I love Brad Weaver’s new book, Creative Truth: Start and Build a Profitable Design Business, and am so glad he’ll be speaking at HOW Design Live in Atlanta this year. (Be sure to register by April 1 to get the best rate!)
One of the strongest chapters in his book is on pricing strategy, in which he outlines 7 different pricing models, or ways to price — proving once and for all there’s no right way!
In the chapter, he covers hourly billing and flat fees, value-based pricing and retainers, package pricing and performance-based.
But the most mysterious and trickiest of them all is “equity pricing” — where you provide services in exchange for partial ownership of a company. (In a recent podcast interview, another HOWLive speaker, designer-turned-venture capitalist, Kristian Andersen, shared tips on how to choose the right partner for this type of arrangement.)
Read this excerpt (below) from Brad’s book about how equity pricing works — then listen to our podcast interview about his book. You’ll learn how to determine which clients are best to try this with — the risks are high but the rewards are too, if you choose carefully.
Pricing Model 7: Equity Pricing
from Creative Truth: Start and Build a Profitable Design Business by Brad Weaver
If you’re joining a startup or building a product, you may be offered partial ownership of the business. It may be in lieu of any cash payment, or it may be a mix of equity and a reduced cash payment. I’ve been down this road before personally and had a bad experience, but I’ve had close colleagues take the risk and come out quite well. In my situation, I had little control over the day-to-day operations. Others have either been lucky to land with a hit company or had some influence on the outcome.
This approach isn’t for everyone and certainly not for someone who needs the money now. It’s a great approach for side projects, small engagements, or something that you’d be willing to do for free if your schedule allows. It’s not a good approach if you’re giving up a large number of cash bookings or dropping clients to accommodate this project.
If you’re in the market for a job or thinking about backing off of your creative business for a while to join with others, then it may make more sense. Just keep in mind that taking equity all depends on where the company is at the time you get involved. If the company has not received any outside funding, your ownership will be significantly diluted once it does. If it has taken on funding, you’re going to be offered a tiny amount of equity, less than 5 percent, which isn’t much unless the company is on the way toward making millions.
You’ll still need to keep up with the cash value of your time involved for several reasons, most notably for tax purposes. In addition to keeping up with your time, ask yourself these questions:
- Are you getting only equity or being paid cash as well? If your ownership is a mix of cash and equity, then you may be able to stomach the risk. Your cash payment for your services will need clear separation from your equity and you’ll need extensive documentation denoting the separation between your fee (a payout) and your equity (stock).
- Are you investing any cash? If you’re bringing cash into the business, then you’re in an entirely different situation. You’ll need the advice of an attorney who specializes in startups or mergers and acquisitions. Do not ever attempt to put cash into a business without involving a serious professional.
- Will you stick around? If you plan to stay involved either as a partner, consultant, or employee, then you’ll have to determine how it affects the rest of your business. It could be a huge decision that limits your ability to serve other clients; don’t let it catch you off-guard.
- Will your work be re-used or re-sold? Intellectual property and copyright can be critical in equity pricing. If you’re creating the brand or the core technology or design for the product, you should be compensated accordingly. If they use the brand for merchandising or resell items, your agreements should include provisions for royalties and future dividends. Again, get an attorney involved.
What is a realistic expectation?
No less than 25 percent. If a client is offering you 5 percent equity for creating important assets for the business, then they don’t value your work. That isn’t the kind of client you want. You want to work with businesses that value creative and design as much as utilities or office space. If a client is offering you a small percentage, they may be past their initial funding. If they’ve received funding, they have money to pay you.
If you still want to take equity, that’s your choice, but you should consider a cash and equity mix at that point.
How to say no but still get the work
You don’t have to lose the client if they’re only offering equity at first. You can offer to help them raise the money to pay you by advising them or connecting them with investors. You could offer to create a presentation or other small work for them to help them along in their quest for the cash they’ll need to pay you. It’s technically working for free, but it may be worth it to you. If they simply can’t come up with the cash and the situation doesn’t look promising, it may just be a client you have to let get away.
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