Should I give up 50% of my company to a digital marketing agency to sell my service?

Nickolay Kolev Freelancer at Private

August 11th, 2016

I have created a website, offering B2B service. It is a marketing platform, which enables businesses reach to their existing customers' friends.

I need to sell the service and I met with couple of smart online marketers, which have an agency and they want to become partners, requesting 50% equity in my company.

The product is live and done for this iteration of functionality. I was full time on the project until about a month ago, but hit the end of my runway, before being able to sell to real clients. I have 2 deployments, which were more of test users, not real clients. The goal was to gather data and test the service in real locations.

I am no longer full time on my startup, took on a job to cover expenses. Which means I can't dedicate as much time as I would have to or wanted to.

Any advice is welcome. I would also appreciate to receive ideas on how to structure the schedule for obtaining equity and in fact, how much equity sounds reasonable. To me 50% at this stage sounds way too much. But based on the fact I can't be 100% into marketing of my product, this may be the make-it-or-lose-it moment...

Thanks!

Anonymous

August 11th, 2016

I would structure it heavily in favor of sales commissions and add a largely symbolic amount of equity. I'd also offer more equity as a strategic investment, i.e. they'd have to buy it as an angel would.

Dawn Wilson CEO & Chief Brand Strategist

August 11th, 2016

I've spent my career in marketing and sales. To receive 50% equity in a business means we would have to deliver big time. I agree with others above, you would need to have very clear, specific performance options that related to equity. The reality with marketing and sales is even the best laid plans don't always work and if they don't, you've given up 50% of your business. That is a high risk.

Nickolay Kolev Freelancer at Private

August 11th, 2016

Thank you all for the comments and for the great advises.

As you probably have guessed, based on the fact that I posted this question here, I didn't fell comfortable giving up 50% (49%, to be correct) at this stage.

The whole process can be paused, and to answer to Richard - there is no real shelf life. What I mean is that, as any idea and product, if it is not executed and placed in the hands of the customers, it will eventually die, but other than that, I can spend some time to find alternatives.

In fact, my advisor said I need to slow down and be very careful with such partnerships. His advise was very much like Orion's and Richard's.

I think I will work on a performance based schedule. I plan to offer them 1) commissions and 2) tie the equity to revenue (discounted). I will expect results with no investment done from me in advertising.

This will help me verify their capabilities and also see if in fact, we can work together.

I hear the range of 5-20% very often, from different people with different backgrounds. May be that is the range I should be considering.

Any examples or links to help me develop a schedule (connecting sales performance and equity) would be appreciated.

Thanks again to all of you, it is amazing that I can reach for help to so many experienced people :).

Richard Reed

August 11th, 2016

I couldn't agree with Gillian more strongly. There are other groups to partner with that will have less onerous terms. Once you give up majority control of your venture, you will also lose control of it's roadmap. I suggest you like at valuations of comparable ventures at your stage, and then determine what the fair market value of the marketing/biz dev services you need would equate to in dollars. That will give you an approximation of a type of equity grant may make sense, which should also be performance based in the event that the other party is unsuccessful for whatever reason. For example, if your company has a valuation of let's say $1M, what would the value of the marketing/biz dev services be? I am guessing without having any particulars that it would be less than raising a seed round of financing so you would likely be looking at somewhere in the 5-20% range (assuming the above valuation). If this approach makes sense, you may wish to pursue angel investors who have marketing or biz dev backgrounds who may be able to contribute both capital and expertise in this area.

Gillian Muessig COO, Board Chair at brettapproved, Inc.

August 11th, 2016

Half of something is better than all of nothing. But 50% for marketing would indicate that the value of all the other components of a business are collectively equal to marketing's share. It doesn't work that way. In general, 20% of a company's capital is spent to aggressively introduce and market a product. The company asking for 50% isn't the only marketing company on the planet. Now that you know what needs to be done, find others who do this work and negotiate a deal with a team that believes in what you're doing and is wiling to do it for a reasonable sum. You aren't paying that 20% in cash, so there WILL be a 'surcharge'. Make it a reasonable one. Gillian Muessig Outlines Venture Group C: +1-206-930-8133 S: gmuessig @SEOmom

Josh McCormack Securing funding for my pre revenue startup app in recruiting space.

August 11th, 2016

50% is a lot if a partner does nothing for the business. If they turned a project of mine into a $100 million business, it would be worth it. Could you give them an option for up to 50% of the company based on performance concluding a year from now? Do $x of business, get 50%. Do $y, you'll get 25%.

David Albert Founder & Principal at GreyGoo

August 11th, 2016

50% is high for a product that's already baked. I would grant equity based on a milestone schedule--start small (10%? 15%?) and grant equity based on hitting milestones - 90 days, 6 months, 1 year. If the company can achieve what they claim, they should have no problem agreeing to this. Couple it with commission and/or royalties to give them some cash along the way and reduce the amount of equity they feel they are entitled to. It sounds like you have a product that can be monetized quickly so if they can on-board new clients, a revenue share should be able to offset giving away pure equity.

Ajay Agrawal

August 12th, 2016

Nickolay,

There can be no simple formula for the revenue to be shared between you and your marketing partner.

The value you could consider parting with in terms of revenue earned due to the efforts of the marketing partner could be based on

- Your estimate of what it would take if you were to set up the marketing team on your own to achieve the numbers given by the prospective marketing partner you are in discussions with

- The valuation of the company if you were to achieve those numbers

- Your operational expenses for you to achieve those numbers

- Another important aspect you should consider is to put a value to your IPR. In no case you should consider parting with value of your IPR.

- The value of the share of the marketing company should be the valuation less your IPR in proportion of their marketing expenses versus your operating expenses.

In simple terms, this value does work out to anywhere between 5% to 20% of the revenue, that too, X% for revenues up to say $A, Y% for an additional $B and so on.

Perhaps, another aspect to consider is a non-exclusive contract with the marketing partner or if an exclusive contract is mandated, then make it region or geography or client profile specific

Hope this helps.

Gillian Muessig COO, Board Chair at brettapproved, Inc.

August 11th, 2016

At the risk of making this a mutual admiration society, I agree with Richard's expansion and attention to detail on this. Gillian Muessig Outlines Venture Group C: +1-206-930-8133 S: gmuessig @SEOmom

Orion Parrott Founder and CEO, Lendsnap YC S16. We're hiring!

August 11th, 2016

No.

(tempted to stop there...)

Tie it to performance. Make it revenue sharing (cash only) or profit sharing. They won't have the same commitment to your business. This is a no go.

Just because you hit the end of your runway doesn't mean you should give it away. Sounds like you still have some time for it. How about find an agency to do it for 5% equity?

Question stats