Swap shop: exchanging equity for professional services
What happens when you gives shares to another business?
Back in the halcyon days of the dotcom boom, a nice little trend
evolved that cut through the airy, overinflated fads of the day.
Start-ups reluctant or unable to sell great slabs of their equity
to drooling VCs instead gave shares to businesses who could
actually help them grow, in return for that company's services.
What usually happened was some creative spark with a big idea for a
website gave shares to a development business. And the development
team would work hard to build a top-notch site in the hope it would
pump up the value of their shares. Things worked out pretty nicely
for both parties: the business founder didn't have to spend a dime,
the development company got a good chunk of equity in a potential
This idea of swapping equity for professional services outlived
the dotcom boom, expanded to all types of B2B businesses, and is
still going strong in the US today. Websites such as
stock4services.com are dedicated to matching up suitable parties.
Big advertising agencies and media companies have set up
programmes specifically to facilitate the exchanges. And you
only have to browse top US small-business websites Entrepreneur.com and Inc.com to find examples of new businesses
adopting the equity-for-professional-services model.
Over on this side of the Atlantic, though, we seem to be a
little slower on the uptake. Sure, it's happening, but it's not
happening that often. When we asked our 6,000 Twitter followers if
any of them had tried it, we got the sum total of zero
So we figured it was time to introduce you to the
equity-for-trade model and how to make it work for you.
Why and when it works
Sarah Beeny, the entrepreneur founder of Mysinglefriend.com, gave web design and
development agency Codegent equity in return for the build of her
latest venture, Tepilo.com. "I could really see the amount of
money you can spend on development if someone's heart isn't in it,"
she says. As anyone who's outsourced a website build knows,
development spend tends to mushroom as your contractor encounters
an ever-more-complex web of supposedly unforeseen
"But it's not just the money, it's the motivation to work the
nights and weekends too." The buy-in of being involved with Beeny's
start-up meant the developers were happy to put in the extra man
hours needed to make things happen as quickly as she wanted them
to, without jeopardising the quality of the finished product.
An equity swap also means you get continuing support as your
business grows rather than just the one-off services you'd get if
you were paying in cash. So you get most out of this set-up from
the types of B2B businesses you want long-lasting relationships
with: marketing or advertising agencies who work best when they
know your brand inside out; web development companies if you're
running an online business (which inevitably needs a fairly
constant stream of tweaks and improvements to stay competitive); IT
companies; even well-connected angels who'll keep a steady stream
of lucrative introductions coming your way. (Be warned that
accountants are a no-no - the auditor of a company is disallowed
from owning shares in it.)
And if things go to plan, that company is going to really graft
to make your business a success - after all, the value of their
shares depends on it.
For you, particularly if you're cash-poor, the set-up is
something of a financial golden ticket. You save yourself whatever
expenditure would normally go on X professional service, throughout
the entire life of your business, and in theory get even more work
done for you than if you'd paid in cash.
Choose your partner business wisely, and you'll also be able to
work in a quicker, more flexible way than if you'd gone down the
traditional private investment route. "The problem with investors
is you spend so long discussing your business plan and it's all a
bit tedious," Beeny says. She says she 'much prefers' the path
she's taken because it lets her move at the rapid pace she wants
That's not to say a B2B company will always have the edge over
an investor, though. Keep your options open - a private investor,
VC firm or business angel might be the wiser choice if what you
really need is one very experienced member on your board, or the
lucrative network of an angel, or actually just a pleasing mound of
£50 notes to distribute across a range of projects within your
business rather than just one core function.
And, of course, if setting up an equity-for-services swap was
really as peachy as we've made it sound so far, everyone would be
doing it all the time. They aren't though - in part because of an
unfamiliarity and lack of awareness about this kind of set-up, but
also because there are plenty of potholes that could trip you up
along the way if this is the path you choose to take.
So first things first: giving away equity isn't a decision that
should be taken lightly. "My focus would be on retaining 100% of
the shares wherever possible for the founder and the management,"
says Guy Rigby, head of entrepreneurship at financial advisory and
accountancy firm Smith & Williamson. "That's my starting
point." He's dealt with enough equity deals turned rotten to know
that shared ownership of a business often gets messy, and becomes
something the business founder regrets. He says it's incredibly
complicated, and expensive, to reverse an equity deal once it's
been documented out. "Once someone owns a share, they own a share."
And every time you hand shares out, your ownership and control of
the business are diluted.
