- Hey there, Dan Martell here.
Serial entrepreneur, investor and creator of SaaS Academy.
In this video I'm gonna teach you how to exchange your startup
equity for services so that you can bring on developers,
biz dev people, other folks creating things for your startup
by exchanging equity in your business and be sure to stay all
the way to the end where I teach you how to get access or I show
you how to get access to my Fundraising Like A Pro training
where I'm gonna teach you the three phases of fundraising for
you to crush your next round.
(upbeat music)
So maybe you're starting off and you've got way too many things
you've got to get done and
you don't have enough moolah to make it happen.
Well, I'm gonna teach you a very simple thinking process and
framework for you to exchange equity in your startup for
output or services or work and I remember I was building,
well, I had an idea.
I was in San Francisco, this was about five years ago,
and this is probably the most relevant example is I was
thinking of co-creating this software.
It was called Velvet. It was a SaaS metrics tool.
Essentially you installed it, it would give you this whole
dashboard of SaaS metrics that you would need.
So it was just a really simple, in Ruby,
it was a gem that you would install and it would make it
just a beautiful admin dashboard for your metrics.
And I found a partner that was super capable.
They were very well known and I knew the founder well in this
agency, this development shop and I wanted them to build it.
So we kind of spec'd out the product and all the different
features and what the MVP would look like and what we would go
kind of to market with the first version.
And they came back and they said,
"Hey, this is amazing. We want to be your partner
"but we're gonna want 40% of the total startup equity."
And I'm like, "Okay, I appreciate the excitement for
"the project but 40% to build the first version
"that could go on," you know,
eventually I was gonna raise venture capital,
build a team around it and scale it up.
It just felt a little rich.
So all I shared with him is the same framework I'm gonna teach
you guys today which is let's just look at
the real economics of this.
If I were to pay you, what would it cost me?
If we convert that dollar amount into equity,
what would that percentage be?
And we need to make sure we're directionally accurate on that
math or this thing doesn't make any sense.
So what I'm gonna teach you today in this video is the four
steps that you need to go through to make sure that you
exchange equity for services in
a way that's win-win for both parties.
Step 1, set a valuation.
When you're starting off and you're negotiating some services
for equity, the first thing you need to do is figure out what is
the fair market value for your startup
and it can be at the idea stage.
It could be at some pre-sales.
It could be a little further along.
It could even be revenue generating and you want to bring
maybe some biz dev support to help you grow up.
The reality is valuations are
100% arbitrary meaning that you can decide.
You can, you know, I always call it like the Kool-Aid.
You can sell the Kool-Aid as sweet as it is before you
actually get somebody to exchange
a dollar for real valuation.
So, you know, in the early days look around your market and ask
yourself, I mean, if you're building a tech startup then a
million dollars is not crazy to just set a valuation right out
of the get-go or even let's call it half a million dollars.
If it's at the idea stage maybe you have like this marketing
site and some pre-sales, it could be a half a million bucks.
But whatever it is, is just set it.
I've seen some people set it as high as $4 million.
It's like look, yes, it's early stage but we've got a team,
we've got a track record, we've got customers lined up,
we've got pre-sales.
This thing's gonna get going.
You know the valuation's a lot further along than
half a million or a million dollars.
But the first thing you need to do when you're negotiating with
a vendor to provide some services or somebody to do some
work is to figure out what the
valuation of the business is today.
Number two, quantify the work.
If you're going to be engaging somebody to do work for you,
maybe it's to write code, to build the first version,
you gotta just ask them, "What would this cost me to
"get built if we weren't talking about equity?
"If I were just to engage you and have you,
"you know, submit a proposal, what would that number be that
"we write down that I could just write you a check for?"
Because the truth is at the end of the day you're giving up
equity which to me has got a lot of value.
In the long term you know a half a percent,
a percent of something that could be worth a $100 million is
a big deal and you don't want to be too loosey-goosey with just
giving that to people for whatever.
