Equity as Compensation

welcome to the school where we talk about the design of business and the business of design I am Jose cavalier and this is Cristo today we are going to be talking about alternative compensation whether it be equity whether it be barter whether it be something other than cash right we're gonna pick up because there were some interests online and this is where we need to hear from you guys if you have a follow-up question for us and put it in there we do read it Jose and I were very active in the social space put it up there we'll read it and we'll respond in this fashion right yeah so I think we left off last time in a kind of really great place right I'm putting it on I button just for a second don't forget to subscribe and now we're continuing the conversation there we go anyway so I I have personal stories to share and I want to talk to you about your people that asked the people that asks are not curious because they're wondering wait should I do this so that well that are what when is this why don't we start let's look at what it is what is it so getting paid for an example with some cash but then also a cut and equity cut that you are part owner of the company you're working for that's one way to do it another way to do it might be a smaller fee up front and a percentage of sales gotta be a fee and that could be a little bit lower with I love that model it's a good model scent of ice as a revenue share it's a restoration sure what other ways there's other ways in the lieu of revenue share that that have different for an example performance-based payment so we're gonna pay you a base salary a base payment let's say of you're an agency or of your freelancer and then based on quarterly performance of sales you're gonna get a bonus percentage of that because your contribution as a designer to the things another one Emmy you can take it way back to the beginning of social interaction in terms of just bartering I will do this for that you know so caches are you make change which how have you bartered I have barter for everything I bartered for legal services for financial services for like I bartered for vacation trips what yeah how do you do that that's pretty good man damn i bartered for product yeah for the client to get his product uh-huh I tried to barter for some cars one that didn't win an hour ago they never wanted ABI good everyone I give you a product in the best go yeah it's too big a too big yeah but you can do that so let's talk about equity specifically because I'm in the process now in a lot of the startups that that we're advising that blind labs is advising I'm personally advising I'm personally taking equity in the startups and and the title of chief design officer or something fancy like that or creative director keeping in mind that I'm not there full-time per se but I'm actually really making a very important contribution to not only the design but also the process in which the startup is being built so that's an interesting topic or model how are you doing it well before before we get into how I'm doing it I'm curious as to what what's motivating you to do it and and without revealing who it is and then so people can figure out let's get a little bit know what let's not let's get into some specifics what are we talking am i doing it with my structure how do you structure it what's your motivation that's a good question so look fundamentally the reason why I closed my agency and I started the school was because I didn't see myself 20 years from now as an agency principal during services I worked for over 40 startups and I'm like wait a minute these guys are building companies that are like you know possibly the future the future right uture why am I sitting here servicing them when I could be part of them I couldn't make the jump into a committed relationship with the startup that sounds like a marriage having an agency and running an agency because that's a whole animal and the biggest issue is that I realized that the business model of the agency is incomplete counter to the business model to startup and there is no way to provide value within that model to that meaning I felt disingenuous and inauthentic in the services that I provided to the startups because I was marking it up triple you know double or triple markup I was not staying on for the length of the business in order to help them reach that and I wasn't managing the process you know I had no control I don't know the management teams are really a big part of it right and how the business gets executed if you have equity in it and if you're a partner in it you need to be a partner in it like a for-real C so for you and I think are a little different you have a moral thing about not wanting to charge a certain price but you want to be a part owner but come apart I didn't want it I didn't want an exit to come from me selling an agency because those are horrible those are horrible exits usually okay that's it whatever I said I mean you sold your company and you're great cash right but wait hold on it that's one I mean I got a pin you down whether it's 30 minutes show go I need to redirect you go what's the structure of the deal we talking about reduced fees 50% reduction what are we talking about what kind of equity stake the FIA's cost meaning that it's not marked up so it's half of what you had cost at cost so if you've been a person for $400 a day let's say you paid that one that's for $1 so there's no markups no matter your cost yeah but my I get personal fees on top of it for myself for sure time so basically there how do you value that then I value it at the I'm Val unit based on almost like you know a day rate or a week a day rate that's comparable to somebody of your experience at your level doing those same work okay so it's not a discounted rate it's not a certain notice they're not necessarily paying this guy now so you're basically trading the markup or the profit margin for equity how much like what are we talking about