While they say “no risk, no reward”, I’d like to change that a bit for the purpose of this article. How bout, “some risk, no immediate reward”?
In almost every industry, service providers work on a per project, per milestone, or per hour basis. The tasks are determined before the assignment begins, by yourself and your client. An amount and method of payment is agreed upon. And you begin your process, whether that be creative, financial, manufacturing, etc…
That model appears to be going through a process of evolution in the creative world and migrating across numerous markets. The new approach takes from the entrepreneurial notion of banking on equity. If you’re a sole proprietor, the entire equity of your business is in your hands. Your actions determine your earnings (or losses) and your lifestyle is molded by the outcome of those actions (no sales, no rent).
If you have been, or are currently in a business partnership, that equity is obviously divided amongst the partners. Whether it’s one or one hundred entrepreneurs at the helm of a business, there’s no guarantee of revenue, profit, or sustainability, for new startups or existing operations. Anything can happen.
So it’s interesting to see some advertising agencies and creative firms toss their service fees out the window in exchange for a share of their client’s projects or business.
Crispin Porter + Bogusky was one of the first businesses I can recall to use this unconventional approach with a client. According to 5 Blogs Before Lunch, CP+B held a minority equity stake in Haggar Clothing Co. in exchange for their services. By becoming a partner they went from the traditional role of creating advertising and marketing communications to also having a say in “product development, new business development, marketing, experience design, digital marketing, viral marketing, and more”, and a share of the earnings.
The cover boy of this month’s Fast Company, Yves Behar, also used a similar arrangement with one of his clients. He approached Aliph, maker of the Jawbone bluetooth headset, who was essentially unknown at that time and had scaled back their organization, and proposed that he take an equity stake in the company in exchange for his firm’s services. Aliph accepted, and another unconventional equity partnership was formed.
I’ve heard of several other firms using the “money where your mouth is” approach, and can see it leaking into other industries.
But you have to ask yourself: who benefits from an equity partnership?
From a client’s perspective: they don’t have to pay any service fees throughout the process. They’re able to acquire an entirely new team to contribute to the development of their business. And they’re able to use their newly acquired talent across their entire operation.
From a service provider’s perspective: if the business succeeds you get a much larger paycheck than you would on a per-project-basis. You now have a say in regards to all of the elements in that business. And you’d essentially assume the role of an entrepreneur within a traditional business.
That was the positive side.
What if that project or business doesn’t succeed? Well, your relationship with your client may come to a close. You’ll walk away having invested a great amount of hours in return for no financial reward. The technicalities of your agreement may result in serious turmoil. And depending on the financial situation of your business, you could end up having to pack your bags.
Equity partnerships are businesses. Partnerships with your clients have an equal amount of risk as to a business you’ve started yourself or with a friend. The outcome can’t be pre-determined, and you have to remember that the amount of new businesses that stay afloat is in single digits.
How to calculate the risk
Most project pricing is determined by the amount of hours, amount of persons involved, deliverables, and operating costs along the way. If you’re looking to exchange that amount for a share of equity with your client, you should still calculate the overall cost as if you were providing it as a service so you understand what you’re putting on the table.
In almost every scenario, your equity will only be for a set amount of time. It usually coincides with the length of time your client thinks they need you on board to meet all their milestones. Some partnerships may only be for 3, 6, or 12 months. As a client, you wouldn’t want to commit to a 3 year agreement and end up paying out more earnings to your newfound partner than what you would keep for yourself. So it’s understandable if the agreement is initially short term and adjusted and expanded as time passes and markers are met.
What you’ll have to do is figure out how much a share you’ll need to be able to cover your costs if your client’s sales were to remain the same as last year over the course of your partnership. If you have a 6 month contract, and you’d normally charge $20,000 for a project of that period, you’ll then look at their revenue numbers. If they had $500,000 in sales last year, that’d be $250,000 over 6-months (length of your contract).
To cover your $20,000, you’d need an 8% share of revenue. You won’t get that. Clients expect you to take a loss against their current numbers, in hopes of you increasing their revenue and earning your share. So you may only ask for, or they may only offer, 4 or 5%. If you have faith in the company and yourself, that share could earn you many times more than your normal price tag for the project.
It’s a tough call for many entrepreneurs
If you happen to be a risk adverse individual, partnering with your clients instead of taking an immediate pay and walking away at the completion of the tasks, can be extremely rewarding. Not only financially, but in experience, opportunities, and overall personal development.
Also, if your client is already somewhat established, you’ll have plenty more resources to work with than you would if you were starting a business from scratch yourself. You can still be a radical entrepreneur in a 9-5 environment.
I happen to be in such a situation myself with one of my clients. Without going into too much detail (this article’s long enough as is) I’ll be assuming a full-time position in exchange for a share of the company’s earnings (and eventually, maybe a share of the company) not too far down the road.
I’ve analyzed the pros and cons I mentioned above, and because of my nature, I couldn’t resist. Becoming a partner with a client will engulf you with more first-hand experience and understanding about their business than you could ever get from any form of research. Playing the role of a motivational partner determined for success and change, keeps you on your toes instead of just behind your desk.
This article also began at about 3am. I can’t seem to shut up in the wee hours of the night. :)
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