Access to better, cheaper technologies has made it easier than ever to launch a business and the current surge of mainstream interest in startups has sparked some public relations and marketing agencies to offer creative payment plans. In a throwback to the 1990s, some service providers are getting into the startup game by offering up services in exchange for a part cash/part equity stake.
Atlanta-based marketing firm Creative Word and Image (CWI) provides video production and campaign management services to businesses including startups. In exchange for service, startups are expected to generate a return on investment within 12 months; or the equity gets converted into a “stronger moving forward entity.”
“Our basic position is that if we find an opportunity that we feel has potential that we can propel with some strong marketing guidance, we will define a value for the services we are willing to provide for deferred compensation – perhaps a convertible debt or future payback with interest – but we would charge for the direct expenses costs,” explains Michael Shoer, CWI managing partner.
Other agencies looking to draft off the current startup wave with an equity-based compensation model include Nebo, which administers a $500,000 venture fund for entrepreneurs with little more than an idea, and email marketing software maker MailChimp, which invested $2 million into Mosley Ventures, a VC firm led by prominent investor Sig Mosley, late last year.
The practice of trading services for equity first came into vogue during the late 1990s, when agencies were more than happy to work for stock options. When the bubble burst in 2001, those investments quickly fell out of favor, leaving many professional service providers without equity or fees.
This time around, equity swaps aren’t necessarily being embraced by all. Of the four public relations firms contacted for this story, we received no response from one and two of the firms indicated that they would consider alternatives to the traditional all-cash model but wouldn’t comment for this story.
Public relations veteran and founder of Carabiner Communications Peter Baron, however, did weigh in:
We have taken equity in exchange for services quite a few times and unfortunately, none of the equity swaps has resulted in a pay-off for our investment of services and time. It’s hard not to get excited about the potential that each start-up represents, we’d love to get on-board with most great new companies we see. For now, though, we resist the urge to exchange our services for equity until we’re given a shot at the next Joulex, Silverpop or Pardot and we can run with the valuation.
The Wall Street Journal notes that, for service providers with little or no experience evaluating startups, these kinds of arrangements can be a bad idea: “The entrepreneurs best positioned to succeed, [critics] argue, rarely need to give up equity for services, because they are funded by venture capitalists or other investors and thus, can afford to pay the fees.”
CWI is certainly taking a more cautious approach. The criteria for evaluation go far beyond whether or not the startup has a “cool” idea:
As a general rule, the startup needs to present to us not only an interesting idea that, with marketing, could become a profitable business, but they also need to be far enough along to have developed a reasonable business plan. They would also need to have some degree of a marketing budget, as we invest our intellectual capital, but we do not generally fund ad spend. The startup needs to have skin in the game: we’re not their bank.”]
It remains to be seen whether agencies will have better luck with this strategy the second time around, though it does appear that the “get rich quick” attitude employed by many during the Internet Bubble of the late 1990s has remained in the past.
Photo Credit: Reinhold Brezovszky via Flickr