well connect with small amounts and and what's the small amount to to 5% okay is that is that common I mean for for like a person of that involvement you know it's common if you're like there every day and you are contributing to then you go into the 10 20 30 percent kind of range for partners you know and they start up your probably gonna see a partnership of 50 50 50 let's say between to design this is a developer designer and a business guy and they all split it equally then investors come in and that all gets diluted so you tell me I look 33 and a third percent right that's if you use that model there are people who carve out a portion of equity for other things like Ryan's and family etc before dilution which then you get into all these mechanics which that and we don't want to talk about sure could you tilt so does that make sense I mean yeah that make sense 2% through person so if you do you define then a project you deliver on that that earns you your 2 to 5 percent equity ownership the Allium ongoing it to exit really yeah I don't I don't feel that my contribution will be worthy okay I checked I'm very different than you then have all right good how long have you been doing this right now one of the first times that I started with it's been a year in a bit no I mean when did you first start it start doing this doctor composition so when I had the male agency it was different I'll give him one example and it quickly a friend and the industry asks us to help one of the startups they had invested in for equity only I said let's talk I talked we did a little bit of equity but we said no we want to get paid and we charged him half of what we would have charged them okay that's it all right so it was instead of 50 grand we charged them 25 and we took like five percent so I know since then you've closed the group if you could go back in time and talk to a younger Jose would you tell them do you just take the cash don't take that what do these companies are not gonna pan out or would you say no keep doing I would tell them the opposite I would say take equity and every single startup you did don't do any startup without taking equity here's why the conversation that it begins the starts goes into a bigger commitment you're no longer doing it just for the cash and the fees and that's why I said the business models are not they're not they don't match very well because the interest of the startup is to keep low-cost high-return speed so what I call velocity and fidelity but an agency cannot provide fidelity or velocity in its model they cannot there's this person the creative director and the designer this person a producer it's a mess but then if you stay in until exit that limits how many companies you could take an equity stake in correct that is correct because they know anything unless estimize it you know and you teach the community how to so for an example what I'm doing in Portland is I'm actually doing it right now on one on one on one startup but for the next startup I'm actually put a team together now you know the fees are higher to cover the team cost right make sense yeah so then you scale that to the next level the next startup you train the team locally in a system that works to allow to deliver high fidelity and high eight velocity okay I happen to know those systems because I develop them at the group and now I can yield them or wield them for these startups and that's why they hired me by the way all right the other hire might be some pretty or because I can design cuz I can I'm both of those that's very surprising yeah but they hired me because I have ability to execute strategy and execution you know a project management on top of design they can't get that anywhere else okay they made themselves say it like wait we want you because there's no other way to do that so unless you're Jose or you're in position to market your services like the way you have a lot of our viewers are gonna figure out thank you they're not gonna be able to make this connection but that's okay some of them do actually but I've met some of our viewers are asking us how to design a logo so look at that level it's it's it's very different but we'll table that all right this is a song about you now because we're talking online I don't know if we said in this the intro but this is the business of design we did design a business okay I just wanted to say that so just talking about my own personal experiences in the very early days of us of us running the company we had people coming up to us and saying let's let's do some kind of trade because people want your services they value what you do but they don't always have the money to pay for it and just the culture and the way that my father taught me he was just like you know just work live this kind of conservative thing don't gamble don't don't get involved these high-risk things so almost patently I just turned them all down I said if you can afford this then this is great because what I didn't know then was my instincts were kind of questioning either in the concept the management or the process and and those things kind of affect my ability to get the money back out because you're in it to exit a lot of the dot-coms went bust right mm-hm a lot of them all all these startups there's a high failure rate so you could be giving up a lot of time and potentially be losing out on that markup that 50% I'm on money you might have made in lieu of conversation that never materializes so you've discounted the work for for no exit yeah so I have to really believe in in the people for foremost the management team as you've said before the management team is very important to me so recently I'm seeing the last couple of years where I think I've built up enough of an infrastructure here there's work coming in people are making money people can pay I can pay my employees they can they can buy a house or get an apartment or something that kind of the basic needs are met now I can start now I can see like okay this