Service-for-Equity: How to get started
The startup landscape is constantly evolving, and so are the strategies for growth and success. With investors pulling in and out of markets, it is sensible to explore and understand alternative options as well.
Service-for-equity is still a rather new concept, which is gaining popularity among startups.
In this post, we'll explore how service-for-equity can propel your startup to new heights, and the steps you need to take to embark on this exciting journey.
A Fresh Perspective on fundraising
As founding team, securing funding is often a primary concern. Unfortunately, traditional fundraising methods can be time-consuming and sometimes unreliable. Service-for-equity deals provide a fresh perspective on fundraising, allowing startups to receive services from a company in exchange for a stake in the company.
To give you an example:
You want to raise 500k. 100k will be used for regulatory measures and services. With a service for equity approach, you only raise 400k, and directly work with a regulatory service provider that offers you work for a total amount of 100k. You have less investor money to raise, and, depending on the deal structure and terms, more favorable conditions regarding your evaluation, repayment and dilution.
A Step-by-Step Guide to Service-for-Equity Success
- Determine the Right Stage for Your Startup:
Before considering service-for-equity deals, your company needs to be incorporated, and you preferably ensure your startup has a validated business model that an agency would want to invest in (e.g. you have pilot users, partnerships, prototypes…). This will also help you identify the services you need and their potential impact on your business when raising funds later.
- Quantify the Market Value of Services:
Clearly define project requirements and desired outcomes. What do you need, what has to be done, with which technology, until when? Communicate your expectations to potential service investors and compare proposals based on their market value.
- Establish Investment Terms:
Set the terms for the convertible service agreement. How much will they receive for their work? Will they be able to have an option to convert the outstanding amount to shares at a premium when you do a fundraising round later? Thus, you need to think about a potential valuation cap, discount, interest rate or markup, and maybe even virtual shares (or phantom stock) to incentivize service providers instead of giving equity. Prepare enough time at this step so that you don’t enter disadvantageous contract agreements. In case of doubt, contact us via kapslyventures.com.
- Prepare for Due Diligence:
A best practice is to treat service investors like traditional investors: Be ready to share information about your founding team, pitch deck, financial forecast, and other relevant documents. Organise this information in a shared folder for easy access. After all, they take a risk in working with you, both monetary but also reputationally.
- Build Strong Relationships:
Once you've received offers, take the time to get to know your potential service partners. The convertible service agreement usually defines the duration of your "dating period," usually six months, after which you can evaluate whether the partnership is a good fit.
- Release Virtual Shares Regularly:
If the partnership continues, incentivise your service providers by releasing virtual shares on a regular basis, this can be periodically (monthly, yearly) or based on milestones. Make sure to compensate for completed work, so no additional vesting period is required.
Service-for-equity deals open up a new world of possibilities for startups, allowing them to access valuable resources without depleting funds. There are, of course, also drawbacks to this, which we will cover in another post. By following the steps outlined above, you should have a good grasp of how to make service-for-equity deals a success for all parties involved.
If you're interested in exploring service-for-equity opportunities, reach out to us at
marketing@kapsly.com
