Should Your Agency be a Vendor or an Equity Partner?
The true value of strategic advice
Mar 11, 2020 | XEO
Should Your Agency be a Vendor or an Equity Partner?
Is it time to request Agency Equity?
Here at XeoDev, we have enjoyed many years of successful product deliveries. A considerable number of our clients are continuing to make updates to their sites year after year. Given the strong leadership background of both XeoDev partners, we are comfortable contributing strategy and corporate guidance at the board level. We are at the point where we find ourselves asking if we should request to take on a larger role in our client's businesses. Should we help them grow their valuation vs grow the lines of code? Should we help strategize new lines of revenue vs working on daily tasks? Should we fill the role of startup CTO in this company? In some cases it does makes sense to pursue a larger role and sometimes it does not. And we are comfortable operating in both modes.
As an agency, one of our long term goals is to create additional revenue streams beyond hourly and fixed price work. Gaining equity in our client's companies is one available option. In the beginning of our relationship we frequently have the option to discuss becoming co-founders and taking on the startup CTO role and owning the entire technology division. Later in the relationship we frequently have ideas for growth-strategies which could greatly impact the corporate valuation. On the flip side we have not ever discussed doing a complete project as software development as pure equity developers as this is too risky for use. The software business has significant fixed labor costs both for our own time and we need to pay our team. In our experience, this equity conversation is much easier to have as the relationship is getting started; and it seems the longer we have worked together the more comfortable the client is with the current website development contract.
Our typical project is to build a multi-tenant SaaS platform for each client. Many of these SaaS platforms include mobile apps. We were hired as technology experts to build the platform and are given free reign to use the appropriate technologies along the way. This frees the founder up to focus on the business side. Of note, as the business matures many of the business decisions are heavily influenced by technology and need additional input. Sometimes the client gets advice from his friends and ignores our opinion, so we just act like a pure vendor and do the daily tasks really well. Sometimes the client garners advice from us and that opens the door to a partnership agreement and becoming equity partners.
Let's take a minute to discuss the equity partners definition. Our definition is that we have a stock grant (no vesting schedule on options) placing us as fractional owners. The next negotiation is how payment will be received and this website contract will pay quarterly dividends or only pay when the company is sold. If the later, the value of the equity deal depends heavily on the timeframe for selling the company. Some companies will be operated by the current owner for years and so dividends is the only payment mechanism in the near term. We also make sure that the website contract language makes it clear that sale of the company enables a renewed contract with XeoDev but does not include us as employees for a year. We've started asking around if we're the only agency searching for equity partners orlando. If your agency also takes equity positions, please reach out to us and lets discuss.
Over time, as the core software is completed and the platform gains customers There becomes a stronger need for the company as a whole to be technology savvy. Customer service needs to be able to correctly describe and guide users through the platform and log actionable tickets for improvements. At this point, we start seeing requests for training and documentation for the broader company which will pull time away from the platform resources or adds a documentation expert to our team. The company needs software engineering management which typically cannot be provided by the business/management team.
Is partner level advice worth the same hourly rate?
Consider for a minute that your agency knows a good introduction to make which will benefit the business. This introduction may accelerate the business and raise the valuation considerably. Is it right to collect only the 15 minutes it takes to make the introduction plus a couple of hours of initial meetings? What if the corporate valuation grows by a couple of million dollars as a direct result of your introduction? So the true valuation of the introduction is somewhere between 15 minutes of an hour or a couple of million dollars. We need to get paid what we are worth. By having an equity position, the corporate growth is added to the value of the agency's investment and an appropriate worth is assigned to the partner level work. As a pure vendor, it is probably better to not make the introduction and let the startup stay the same size.
Strategic Partnership Examples
A startup working to build a big SaaS product such as UpWork for a different niche would benefit from a strategic partnership and equity split. This type of company needs to raise a lot of money and will benefit from both our finance network of people to ask for money as well as our significant experience laid out in the pitch deck when approaching said money. A company building an e-commerce site on Shopify is not in the same position. Instead of an equity position, a royalty on sales is a better payment option especially when we are also building SEO for the store and are in control of both the inbound traffic and site experience.
Website Development Agreement Checklist
A few items to make sure are included in the web design contract or SaaS contract depending on your business model include the following. Make sure the shares you're getting do not make you subject to a capital call if the business suddenly needs cash; you don't need this headache. Ideally ask for Preferred Shares which can be converted to common stock and generally have a lower strike price and better privileges. Make sure that you are also getting fully compensated for the development work you are providing and don't let the client take advantage of the partnership to extract free work through emotions. Sometimes it is a good idea to discount your hourly rate as part of the equity deal; make sure to include a ratchet so you can still raise rates over time.