is icing on the cake and so I've entered into a couple of deals where I'm an equity partner in the company and it's for a very defined scope of work it's not in it forever hmm now that doesn't mean that if they call me and ask me a question by the way I do have an email scope okay I do but I do find it a check times this is the amount that is gonna be traded for money cash and this is the equity amount and it's for this kind of work got it but it you know you call it evil I believe but I want very clear defined boundaries because I don't want it to be beyond that three years later I'm still doing the work and now what I'm getting paid is 25 cents an hour right again I don't want to do that plus I got to move on with my life got it right so so I value eight that so one of the things I look at is you have to look at risk versus reward so the the models I built are you pay all my hard costs and even in that there's a little bit of markup but it's it's it's all discounted rates okay so I'm gonna cover my cost because there's things like machines software a support team or the people on your staff that are impacted but aren't billable the receptionist people getting lunches for people it's that kind of stuff so that I'm not purely if that if a person is earning say four hundred dollars a day as a day rate for me it's gonna be marked up a little bit mmm let's say 450 because what people don't understand there's insurance there's a lot of other things packaging that because you will lose money yeah I mean the cost of sale really does include a lot of the infrastructure that it does so now I'm looking at what's the exit scenario what's their business plan so are they in it because they want to build the world's greatest community that doesn't sound like a great exit plan right it might be a great thing to do I'm at a bit human level it might have been Facebook I don't know but I'm pretty sure they had a pretty smart business plan right people could see that so the guys that I'm working with they're very straightforward we're a build to sell model right and that means that they have no delusions about building us to be the greatest company ever so they're doing discrete things like a game that they want to sell basically what they want to do is to disrupt or annoy the market leader in that space enough so that they they just a killer competition and they just sell it it's a very quantitative approach but it is with you and your risk profile and I see that so they say you know maybe in two years 24 months we can sell this company for twenty million dollars which isn't a lot of money in the in that kind of space right it's not like that that's doing it and let's say if I have 10% of that in two million so in two years I can get this really great payoff and if it doesn't work it doesn't work out by new the risk going in yeah now I'm going to contrast that with another case that somebody brought to me another game and we talked about a little bit and they value to a company at 50 million dollars I have no idea where they got the number from 50 million 50 million because they think their ideas worth that at this point you mean they've evaluated it yeah and basically they had a little bit of money from you know friends and family angel investors and they just arbitrarily pulled out a number I have no idea where think that's an odd valuation of it early so then what they said is well one percent of 50 million my math isn't good Andrew what's that where's all my agents five million there so we're gonna trade you five million dollars of fake value for all your service well that valuation was too high that was the issue it was way too high but plus I also saw it like if you want to give me one percent of your company it's I can see how you view the relationship so it's not one that I could move forward with right that's not what I want that is my wobbly well they don't believe so yeah but okay I believe so and everybody you guys watch enough reality TV and Shark Tank everybody thinks their company's worth so much but they're let's be realistic look at how investors are gonna and for our audience in there because they're gonna what had its valuation what is valuation relegation is simply what the company will be worth at a next time you know as I say a year from now relative to the possibility of actually building the revenue and then a multiple of that for an example if me and you start a business and we say that making these bottles and we say that within a year we can be selling a hundred thousand dollars worth of these bottles every month that is a 1.2 million dollar business 12 months you know it's 1 million three hundred so that basically puts our valuation if you multiply that let's say times three maybe just kind of why you spent three tenors wouldn't it right that would be generous so let's say okay so let's say three million evaluation for your smart bottle right company right in a year right and then so that's more realistic and that's better to do but these guys well hold on what is that realistic based on I've not sold a single bottle your track record your back but I've never made anything okay oh you seem insane there's there's problem so keep in mind that's all about narrative so there's all these different narratives that play a role in what they're telling you so this scenario that our audience is gonna get is a very hyperbole ridden person saying oh my god this is the best thing since sliced bread help me out do the logo and the identity for free and I'll give you equity that's what they're gonna get out there so don't do those don't pay attention to those even just say look here's my fees cut the fee a little bit and then take a little bit of equity but community is important too you're getting deals from your own community I'm getting deals from my own community right before we talk about that I want to make sure we complete the evaluation talk yeah well before valuation also in equity so a lot of people say well this is worth this because