Growth Strategies

When to Share a Piece of the Pie

Does it make sense to trade ownership for services?
Magazine Contributor
Writer and Author, Specializing in Business and Finance
3 min read

This story appears in the June 2010 issue of Entrepreneur. Subscribe »

Tony Marrero was ready to grow his fledgling Columbia, Mo., soccer apparel and equipment company, So he did what any spunky entrepreneur does: He visited his local bank. And the banker laughed at him.

"He started to giggle when I sat down and talked to him," Marrero says. "That was the environment we had to deal with."

So, he improvised for a while and then connected with a local company, Growth Partner, which invests both capital and services in exchange for equity within the company. In 2007, they struck a deal and, in exchange for a 9 percent stake in the company, Growth Partner committed to provide services such as online marketing over a period of years. The company gains a greater stake in as various sales and growth levels are met, capping at a 33 percent ownership, as well as a back-end share of profits.

Growth Partner and companies such as Media Funding Solutions, in Las Vegas, can get cash-strapped businesses the services they need to grow by swapping equity, some profit sharing and maybe a small startup fee.

But are such equity swaps a good idea? It's a tricky question, says Dennis W. Hoppe, president of Change Management Implementation, a small-business management consultancy based in Rochester, N.Y.

"Once you give away equity, even if it's half of one percent, you've got somebody you've got to provide financials to and answer to," he says. And that somebody may have a different vision for your company than you do.

Hoppe doesn't recommend giving away equity unless there is a long-term payoff or a solution to a crisis that threatens the business's livelihood. For instance, if your business is about to go under and this is a Hail Mary shot at survival, or if the potential payoff will get you somewhere you can't get yourself--such as rolling out your company nationally or tapping contacts that take years to develop and sell--then it might be worth it.

If you do make the swap, cap the ownership stake like did, he suggests, or even spin off a new entity so that the partner doesn't get too much control of your company.

Basing the deal on performance is smart, Hoppe says, that way you don't have a silent and ineffective partner. And bring in an objective third party, such as an accountant, to ensure that you're trading apples for apples in terms of the value of equity vs. the value of the services provided.

As for Marrero, he says Growth Partner has met its benchmarks and helped double its sales, turning the 18-person company into a multimillion- dollar operation. "They have a vested interest in continuing to perform. And they do," Marrero says.

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