offering a stake rather than paying

[jibbajabba]

Hi
I have a e-commerce startup (kids toys and stickers) and am running out of funds fast (as you do). I have had a few sales and the market is there, (not in uk yet but Germany France and US), most sales are US. Company is limited and 100% owned by me as sole director.
So I don't have many design skills. My skill set - Idea's, finance (accountancy), sales, credit control and research. I have a care business that employees 7 people which I started from scratch 2 years ago so I guess I can say I have business skills.


I have a few people i outsource too, my engineer for the nuts and bolts and my graphic designer.

My designer is starting to cost a bit and will do in the future. I come up with the idea for the stickers and she charges me about £125 per design. I get them printed, do the test run/photography and put them up on the marketplaces and all the behind the scenes stuff.
Part of the business is going to need constantly updated designs so I will paying a bit as we go along, prob around 5k a year.

I thought about offering her a stake in the business (5- 25% depending on if she funding) rather than paying for each design. i have 2 reasons, 1 cash flow & 2 her investment in the business may take a giant leap forward and she can help on my product in development (which is going to be the big hitter). I will do my due diligence, references, cv, shareholders agreement etc but thought I would broach it with her over the phone first before I embark on all the work checking her out.

Would you guys do this? Is it a good idea or should I keep 100% and grow a bit slower?

 

[ryedale]

We get asked this a lot and it's always a straight no regardless of how good the business may potentially be because future profits don't pay staff wages and overheads. People often get very offended by it!

If she works by herself then she may be more open to it but it's always a very risky gamble by a developer.

 

[Mr D]

Perhaps as part of payment rather than replacing payment?

Would be a bad idea still, no guarantee that you will ever issue dividends. Or that the business will survive to issue dividends.

 

[Lloyd Williams]

I’d never accept it.

Would you work for an employer for free on the promise that one day if they ‘make it’ you’ll get a lot of money?

Would you do so knowing that the vast majority of businesses don’t make it past 2-5 years?

 

[deanpunchard]

I think making a person who has 1 skill a shareholder could be risky, and not a great deal for either side. They might not want to become a shareholder, or simply want cash to pay for food. From your point of view, you'll be tied to this one designer. What if trends change, and their style is no longer what you want. What if they become ill, and can't produce the work, but are still entitled to the dividend?

If I was thinking about this, I'd look at offering a % of the profit from the sales of items they've designed, rather than shareholdings. That gives your designer the incentive to produce their very best work, and even promote the work (handy if they have a good social following).
It also gives you both freedom to move as you please.

Failing that, have you thought about having her on a long term retainer, which may bring cost down, but also give her sustainability?

 

[jibbajabba]

We get asked this a lot and it's always a straight no regardless of how good the business may potentially be because future profits don't pay staff wages and overheads. People often get very offended by it!

If she works by herself then she may be more open to it but it's always a very risky gamble by a developer.

We have worked together since feb, No real overheads in this business (or for her) apart from the big product and that is funded until production. She already has all the equipment to do her part of the job.

Perhaps as part of payment rather than replacing payment?

Would be a bad idea still, no guarantee that you will ever issue dividends. Or that the business will survive to issue dividends.

I think I'm looking for a partner as well and she has the design skills that I need plus she appears entrepreneurial (worked with a few business). She has bought into the concept of the business and loves doing the work and its done alongside her day job.


I know she can say no, but I think she would say yes. I am more looking at my side of it, protection for me and pitfuls of the change of relationship.

 

[jibbajabba]

I’d never accept it.

Would you work for an employer for free on the promise that one day if they ‘make it’ you’ll get a lot of money?

Would you do so knowing that the vast majority of businesses don’t make it past 2-5 years?

Depends on the product, If it was google maybe. and isn't that what an element of internships are?

I think making a person who has 1 skill a shareholder could be risky, and not a great deal for either side. They might not want to become a shareholder, or simply want cash to pay for food. From your point of view, you'll be tied to this one designer. What if trends change, and their style is no longer what you want. What if they become ill, and can't produce the work, but are still entitled to the dividend?

This is my big concern, what if she just decides not to bother. all my due diligence cant account for what you advise.

If I was thinking about this, I'd look at offering a % of the profit from the sales of items they've designed, rather than shareholdings. That gives your designer the incentive to produce their very best work, and even promote the work (handy if they have a good social following).
It also gives you both freedom to move as you please.

Failing that, have you thought about having her on a long term retainer, which may bring cost down, but also give her sustainability?

% could be a good idea and will chat it through with her. I hadn't thought about a retainer, how does it work? would I have to give her a payment upfront?

 

[Clinton]

She would be stupid in the extreme to agree to any arrangement without several safeguards in place.

The #1 safeguard, and one that should not be optional, is a shareholders agreement. They cost thousands of pounds (if you get it properly drawn up by a corporate lawyer).

And if she wishes to get the business formally valued to calculate what level of shareholding would be fair ... that'll cost a few grand as well.