I got a little bit amount of money yeah or let's say I can go along with this if you got a million dollars and you you you gave away 10% equity so 10 times a million I would say your companies for 10 million dollars because somebody invested that much and that's what you've sold if that's the case that's fine if you have say no real revenue but you're growing users by a 400 percent every month month over a month some we can say that's worth a certain amount of value but you gotta track it against something against them I can't just be like you know what this is worth 50 million dollars for this is worth five they're saying Ward five dollars to me right now because right now what you have is negative revenue you don't have a track record and the management team isn't doesn't have a clear exit strategy there's no way I'm gonna get involved in that you just made me think of that we should have Shark Tank four designers that would be awesome what like have designers come pitch ideas all right okay but all right what do you guys think tell us in the comments would that be a good idea right all right okay so let's go back to the next topic so so we took care of Al you a ssin we talked about some stories about how you've done it how I've done it and we'll see we'll see how this all works I mean ultimately the question to answer for the kids is like you know how do I do it how do I discern the right deals you know you guys are old experienced people and you many times the reality is that you're gonna have to dip your toes in somewhere and you're gonna have to learn by making a lot of mistakes and that's what I did I made a lot of mistakes you know you know me well enough today that one of my big you know pluses is that I go out there and I try it I'm like Mikey so I've tried it every which way to Sunday and most of it fails but it sets up the foundation for what I'm doing today without having done you know the 3040 startups that I did well I had the group I would have never been able to do what I'm doing today I want to talk about one more subject that's related to this I think sometimes you're on the other side of the fence let's say you have a product a company service of some sort and you want to bring in somebody that potentially provides tremendous value to you yes and what you're thinking is I'm worth X and you don't really do anything interesting because you're in the idea space and I'm in the doing space so let's talk about that I have an experience where it's been you know I think somebody that's watching this will know who they're talking about who I'm talking about right so you're talking about somebody sauce I have a buddy and in he had a product a consumer electronics product and he and his friend partner decided to do this thing so they're 50/50 partners that's how it worked out worst idea ever by the way designers love 5050 I hate it well whatever however they want to do that's fine and so they got to this point in which they they realized they're not gonna grow the company anymore it kind of stalled out and I had been kind of coaching them along the way just as friends do but at some point there's they said you know we want to invite you into the company Morden gave you an equity stake in this thing you mean and I said for that I will help you brother and no money he needs to exchange hands I'll figure out your strategy up platform I'll even build you're an advisor you're getting equity on buzzers how I'll even build your site out for you and I'll help you figure this thing out that's I can't promise you it's gonna do XY and Z but we got stuck we got stuck you know where we got stuck earliest evaluation what they were well then what what did it what kind of equity they wanted to give me in exchange for that Oh an advisory equity is usually traditionally between two and five percent also is it but if you wanted like a third of it or you want it too much you break out what do I want too much it because it I may be too aggressive but I value what I do so I really do I got to tell you so my starting gambit and that whole thing was I don't want to take your company away from you but 10% to help you grow this company and to build out your site I'm spending money right I'm gonna spend money in this thing and right now it doesn't even look like you have positive revenue but they couldn't get over the idea they just need more equity of even 10% as well as 10% I could easily said you know I'll take 30% and we'll be 3-way partners it's better to have I'm putting them on percentage of something that's gonna make it bigger than zero of something that does that right and you if you guys watched Shark Tank pick they make this mistake every single time because you got a hundred percent of nothing nothing and you can see it time and time again the right management the exposure the experience in the leadership that somebody can bring to the table right can bring your nothing company to a 10 million dollar company even though you might only own half about half of 10 million is much better a hundred percent of nothing people need to understand let's talk about it from a spiritual level wait before we do that don't flip the narratives okay gotta go okay so long story short there there was a little friction in this discussion I say you know what you guys if you don't feel that I don't want to sell it that's totally cool god bless you move on moving your way you know what a year and half later that thing just fizzled they had it up they had a 10% that's nothing yeah if nothing else I would have built them a better website with better messaging and nothing else I'm not saying that those percentages do not matter you know when they matter they matter when the company she starts making money that's what everybody says but I'm in it to make money you are and that's a great partner to have I mean that's all this is the business is on the table right the business of design what I'm trying to say to those people not just those people but to our audiences