Sweat equity funding

Entrepreneurs seeking investment tend to see it as cash.

Others see it as a part buy-out for themselves, whereas nearly all ‘early stage’ investors place funds into the company to help it grow rather than to exit the founder.

Either way, investment can come in numerous forms from business angels and banks who inject cash in the form of debt or equity to serial investors who want to spend their time, money and effort in mentoring young entrepreneurs and their business.

Many aspiring entrepreneurs acknowledge that they need help and actively look for investment and guidance from more experienced entrepreneurs and advisors.

However, with more investors wanting to be ‘active’ investors there is an increase in the number of ‘equity for cash’ mixed with ‘equity for advice deals’.

It is hard enough to obtain the correct value of a business when cash in the offer, but how do you ensure that you get the best offer when advice and/or services are laid down?

In simple terms, if the ‘advice’ comes as a service then it can be benchmarked in the open market, ie PR, marketing, accounting etc can all be bought in.

Likewise, if an investor gives investments such as premises, IT etc this can be bought in.

Look at the open market cost of buying it in and equate that as a cash investment.

This is the offer on the table.

The difficult part is in valuing the intangible benefits that a business partner can bring. Hence giving away equity for these intangible benefits is nearly impossible to quantify.

Some mentors bring great insight into the business and industry; others are great at focusing your own actions so that you lead yourself down the right route.

Some on the other hand can not deliver what they promised they could deliver – these are the ones to run away from, very fast.

Hence in this blog post, we are giving the entrepreneur some basic pointers about giving equity away.

Never give up equity unless you have to – it is the most expensive type of money – instead look for debt.

When offered advice and/or services for an equity stake, be sure to benchmark this against the market price of buying in that service. If it is intangible benefits on offer, then research the person thoroughly – find out what they have done before and what they are doing now.

Create a contract outlining the advice and/or service you expect to receive. Include simple things such as how many days the person will spend on the business, when and where they will spend the time and what level of equity you are willing to give away for this advice. Also, consider a ratchet system where there equity builds up upon deliver of the advice/service. Above all else, ensure that you can legally withdrawer from the contract if they do not deliver on what they agree.

Ensure that you use the time with your Investor wisely. Plan for the meetings and keep a list of questions to ask. Do not bombard them with questions daily, but create a list of questions and review this list prior to the meeting. Finally, ensure that the meetings are structured and that you create and circulate agendas for meetings and stick to them.