Then don't forget when you have someone else as a shareholder you do need to actually complete formalities such as shareholder meetings, maintaining board resolutions blah, blah. When they are the only shareholder most small business owners don't bother with these things. But when you have another shareholder, it would be wise to do everything "by the book".

And do you know what additional risks you are taking? It's a very low shareholding threshold for her to have the power to demand an audit of the accounts. Should your relationship sour, she could impose enormous costs on you by making such demands.

Far too many small business owners seem to think that "giving shares" is a simple matter. It's not.

 

[deanpunchard]

A retainer simply means you agree to give them X amount of work a month. You can then generally negotiate a discount.
From a freelance background, this stability and guaranteed income is the building block most freelancers want.

 

[jibbajabba]

A retainer simply means you agree to give them X amount of work a month. You can then generally negotiate a discount.
From a freelance background, this stability and guaranteed income is the building block most freelancers want.

I think this is the best Idea, im going to put some thoughts on paper. I guess this wwuld make her more invested in the company as well. If (When) the company gets big enough I would look to take her on as an employee full time any way (or someone of similar quality and skill set).

 

[Gecko001]

Your designer is just that - they design. They sit down at their desk and do the work which can take hours for each design. They are competing with maybe 1000's of other designers worldwide, so are have probably working at quite a low rate per hour. they will probably have several clients all demanding that they produce the work at this low rate per hour. One client says that they want to not pay them as usual but offer a stake in the future.

If they are business savvy they will know that this is client who is having cash flow difficulties and thus steer clear of them. Those who are not business savvy will just not want to do hours and hours of low-paid work on terms they are just not familiar with.

 

[DontAsk]

A retainer simply means you agree to give them X amount of work a month.

Paying a retainer means you pay them £X/month regardless of whether you need them to produce any work.

 

[Mr D]

Paying a retainer means you pay them £X/month regardless of whether you need them to produce any work.

Can be built into the contract that for that money they agree to do xx per month.

 

[deanpunchard]

Paying a retainer means you pay them £X/month regardless of whether you need them to produce any work.

Can be built into the contract that for that money they agree to do xx per month.

A retainer has to be mutually beneficial to both parties to work. Generally there'd also be a cooling off period, and a notice period too.

 

[Change18]

If you think about why you're doing this and the fact you seem to have a need to do this due to cash flow, it's becomes clear it's one sided and it's all for your benefit. I'm not sure what the designer is getting from it. She will be working for free and will get paid as little as 5%? If you stretch to 25% she will have to fund some of your business?

I can only see this ending badly and hopefully she declines the offer otherwise I think you two may be falling out with each other soon.

 

[jibbajabba]

Cashflow isn't that tight at the moment. I think the main reason I am doing this is to get a partner rather than avoid paying. my designer isn't that expensive.
I think I may of worded the original post a bit wrong.
I appreciate the feedback from the other side of the deal. I spoke to her this morning and she is pretty invested it, I hadn't mentioned anything about the thread yet.

 

[fisicx]

Your problem isn't the designer, it's sales. If your products were selling then you wouldn't be asking the question.

You don't need a partner, you need better marketing.

 

[GTL]

In my experience, people prefer cash; especially if they are freelance. It's a black and white arrangement. The moment you become, for want of a better expression, 'partners', the whole relationship changes. You'll expect more and more from the designer. The designer will need to find other work to compensate for the 'loss' of your cash and before you know it you'll be left with a load of design stuff half completed which you'll then need to pay someone else to complete when the present designer walks. And at some point - if the designer does hang around - you will need to pay he/she something. How will you do this? sell the company? From profits? Buy her out? On whose valuation? It'll end up a mess. If I was the designer and you asked me, I would say no; start looking for other clients and when I had one, I would walk.

 

[Ashley_Price]

Quick simply you are asking the designer to take a gamble on your business. You are expecting her to use all her expertise and experience for nothing.

What happens if the business doesn't grow as you hoped and you end up shutting down? The designer is going to be left out of pocket.

I don't think you will find anybody willing to do this. Just look at the (many) stories on the Clients from Hell site and how often something like this is offered to designers - and turned down. One story posted just a few days ago:

Client: Your prices are really expensive. What if you do it for me now for free and when my ideas get big I can pay you back.

Me: If you’re so confident in your ideas, perhaps you should take out a loan. That’s typically what small businesses do to get started.

Client: And risk going into debt for some nobody? No thank you.

 

[jibbajabba]

Cheers for all the advice, a lot of good stuff and i'm putting some of the stuff into practice.

Your problem isn't the designer, it's sales. If your products were selling then you wouldn't be asking the question.

You don't need a partner, you need better marketing.

Agreed. I have a couple things to do before the PR to start, currently reading Peter Fisk and a few others to get going. I have a couple of things set up but wanted to have a few ducks in a row before I hit the phone. I have never had to do e commerce marketing before so google academy videos are on most days for ad words.

