I was in touch with a mix of academics, inventors and entrepreneurs as a student in Boston when I started my company American Patent Agency, which helps founders obtain patents on the inventions behind their businesses. While ideas were plentiful, the same could not always be said about venture capital.
As I started building the groundwork for my company, I realized that it was more important for us to work with clients whose business models we believed in instead of the ones with the most immediate financial upside. In order for that vision to work, we accepted equity in place of cash for the company’s services.
If your business caters to the startup community, and the market views your costs as a barrier to entry, I recommend considering accepting equity instead for the following reasons:
1. Equity returns can mature into valuable interests.
I put little more than $1,000 into the initial phases of my company. Each client I worked with thereafter was a unique opportunity to invest in. Today, my portfolio of client equity is now valued at over $1 million. Sure, you can always take revenue and put it in the stock market, but when you understand your clients’ businesses, you begin to see that there’s a lot of potential for growth in startup equity.
It’s important to note that most of the equity payments I’ve received over the years have taken anywhere from three to seven years to mature. I still worked full time at a day job in order to facilitate equity payments. This can be a rewarding model if you are evolving a side hustle into a full-blown business.
2. Offering alternative methods of payment allows more companies to take advantage of your service offering.
One thing startups always need is capital. There are so many ways to use it. Do you invest in a new technology? Hire more staff? Concentrate on research and development? Most founders want to answer all of these questions with yes. So, if capital is almost always channeled back into the startup, how do you build a service that is affordable for clients? By accepting equity instead.
In my experience, you will notice that case studies, references and your presence in the local startup scene will grow more quickly as a result. These are fundamental building blocks in any industry where word of mouth can get you ahead. It’s much easier to pitch and land new clients when you have ones who have already undergone the full breadth of your service and stand by it.
3. Stop worrying about who is the most lucrative client today, and shift your focus to who you believe will have the best business model in the future.
Throughout my time traveling to various startup hubs such as Boston and San Francisco, I’ve come across many companies and thought, “I want to work with that business.” I find that I am more inspired in my work when I’m serving a company that I believe in.
Unfortunately, not every company you want to work with has the cash to work with you. In that case, equity is more than a way for clients to pay for your services; it’s a way for you to ensure you’re doing what you love.
4. It’s important to practice the art of valuation.
When aiming for equity returns, both you and your client will need to value the respective businesses. I’ve gained critical experience as an investor by engaging with clients this way. Not only is it excellent practice for future venture capital opportunities; it also hones your understanding of what markets you invest in the best.
My background is rooted in inventors with scientific technologies developed in academia. While not every client I’ve worked with fits exactly into that niche, it helps when there are similarities. The more I relate to the client’s business model, the better I can envision its success, risks and potential return.
While difficult at the beginning, equity services can pave a path for exponential success. The biggest thing you need to decide is how you will cover your operating expenses when the equity has yet to provide a return. As I mentioned earlier, working a day job helped cover my finances, but that’s not the only way to handle things. You can also incorporate the need for this funding into your business plan for presentation to venture capitalists.
Whichever side of this coin you end up on, I’m sure you’ll find equity returns to be a refreshing, rewarding way to do business with startups.