How to access commercialisation expertise without giving away equity
Posted 12 months ago
Understanding what expertise you need and how exchanging it for equity could impact your business will help you make good decisions about funding your commercialisation plan.
Securing the financial runway for bringing a product to market can be scary, especially when you have the technical smarts but not necessarily the commercial acumen.
It makes sense to bring in specialist commercialisation experts to guide you, to maximise the return on what you have already invested with time, sweat and capital.
But how can you be sure such expertise will add value to your progress rather than burn more cash for no clear outcome?
This concern is what prompts spinout project teams and start-up founders to negotiate an exchange of expertise for equity.
Like all steps in the commercialisation process, this tactic involves risk and therefore testing assumptions about what an expertise-for-equity exchange will deliver, when, how and for how long.
Let’s consider the expertise factor first:
- What skills and knowledge do you need at each stage of your project’s development?
- Can that be provided by one firm of consultants, or will you need to spend time shopping around for different advisors, mentors and facilitators?
- How do you work best with external experts? Do you need them to crack the whip so you stay on track and pace? Would you rather a report you can action later? Do you like a structured program of activities or ad hoc sessions?
- What’s going to help you gain clarity and direction to shape your commercialisation strategy – tools, training or talking (or all three?)
- How will you measure your return on investment, whether paying for services or relinquishing equity?
What will give you confidence that the people sharing their expertise can really help you accelerate commercialisation?
- How big a role do you want them to play in exchange for the amount of equity you offer or the service fees you’re prepared to pay?
- Can you afford the expertise without offering an equity share?
- Can you afford to proceed without the expertise (think speed to market, reputation, competitive edge, etc.)?
Understanding what you need and how the expertise will help you achieve your goals in ways that are meaningful to you is key before working out how you’ll pay for it.
Now consider what equity entails:
Equity is the degree of ownership that stakeholders have in a venture or company. It refers to the value of the shares that each one holds.
Exchanging equity/shares for cash investment is one way a venture that’s showing significant potential can secure funding for further development.
When you offer equity instead of payment for services rendered, you’re asking your supplier to forfeit a short term financial gain and take on a financial risk in the hopes of receiving a better financial return later.
Often, that investment comes with expertise and expectations of a seat on the board or managerial input, because the investor has a keen interest in ensuring the business or project is a success.
It’s common for industry experts who guide product commercialisation to be compensated with equity. It’s reasonable that anyone making a significant contribution to the venture’s growth for which they are not being paid in cash to want some form of ownership.
Slicing up the pie to share the risks is fine, so long as you’re willing to share the rewards in equivalent measure. To enable your pie to grow and become more valuable as a whole, how many pieces are you willing to forgo?
Common risks in an expertise-for-equity exchange:
Buying a stake in a business, either with cash or in-kind expertise, can raise some control issues.
Each stake comes with entitlements, like voting, a seat on the board, or a management role. Project progress can be derailed and delayed when the rights and responsibilities accompanying the shares are not clear, resulting in overstepping or underwhelm. A clear governance structure is essential.
Letting go full control of something you have nurtured from concept to commercial possibility can be wracked with fears of property loss and displacement.
Working out a fair exchange rate can be tricky:
- What is the worth of the expertise in relation to the value of the venture at that point in time?
- Do you offer someone providing $5,000 equivalent expertise (and their time) a different size stake to someone contributing $5,000 cash (and no time)?
- If you offer a consultant a five percent stake, how do you know their contribution will be worth five percent of the company’s value in a year’s time?
- Are hard assets (cash, equipment) worth the same, more or less than soft assets (intellectual property, know-how)?
Each time you bring in a new expertise-for-equity arrangement, the value for the existing shareholders is diluted – especially in the early stages and that’s when outside help is often most needed.
Then there’s the vesting schedule to consider. Once an equity stake is purchased with cash or in exchange for expertise, it belongs to the owner until they choose to sell it, give it away or convert it to cash. What if they want or need to cash in their contribution early? It’s rare to be able to return expertise investment in the same form!
Managing expectations with multiple owners can be difficult and a complex capitalisation table (aka “cap table”) can make attracting venture capital harder – sometimes because of the ownership structure and sometimes because there might be too many differences of opinion.
It’s important to weigh up the short-term gains against potential long term losses. Equity in your business is not income in your bank account.
Why would someone offer support or services in return for equity?
- They detect some red flags and don’t want to commit their cash.
- The perception of a free ride – minimum input, maximum output to introduce you to their network of ‘investors’.
- Perhaps the risk-reward trade off hasn’t been considered – it’s still a high-risk option for someone to invest time, especially without having cash to invest too.
- It’s one to way to bet on the field and play the numbers.
- The accelerator or incubator model might represent “all care and no responsibility” – whilst they provide structure and varying amounts of support, they bet on the entire field because they only need a handful of businesses to succeed.
What’s another option?
Paying for the right expertise as a fee for service, when and how you need it, gives you immediate and practical guidance towards every next step without the risks of equity arrangements.
You know what the price is, so you can budget and account for it.
You keep control over your intellectual property and how it’s developed.
You have full responsibility for how your business is run, nurtured and scaled.
Build a relationship with your commercialisation advisor, but pay as you go. Just like you do for accountancy, marketing and legal products and services.
Start with a small expertise investment, like a Commercialisation Navigator package to recharge a stalled project. It charts a clear roadmap for your commercialisation plan that eliminates the guesswork.
Enrol in the Product Accelerator to gain expert-guided support for unblocking obstacles as you design, develop, test, and deliver your new product. It’s a 14-week online program with a flexible schedule.
You may be eligible for grants, subsidies and other funding schemes to cover the costs of these programs.
Exchanging equity for expertise might well be what’s best for your commercialisation plan and business growth strategy.
But don’t assume it’s your only option. All assumptions should be tested so commercialisation decisions are based on facts, not fears.
If you would like to learn more about expertise that doesn’t entice you to part with equity, check out the options here.