at this point when you're trying these things out assume that they're gonna fail so don't worry about the percentages you know 30 40 50 50 whatever or it's good a if it succeeds you can even renegotiate that at some point and kind of like you know take stuff back and sell back equity but the point is this if you get hung up on the on the percentage that wasn't even valuation that was a percentage its percentage if you get hung up on that early on you know just keep in mind that that that it's whatever if you get hung up early on and you don't you make the mistake that they obviously made that's the mistake you actually might have you it's better to give away a little bit of more of something that works than not that's my stuff my point I'm always very generous with how I carve things out if I know it's gonna work and it's a right relationship and that's we're gonna go to the spiritual sense let's do it bring me to church well but the spiritual sense is a you're doing it very quantitatively and I'm doing it very much about building a relationship in a community so I had to be kind of hippie-dippie yeah I've been spending too much time in Portland that Saturday night right so but but what I what I what I what I've learned is that in the investment and in the growing businesses and companies in the startup community in the tech community it's a very close knit of group of people and it's usually the people that you're traveling with the longest so Trust gets built over time and over execution people seen you execute I'll give you an example so I know I needed to raise money eventually for the school and I started meeting with some of my people my network just to listen to what they were doing the former creative director of the group who's a old friend from Razorfish Henry Minh who's also Asian I figured that out with him man thank you he actually was doing product he started doing startups when he was at the group he got on to the bug of entrepreneurship he was doing his own thing a group of investors asked him to help with one of their startups and he did for a year he helped be product development and they're like wow you're really good what are you doing next so I want to do my own startup oh here's a million dollars so he got he got an investor not by going out and pitching and asking he got it by doing being a service and a value with what he was good at he's a designer he does product development so I'm doing the same thing from him I learned that and I said you know what faithfully you deliver value to the community that you're already working with other people will come and then you'll begin getting so what I'm doing is a precursor it's a practice I'm 40 right now remember my goal I said at the beginning I don't want to be a 60 year old dude running a studio you know like still dealing with clients at that point I want to be done you know have multiple exits advising and best that's what I want to be doing right be an old man which I am now probably but the way I'm doing it is by building the community and slowly beginning to train coach and have multiple startups that I have it's not portfolio theory basically I know I need to have a small amount of equity and at least ten startups whether they're here in LA whether they're in Portland it doesn't matter because I know that one of them will hit big so whatever the percentage is it might be I might make it bigger over time because my contribution is proven when the first startup that I'm advising exits which it will and people are like well you're so very confident I know it will and how do I know it will because I've done it a million times and I've seen the team and I seen the process that we're doing and I'm confident in that and when it exits then people are gonna say damn dude how did you do that we want some of that then my equity ratio goes higher so what what I'm going towards is that eventually the designer let's call it design firm let's call it we're no longer a service provider we are now a value provider and we're getting paid on the upside so we're like VCS I want us to be like VCS like where we provide the value of our advice and of our design experience well VCS have money we have we have mature capitalists will have that too at some point soon at some point okay yeah so we can write we can after we prove it a few times we can go raise you know 10 15 20 million and start investing in our own companies that we are advising through the cycle it's good plan let's see how it plays out that's it I do want to challenge you a little bit on a couple of things where at least it is uncrazy and and from a guy who's Thank You Nicole from a guy who's who's been taught you know there's no get-rich-quick scheme it's just hard work and perseverance I may be I'm The Tortoise on this one and you're the hare and I've been just slowly building it and I've built up something where I think I'm getting close to that place where I'm close to hitting my goals yeah where work is is going to become a thing where it's not a necessity it's a luxury yeah well I don't need to right and so I've been building out that that plan so we have two very kind of different platform that's why I love this dialogue yeah one way of solving I have a different way but we run towards the same goal we are going towards the same goal just different ways of getting other ways of it and only time will tell like what way works we don't know right so but I do know this I can only do as an artist as a designer not as an artist don't take them back that's a car designer that's a crafter as a craft their glove things right I can only do a few things well and so that's where I get really concerned where I don't want to spread myself too thin I know how I work I'm gonna go deep yeah I'm gonna dive deep on your project I'm gonna give you tremendous value for that and give myself to you and that's worth a lot to me yeah and and so that's where I I don't know if I can do that where I'm going why you're going really wide and but