In my experience, people prefer cash; especially if they are freelance. It's a black and white arrangement. The moment you become, for want of a better expression, 'partners', the whole relationship changes. You'll expect more and more from the designer. The designer will need to find other work to compensate for the 'loss' of your cash and before you know it you'll be left with a load of design stuff half completed which you'll then need to pay someone else to complete when the present designer walks. And at some point - if the designer does hang around - you will need to pay he/she something. How will you do this? sell the company? From profits? Buy her out? On whose valuation? It'll end up a mess. If I was the designer and you asked me, I would say no; start looking for other clients and when I had one, I would walk.

Cash is King, I am going to discuss her a royalties + payment method to keep going.

Quick simply you are asking the designer to take a gamble on your business. You are expecting her to use all her expertise and experience for nothing.

What happens if the business doesn't grow as you hoped and you end up shutting down? The designer is going to be left out of pocket.

I don't think you will find anybody willing to do this. Just look at the (many) stories on the Clients from Hell site and how often something like this is offered to designers - and turned down. One story posted just a few days ago:.

Its good to get the other perspective. sometimes i get excited and want to do it all straight away and cant figure out why the rest of the world doesn't. I was actually speaking to the wife about getting a loan over breakfast. It would fast track it a lot and with Virgin loans you get the support as well.

 

[fisicx]

I have never had to do e commerce marketing before so google academy videos are on most days for ad words.

It's hard work. And especially so as you are selling something for which there are already a lot of established players. It can take years for you to start making a profit, for the first couple you will probably be running at a loss.

 

[Change18]

I re-read your opening post and it seemed clear that it's about both getting the designs for free from the designer whilst also trying to get an investment from her. And you'll be packaging this up as her being a partner. Therefore, you being able to move forward with the business and she is putting up the risk, both in time and money. And she only benefits if enough profits are made that her stake is worth at least as much as the time she is giving up for free.

Maybe you didn't mean it like that but that's how it came across. If that's the case then she really shouldn't accept it and even if she is excited and takes the opportunity it won't last when she doesn't start receiving payments. So it would probably waste both of your time.

If the £120 price you're paying and the updated designs (you've mentioned costing £5k per year) isn't viable then it sounds like you either neither to do one or more of the following:

• negotiate a lower price with your designer, as it's not profitable at the current rate. This could include an initial lower price but also a commission based on sales. I wouldn't recommend suggesting she does them for free. But she may be prepared to do them for a little less, with a commission on any sales.
• Increase your prices
• Increase your sales

 

[Financial-Modeller]

A slightly different perspective on this based partially on actual experience.

You presumably don't know what your business is worth, or will be worth. It is not within your Designer's skill set to understand how to value your business, now or in the future.

If neither of you know what it will be worth, how can you possibly agree on the shareholding to transfer?

Clients have occasionally offered me equity in a start-up business in return for financial modelling work to create business plans and for fundraising, and I have politely pointed out that properly valuing the business (my core skill set) would cost quite a lot, and more in some cases than the work actually being commissioned!

Back to the original request, if the Designer is happy to accept that this is a straight gamble on your ability to create more value from their work than they can, and accept your terms on that basis, they should consider accepting equity. In reality, you should be concentrating on adequately funding your business so that it can afford these normal costs, and pay the Designer's agreed terms.

As an aside, if you're considering giving away 25% of your business in exchange for a some design work with a value of £5k or less, it doesn't sound like you have a very ambitious business plan. It may be wise to step back, think about what you're trying to achieve, and consider other options.

 

[The Byre]

We get this kind of idiotic offer all the time - "Why don't we make this a joint venture and I cut you in on any deal we do down the line?"

In our case, our invoice runs to thousands and not £125 (the cost of filling the tank on my 4x4) and I still politely decline. There are all kinds of good reasons for declining such an offer - my main reason for not wanting to get involved with anyone who makes such an offer, is the rather obvious fact that if you need to cut an ownership or profit-share deal over a few thousand pounds, you must have the business acumen of a goat.

There are branches of business, where it may be in everybody's interest to cut such a deal - for example, where a major actor wants to get a pet indy project off the ground that has artistic merit, but is never going to be a bock-buster. Tom Hanks has done many such movies, but he keeps a steady stream of $10m-$20m 'payday' gigs going at the same time.

Web designers get this kind of offer all the time. They are supposed to do all the on-line heavy lifting for someone who has had 'a brilliant and unique idea' - yer, right!

In this case, the OP wants to cut a deal over £125. Say what????? Are you serious????? Has British business really fallen to this level?????*

Step One to starting a business - save up enough money to be able to get all your beans in a row, before you launch the business!

Or as a studio owner once told me, when he discovered that a producer could not actually cover his bill that month, but needed 'a few weeks' to pay - "I lose all sympathy for a man, when I discover that he has no money!"

*Judging by the news from Carillion today, the answer to that question has to be 'Yes!'