Ask HN: Is Sweat Equity a viable idea?
14 comments
No. So many reasons.
* Even people with long-term commitments to companies have a hard time valuing equity.
* In order to value equity, you need to be given access to confidential details of the company.
* It's legally expensive to give different kinds of equity to people, and every time you do it you create a small (or worse) amount of risk.
* The rules about employee equity are well-tested and understood. The rules about equity offered like this aren't.
* Offers for exchange of equity for in-kind services could be construed as unlawful solicitation of investment (I don't know, and am not a lawyer).
* Having a web design contractor on your cap table is going to make it harder to close VC rounds.
* Screwing up your equity grant to a web design contractor so that they have an effective veto on a VC round is going to make it impossible to close VC rounds.
* Employee equity vests.
* At good companies, a grant of equity has uncapped upside. Nobody buys web design for "potentially unlimited dollars".
* So now you also have adverse selection to deal with: the companies whose equity is available in a program like this won't be the Airbnbs and Dropboxes of the world.
* Similar barter programs (based on pure in-kind/in-kind exchanges) have been tried for decades (the ISP I worked at in the '90s was involved in one) and they appear to reliably fail; once people start to believe their contributions aren't fairly valued, a vicious cycle sets in.
I wouldn't just not participate in a program like this; I wouldn't work for a company I found to be participating in one.
* Even people with long-term commitments to companies have a hard time valuing equity.
* In order to value equity, you need to be given access to confidential details of the company.
* It's legally expensive to give different kinds of equity to people, and every time you do it you create a small (or worse) amount of risk.
* The rules about employee equity are well-tested and understood. The rules about equity offered like this aren't.
* Offers for exchange of equity for in-kind services could be construed as unlawful solicitation of investment (I don't know, and am not a lawyer).
* Having a web design contractor on your cap table is going to make it harder to close VC rounds.
* Screwing up your equity grant to a web design contractor so that they have an effective veto on a VC round is going to make it impossible to close VC rounds.
* Employee equity vests.
* At good companies, a grant of equity has uncapped upside. Nobody buys web design for "potentially unlimited dollars".
* So now you also have adverse selection to deal with: the companies whose equity is available in a program like this won't be the Airbnbs and Dropboxes of the world.
* Similar barter programs (based on pure in-kind/in-kind exchanges) have been tried for decades (the ISP I worked at in the '90s was involved in one) and they appear to reliably fail; once people start to believe their contributions aren't fairly valued, a vicious cycle sets in.
I wouldn't just not participate in a program like this; I wouldn't work for a company I found to be participating in one.
I wouldn't just not participate in a program like this; I wouldn't work for a company I found to be participating in one.
Many (I'd even say most, maybe?) venture-backed startups engage in something like this, though, just not for very concrete things like design or engineering or marketing. Members of 'Advisory Boards' or 'Technical Advisors' or similar often get some nominal amount of stock [options/RSUs/whatnot]. Maybe this just flies under the radar with the expected value by both participants in the transaction being close to nil.
Many (I'd even say most, maybe?) venture-backed startups engage in something like this, though, just not for very concrete things like design or engineering or marketing. Members of 'Advisory Boards' or 'Technical Advisors' or similar often get some nominal amount of stock [options/RSUs/whatnot]. Maybe this just flies under the radar with the expected value by both participants in the transaction being close to nil.
That's true, but the stock they receive is more in the notion of an honorarium than a payment for services rendered, and there's often mutual benefit aside from the stock (being on advisory boards is, or used to be, a high-status thing). Advisors don't so much try to value the stock they receive. But a lawyer or a web designer has to do that.
Also, the value a company gets from an advisor is long-term. Not the advice, but the NASCAR-sticker-like endorsement the company gets from the name on their website.
Also, the value a company gets from an advisor is long-term. Not the advice, but the NASCAR-sticker-like endorsement the company gets from the name on their website.
I think (and I should have said so) I was mostly responding to the categorical-sounding 'No' at the start of your comment - such transactions do occur, occasionally even for straight up 'services rendered' (with the other party generally having to pass the 'qualified investor' bar).
I'm probably in violent agreement with you that there is no sensible way someone's going to be able to offer some magical web-based marketplace for such exchanges, for all the reasons you listed.
I'm probably in violent agreement with you that there is no sensible way someone's going to be able to offer some magical web-based marketplace for such exchanges, for all the reasons you listed.