But Rigby also concedes that retaining all equity is an ideal
situation, and one most ambitious and cash-hungry start-ups simply
can't afford. If you do decide to go ahead with an equity-for-trade
set-up, 'definitely don't give away shares for just a one-off
activity that ceases to be relevant in the future'. Instead, he
advises thinking in the long-term: "If it's more of a partnership
agreement where it has future then it might work."
There are also tax complications you need to be aware of. The
company who provides services to you would normally be making a
profit on those services, which they'd have to charge VAT on. So
technically, what you should do is split the transaction into two,
so that you pay cash for their services (and pay VAT), then they
use that cash to buy your shares. This is what much bigger
companies do when they adopt the same model.
These tax technicalities are, however, unbeknown to most
start-ups who do a shares-for-equity swap. And for many of those
that do know about them - well, let's just say the dog ate their
rule book. Most don't bother with the pernickety end of procedures,
because in all likelihood HMRC won't pick up on the set-up at this
level. But don't tell anyone we told you that!
How to get it right: choosing the business you want to work
Think of the company you give equity to almost like a joint
venture partner, or a member of your board - that should give you
some idea of how carefully you need to choose them. This is a
long-term relationship that will have a direct impact on your
There are a whole host of qualities they need to embody: the
right size and stage for you (if you want to scale quickly, they
need to be planning to grow too, whereas if they want to expand
fast and you don't you'll end up being neglected); genuine passion
for what you're doing; a similar working style as you (are they
happy pulling seriously late nights or do you both prefer to finish
at 5pm on the dot? How quickly do they work?); near enough that you
can reach each other easily; good enough at what they do to warrant
part-ownership of your business. And you need instant chemistry
"You need to have people who have a similar ethos to you, who
get the picture of what you're trying to create," Beeny says. "I
looked for a very specific company: big enough to be able to
swallow the costs and good enough to make an absolutely incredibly
site. I needed them to be better than anyone else but small enough
to make a decision right there and then without corporate
Once she'd tracked down one she liked, she trialled them by
asking them to do a much smaller website - keeping the Tepilo.com
project strictly schtum until they'd proven themselves. "Then I'd
had a positive experience and quite liked the way they did things,
so I said we were taking on a partner, do you want to come
If funds are tight to finance a pilot project, draw up a
shortlist of companies you'd like to work with then get each to
pitch for an imaginary piece of work or a small section of your
bigger project (although be wary of sharing your whole idea with
developers, some of whom are prone to nicking it for themselves).
The most enthusiastic and capable team will hopefully shine
through. If no one catches your eye, go through the process again -
this is not worth the risks involved with cutting corners just to
save time. They're going to be with you for the whole lifespan of
your business, and they need to be good.
How to get it right: drawing up the deal
You need to have a rough idea of how you want the
equity-for-services swap to work before you approach the
prospective business. Decide how much equity you're prepared to
give away, and what you expect in return.
When it comes to equity, Beeny says: "Other entrepreneurs have
given 2% or 3%, but I think it depends how hard you want them to
work - you're going to need a very successful company to make that
worthwhile for them. I think 25% or 26% shareholding is decent, and
it gives you space to give shares to other people. Also, if you're
working with someone you've given maybe only 2% to, and they're
difficult and not quite delivering, you wish you'd just paid for
She advises against owning anything like equal portions of the
business. "The danger is you end up in stalemate. You're kind of in
a situation where you can end up just not agreeing and no one can
make anyone else do anything."
Once you've found a partner and talked out the nitty gritty over
a good few double lattes, it's time to get everything in
Now we know that penning 40-page legal documents isn't every
business starter's idea of a good time. But at least exchange
emails confirming the basics you've agreed on, so you have a foot
to stand on if things do go skewiff before you've made your
collaboration more official.
That gives you some protection for the short-term, then aim to
get an official document drawn up not long after. You'll need a
shareholders agreement, and, Rigby says sagely, 'you'll definitely
need a lawyer to get the agreement properly drafted'.
Discuss whether you want to write in a clause that allows you to
buy back the equity should you want to or need to further down the
line. It's perfectly possible that you'll fall out, or one or other
of you will outgrow each other, and it will simplify things
immensely if you've both given yourself safety cushions for that at
You should also map out roughly what work you expect them to get
done by which dates. You hopefully won't have to clockwatch too
much if you've picked your partnering business wisely, but this
isn't just a favour they're doing for you - you've paid them with
part-ownership of your business. Leave your expectations out the
conversation, and you risk being disappointed further down the line
- which will inevitably lead to a sour, unproductive
But as long as you both get all your cards on the table early on
and live up to your sides of the deal, there's every chance yours
will be a happy and fruitful partnership - and one that might just
benefit your business more than any investor ever could have,
however many millions they had to spare.
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