications. And we had a really great reporting structure set up. It was, you know, you, we could, we were able to tell what customers came from, from our efforts. And, when it came time to bonus us, the, the, client bought himself a Ferrari and said that there was no profit in the, in the work because he spent it on a Ferrari, but he was very kind and showed up with a piece of art at my office and said, here’s your reward.

And I was like,

he’s no longer a friend or a client for that matter. but you have to be really, really careful about that kind of stuff because you, like I said, you have no control over it. And that’s part of the problem is if you can’t control it and you can’t control the outcome, it’s. It’s pretty, pretty risky.

Chip Griffin: Right?

And equity can be very, very tempting. It is for sure, because you hear stories about when it really did pay off. And particularly if you’re in the business where you’re servicing a lot of high tech companies or those kinds of things that tend to have big paydays with equities, you sit there and you know, your eyes get wide and, and you say, wow, you know, I could be part of that someday.

And, and you… entrepreneurs who are out there raising money and willing to share equity in their business, they often are very good storytellers and painting the picture. And so you end up coming out of a meeting with them thinking, wow, this could be the next Google. And you sit there and say, well, I’d be foolish not to get in on the ground floor of that.

So why wouldn’t I do that? And so I think you need to approach it from the opposite angle of why would you do that? You really need to talk yourself into it, not, not talk yourself out of it. And if you go into it with the mindset that there’s just no way I’m doing this, you will be in a better spot because now you are looking for the reasons why it is a good idea, you know, rather than saying, this is a great idea.

I find anything bad, maybe I’ll walk away after that.

Gini Dietrich: And it takes a long, long time to see any kind of results. So you almost have to think about it as you would with the stock market where you’re putting money in it and you’re just letting it sit there and do its thing and pretend it doesn’t exist.

Same kind of thing here. Like if you’re going to do it, you have to. You know, take the risk and put the, put the work into it and pretend like it doesn’t exist for 10 to 15 years, because it takes that long. And then, then you go through the, the sell of the business with the client. And that’s a whole different thing, right?

There’s a whole other thing. And then. The buyer starts to look into, well, what is this structure? And what is this structure? And why do you have this set up? And so all of your legal i’s have to be dotted and T’s have to be crossed because then they start to pick those things apart. And if it’s, if you’re not solid on that front, you’re going to get screwed in the sale too.

So there’s just, there’s so much to think about and there are so many things that go into it. And so if you can think about it from the perspective, I love the idea of going this is not right for us. And figuring out a way that like, you have to almost talk yourself into it. I love that, that advice. So do that, take Chip’s advice, do that because that’s, that’s really solid advice and figure out a way, you know, it’s going to be few and far between that it actually will work for you.

Chip Griffin: Yeah, and I would say it’s it’s much more risky than the stock market. I, you know, I think that Oh for sure. this is it is it is much more like going to Vegas. And you have to sit there and assume that whatever you’re taking in the form of equity compensation that you will never ever see it. Not, not that it’ll be even 10 years or 15, it’s, you have to, to be comfortable with the idea that you will never get any payout.

And if you are willing to do it on that basis, okay, then it’s something that, that you can consider. But if you are not willing to accept that you might never, not in 10 years, 20 years, 30 years ever get anything at all out of this, then you are, you’re going into it where you’re more likely to be disappointed.

And frankly, the way these things work is even if the business sells, particularly if it sells to a public company, stuff can still happen after that. I had one deal where I had a significant investment that very small one that had turned into a pretty significant one and the company sold and then the shares get transferred, but then they’re in a lockup period.

And so you can’t sell for a period of time. And in that particular case, the stock completely tanked, like the bottom fell out of it between when the shares were transferred to all of the, the original investors and when, they were actually able to sell. And so you sit there and you watch the stock ticker and you’re like, And you can’t do anything about it.

Like normally in normal stocks, if you own something, you know, you can see it, you can see it dipping and you’re like, I’m getting out. And instead when you, when you have these lockup periods for something, you just sit there and you watch it go down and down and down. And so, so even once you think that you’ve got your payday out of something like this, you still may not have it.

And so you, you have to be, you have to have nerves of steel to be willing to go down that path. And frankly, most agency owners don’t. So. So I, I think our real mission here is to scare you into being very, very skeptical of any kind of exotic payment scheme, but particularly equity compensation for the work that you’re doing.

And especially today where companies are trying to, to, Hold as much cash as possible. Do all sorts of uncertainty. It’s likely that in 2024, we may see more of these kinds of deals being offered to agencies. Be really, really careful and by default say no, and you will be in a much better place. You’re better off going off most of the time and finding a client who will pay you cash than dealing with somebody who wants to pay you in equity or a performance bonus or any of these other things that are just, they’re, they’re really advanced. And they’re really for people who understand and are willing to accept and stomach the risk.

Gini Dietrich: Yeah, I think that’s really good advice. Be skeptical, skeptical, and then. Figure out, I mean, if, if, if there are no red flags and you can figure out a way to do it, great. But for 99 point, what’d you say? 99999, percent of the time.

Chip Griffin: I don’t know how many nines I went to, but you know, I, I used to, I used to be in the software as a service industry and you know, so five nines, six nines, you know, that was always talked about.

Gini Dietrich: So that’s funny. Yes. It will not work. So don’t, don’t put yourself or your agency or your team at risk.

Chip Griffin: Now, that said, if you’re listening and you’d like to give us some equity in your business in exchange for listening to this podcast, we’d be happy to take that equity as compensation for your listening.

Well, with that, we will draw this episode of the Agency Leadership Podcast to a close. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Diedrich.

Chip Griffin: And it depends.