Oh, sorry, the categorical no was just an answer to his question of whether I'd get involved in something like this.
Whole point is that you involve skilled individuals and (perhaps) long term mentors who will increase the likelihood that you become investable. Their "share" in the business is a positive vote of confidence in the idea and the founding team.
Worrying about things that just might become an issue if by some magic you make it to the stage where you have a validated idea and a pitch that VCs might go for - well OK I admire your ambition (if you are actually in the process) but most people would probably recognise they are not superman and value the input of an external group highly qualified and rooting for them. Gotta help when raising angel investment (which is what us ordinary mortals are working on).
Worrying about things that just might become an issue if by some magic you make it to the stage where you have a validated idea and a pitch that VCs might go for - well OK I admire your ambition (if you are actually in the process) but most people would probably recognise they are not superman and value the input of an external group highly qualified and rooting for them. Gotta help when raising angel investment (which is what us ordinary mortals are working on).
Putting contractors on your cap table is not going to make you more investable.
I took part in this program http://www.inventorium.org/events/swequity-wales-spring-2013... that runs in Dublin and now North Wales. Great idea - check out the info packs to see how it works. No reason that you could not harness something like this to an accelerator or incubator program for a share in the best ideas.
Thanks for sharing the link. Building up our customer base, from the ground up, via accelerators/incubators, is something that is definitely on our minds.
I'd have thought the reverse was the bigger part of the problem: finding skilled people willing to work solely for a small slice of equity in a company they had no influence over.
I'd expect there to be an adverse selection issue too (startups most likely to succeed are those that can pay for stuff with revenue or investors' cash; startups most likely to hand out equity like candy are those that know they're struggling)
I'd expect there to be an adverse selection issue too (startups most likely to succeed are those that can pay for stuff with revenue or investors' cash; startups most likely to hand out equity like candy are those that know they're struggling)
Our firm has played with that concept already for number of years. However in the last few years with easy access to funding capital it begs the question why exchange equity for those items? It would seem then that this would appeal to startups only if they can't get funding, which raises another question on how viable of a startup is it?
With that said, we concluded that a capped equity swap might be acceptable. As in where the service provider would be rewarded with up to 4x to 8x their or the industry normal business rate for the services they performed. So a lawyer normally charges $150/hr. He choose to only charge $50/hr in exchange for the other $100/hr be some sort of investment. At payout time he could receive upto $800/hr for services performed. Payment could be tied to any company metric. This would be much easier to track then say % share of equity.
With that said, we concluded that a capped equity swap might be acceptable. As in where the service provider would be rewarded with up to 4x to 8x their or the industry normal business rate for the services they performed. So a lawyer normally charges $150/hr. He choose to only charge $50/hr in exchange for the other $100/hr be some sort of investment. At payout time he could receive upto $800/hr for services performed. Payment could be tied to any company metric. This would be much easier to track then say % share of equity.
The equity in business is pretty low until it generates cashflow or contains assets(traction). For businesses with traction their are already established ways of getting investment capital. Also, I don't know if it makes sense for a business to dillute it's equity for one time costs. If it were to be done, you would need somekind of project plan to profitablity. And some kind of model were nobody puts in effort until all the peices are in place. And how does the project adapt if people don't deliver on their promise?
I'm never a fan of giving up equity in exchange for short-term services, rather than a long-term commitment from an employee or investor.
I wonder if you would have success attracting high-potential startups. It would seem that most of these are able to raise money for the needs you talked about, especialy since it appears easier than ever to raise a small seed round.
As a result, you could be left with mediocre to low-quality startups only which threatens the model.
I wonder if you would have success attracting high-potential startups. It would seem that most of these are able to raise money for the needs you talked about, especialy since it appears easier than ever to raise a small seed round.
As a result, you could be left with mediocre to low-quality startups only which threatens the model.
I would be willing. I'm a believer in multiple streams of passive income so this idea is a natural byproduct. I would love the opportunity to do small pieces of development work in exchange for micro equity. In this way, I could 'invest' in a dozen different startups and thereby make some long term bets. In todays climate, one win in ten has enough ROI to cover the cost of the other nine.
Our site would allow startups to exchange equity for those needs.
As part of our discovery process, we'd like your feedback.
Would you be willing to exchange equity in your startup for a particular resource mentioned above? Why or why not?