So asking somebody what the work would be worth and then just
thinking to yourself, well, you know what?
Do I really want to give them the equity or do I want to just
pay them because I could go raise money once I've got this
prototype and I'll just pay them.
So that's the way I think about
it is like let's just quantify the work.
What are they building?
How much is it gonna cost me right out of the gate?
And then that way, we at least know what number essentially
they're investing into the business for in-kind services.
Number three, give it a bump.
So if they are doing the work and let's say it's a $100,000
worth of development or marketing support or whatever it
is then to me it's higher risk 'cause like if I give you
$100,000 check that's a totally different scenario than if
I give you $100,000 worth of consulting hours
or services or whatever it is.
So to me there's a higher level of risk.
So what I suggest is give it a bump.
So if you know that it's super early stage and it's super high
risk, meaning you haven't raised any money yet from other
external investors then maybe give it a,
you know, 30, 40, 50% bump. 'Kay? And this is a negotiation.
You could just say, "Look," maybe the person doesn't know.
So they're like, "Well, normally this costs $100,000."
Like, "Great, we're gonna give you $100,000 worth of equity.
"This is the valuation so here's the percentage that you would
"get once you've completed the work."
And if they're happy with it then don't give them the bump
but maybe they say, "Well, geez, this is super high risk and,
"you know, I would feel better if maybe you know we did a
"higher valuation than I would normally get paid 'cause that's
"a real dollar that I'm not getting paid that I'm giving you
"so maybe you know the number is a little bit higher."
So number three is just really give it a bump so that everybody
feels like it's win-win.
Number four, allocate the equity.
So now that you've got the valuation set for the startup,
you know you've quantified the work and you've got the bump
added to it, some kind of multiple enhancer then it's
really to allocate it using some kind of legal framework.
Okay, and I'm not a lawyer.
I do not play one on the internets,
on the YouTubes so you're gonna have
to work with a startup lawyer.
I will say this, there is enough in today's world,
okay, and trust me when I started off building tech
startups and venture backed companies there was no
best practices, templates, docs. Those exist today.
If you just search startup fundraising documents or seed
round documents or legal fundraising startup templates
you will find a ton that you can use and you'll find some
incredible lawyers that you can reach out to.
But the key at this point is to actually get it put in writing.
And what I would do is do it in releases.
If they're developing code and their normal invoice cycle is
every two weeks, I would release the equity every two weeks.
I would not allocate it straight out.
I would do it as per the work is getting done in case,
which is sometimes what happens, they totally miss the mark and
the code doesn't work and all of a sudden now if you've allocated
it all up from and the work isn't even done then you've
got no leverage to hold them accountable to it.
So you want to make sure that you've set the allocation in
proportion to the work being done
and that's how you make it all work.
So four steps for exchanging services
for equity in your startup.
Number one, set a valuation to use
as the price of your startup so far.
Two, quantify the work being done so we know the number that
we're exchanging it for.
Three, give it a bump maybe.
If they're negotiating, right,
so that they feel like it's win-win.
And four, allocate the equity in proportion
to the work being done.
As I mentioned at the beginning of this video I want to share an
incredible resource called The Fundraising Like A Pro training.
Click the link below in the description to download
or to get access to that.
Essentially in it I break down the fundraising process into
three distinct phases.
The first one is the most important.
It's called the pre-marketing.
You don't want to miss how to do that properly 'cause if you do
you'll get a 98% confirmation rate
for meeting with new investors.
Here's the big idea behind this whole training is investors
don't want to hear from you.
They want to be introduced to you.
So you can click the link below to get access to that and if you
liked this video be sure to click the like button.
Just smash that like button.
Subscribe to my channel if there's anybody that you care
about that you think this could serve,
feel free to share it with them directly.
And as per usual, I want to challenge you to live a bigger
life and a bigger business.
I'll see you next Monday.
We can have lots of fun.
Step two, two, two, there's so much we can do.
Step three, three, three.