I'm also pro and then I'm what I'm providing is the systems in which to do it so that I don't have to be in it I'm training other people to do it which is by the way it's good that we are our partnership our relationship really works in that context right because we can do projects where you're pushing for deep and I'm pushing for wide and that moves us a little bit faster so it's basically instead of The Tortoise and the hare racing separately we're kind of racing like with each other and one has to catch happen and then you slow down and catch up right right that's a better pace well what I love about our dialogue is that you have a very different way of doing it I have a different way of doing it and you know probably there are ways to do it who knows whatever works for you and this is this is why I think this is great some some people are gonna connect directly to what you're saying and say I can relate to that understand is personality base sure there's people you you you are evil of dorky and I am flaky obnoxious so our personalities we're executing our Saints the same goal in different strategies let me give you one quick insight and I just want to give you a reminder we have two minutes left here so we do need a wrap up this episode I'll make it this simple so from a model of artists that are taking control of their careers I saw a great interview at South by Southwest with Nick Cannon he's an actor no he's a writer producer he does like a million things like super ATD and he talked about his a DD it was really funny this is Mariah Carey's have a husband yes I think you carrying but I like what he said of how he sets up all these different things happening at the same time and some start here some start there they started different times he has a team around him that helps him do those things because that's who he is and what he wants to do he wants a million things happening right there people we just want to focus now that's a creator that's doing it in a specific way but he gets ownership in a lot of his products and the partnerships with the studios and stuff he gets a cut of the episode here so here's what I think about that so I don't want to send the wrong message to some of our viewers out there is he did something really well and he made a name for him on and then he built up a team of people he trusted and then he could start to do these things and he delegates that and that's what's working for him so he has his you know his core competency and what people pay him lots of money creative t-shape right so a lot of people make this mistake in their say I'll do this I'll do this and then they never really could get good at anything and they're they're betting the farm on everything yeah and nothing pans out and then they're broke and you've heard me say this before and I think designers we get into this designers and I'm a designer I used to care about all these little things like kerning and letting a little bit a little bit a little bit and we can get lost in the details and that's what the world loves us for and that's what we high-five each other for but outside in the real world in the business context nobody can it really hampers us and I know that each area in our organizations and in our and our professional organizations and it frustrates me and I'm kind of brash and obnoxious and people people I offend people really well so if you guys are out there watching yes I offend people all the time because we're pushing a different agenda and we're pushing you know for us as designers to have more power and to have more equity in what we do there are people doing it well I just look at it like designers as entrepreneurs and not as service providers yes that's a big deal the designers entrepreneur that's a great topic the designer has entrepreneurial look ifs bear is doing it with the studio people like you know jay-z I am I'm not a business flip star and the business really start so there's a lot of singing going on there's a lot of models just precedence for us as entrepreneurs and I know that a lot of people out there watching and that you're watching this or that you've been following what we've been doing what I've been doing and what I'm doing with Chris now and you're not looking at it only from the point of view of hey I want to serve as my clients better you're looking it from the point of view is like hey what do I do that I can do that it's in client services a lot of people want to admit it with us that's the Holy Grail and then it's the Holy Grail but but we get stuck on doing this kind of stuff alright we know how to do this the 20th century model so what are we gonna talk about next weekend you know what I want to talk about maybe we don't talk about that we talk about designers entrepreneur it's up to you well you have next week to find out we've we're gonna we're gonna flow with the Holy Spirit's ELISA thank you guys for watching and spending another half hour with us don't forget to subscribe and don't forget to tweet and to leave comments below tell us what you want to hear about is this valuable to you to the community let us know Chris we can continue ranking above others up here alright thanks to everybody in the studio audience so I had hippy kind of hippie-dippie yeah I've been spending too much time in Portland Portland that's more like Boston it's more like you're bad that's Saturday night right

Channel: The Futur

Views: 19,468

Rating: 4.9443154 out of 5

Keywords: equity as compensation, equity as payment, payment in company equity, equity compensation, compensation equity, equity in compensation, equity based compensation, design payment alternative, accept equity as payment, equity vs payout, equity vs salary, equity vs cash, equity vs money, startup design equity, agency and startup business, venture design, venture capital design, venture capital designer, What is a company valuation, design equity, theskool

Id: zyewUQL_QUo

Length: 31min 47sec (1907 seconds)

Published: Tue Apr 01 2014