Dan Martell - How To Exchange Startup Equity For Services

00:00:00.000 Hey there, Dan Martell here, serial entrepreneur, investor and creator of

00:00:03.360 SaaS Academy and in this video I'm gonna teach you how to exchange your

00:00:07.600 startup equity for services so that you can bring on developers, biz dev

00:00:12.640 people, other folks creating things for your startup by exchanging equity in

00:00:17.920 your business and be sure to stay all the way to the end where I teach you

00:00:20.920 how to get access or I show you how to get access to my fundraising like a

00:00:24.880 pro training where I'm gonna teach you the three phases of fundraising for

00:00:29.480 for you to crush your next round.

00:00:43.800 So maybe you're starting off and you've got way too many

00:00:46.800 things you gotta get done and you don't have enough

00:00:48.600 moolah to make it happen.

00:00:50.400 Well, I'm gonna teach you a very simple thinking process

00:00:53.800 and framework for you to exchange equity in your startup

00:00:56.600 for output, or services, or work.

00:00:59.740 And I remember I was building, well I had an idea.

00:01:02.440 I was in San Francisco, this was about five years ago,

00:01:05.200 and this is probably the most relevant example

00:01:08.220 is I was thinking of co-creating this software,

00:01:10.940 it was called Velvet, it was a SaaS metrics tool.

00:01:13.620 Essentially you installed it and would give you

00:01:15.220 this whole dashboard of SaaS metrics that you would need.

00:01:18.460 So it was just a really simple, in Ruby it was a gem

00:01:21.260 that you would install and it would make it

00:01:23.100 just a beautiful admin dashboard for your metrics.

00:01:26.040 And I found a partner that was super capable.

00:01:28.700 They were very well known and I knew the founder well

00:01:31.880 in this agency, this development shop

00:01:33.740 and I wanted them to build it.

00:01:35.120 So we kind of spec'd out the product

00:01:37.880 and all the different features

00:01:38.880 and what the MVP would look like

00:01:40.160 and what we would go kind of to market with the first version.

00:01:43.220 And they came back and they said,

00:01:44.720 hey, this is amazing, we wanna be your partner

00:01:46.560 but we're gonna want 40% of the total startup equity.

00:01:50.700 And I'm like, okay, I appreciate the excitement

00:01:54.040 for the project, but 40% to build the first version

00:01:59.540 that could go on, eventually I was gonna raise

00:02:01.680 venture capital, build a team around it and scale it up.

00:02:04.380 It just felt a little rich.

00:02:05.880 So all I shared with him is the same framework

00:02:07.720 I'm gonna teach you guys today, which is,

00:02:09.320 let's just look at the real economics of this.

00:02:12.600 If I were to pay you, what would it cost me?

00:02:15.400 If we were to convert that dollar amount into equity,

00:02:17.840 what would that percentage be?

00:02:19.860 And we need to make sure we're directionally accurate

00:02:22.900 on that math or this thing doesn't make any sense.

00:02:25.940 So what I'm gonna teach you today in this video

00:02:28.300 is the four steps that you need to go through

00:02:31.180 to make sure that you exchange equity for services

00:02:34.340 in a way that's win-win for both parties.

00:02:36.680 Step one, set a valuation.

00:02:39.420 When you're starting off and you're negotiating

00:02:41.960 some services for equity, the first thing you need to do

00:02:44.220 is figure out what is the fair market value for your startup.

00:02:48.720 And it could be at the idea stage.

00:02:50.360 It could be at some pre-sales.

00:02:52.060 It could be a little further, it could even be revenue

00:02:54.220 generating and you want to bring maybe some biz dev support

00:02:56.900 to help you grow up.

00:02:58.640 The reality is valuations are 100% arbitrary,

00:03:02.900 meaning that you can decide.

00:03:04.440 You can, you know, I always call it like the Kool-Aid.

00:03:06.740 You can sell the Kool-Aid as sweet as it is before you

00:03:10.340 actually get somebody to exchange a dollar for real

00:03:13.880 valuation.

00:03:14.680 So, you know, in the early days, look around your market

00:03:17.780 and ask yourself, I mean, if you're building a tech startup,

00:03:20.980 then a million dollars is not crazy

00:03:23.020 to just set a valuation right out of the get-go.

00:03:25.980 Or even, you know, let's call it half a million dollars.

00:03:28.120 If it's at the idea stage,

00:03:29.660 maybe you have this marketing site and some pre-sales,

00:03:33.000 it could be a half a million bucks.

00:03:34.160 But whatever it is, is just set it.

00:03:35.520 I've seen some people set it as high as four million.

00:03:38.200 It's like, look, yes, it's early stage,

00:03:40.800 but we've got a team, we've got a track record,

00:03:43.600 we've got customers lined up, we've got pre-sales.

00:03:46.240 This thing's gonna get going.

00:03:47.900 You know, the valuation's a lot further along

00:03:49.740 than half a million or a million dollars.

00:03:51.180 But the first thing you need to do when you're negotiating

00:03:53.980 with a vendor to provide some services

00:03:56.140 or somebody to do some work is to figure out

00:03:57.980 what the valuation of the business is today.

00:04:00.760 Number two, quantify the work.

00:04:03.480 If you're going to be engaging somebody to do work for you,

00:04:06.080 maybe it's the right code to build the first version,

00:04:09.500 you gotta just ask them, what would this cost me

00:04:12.000 to get built if we weren't talking about equity?

00:04:14.500 If I were just to engage you and have you submit a proposal,

00:04:18.340 what would that number be that we write down

00:04:21.880 that I could just write you a check for?

00:04:23.880 Because the truth is, is at the end of the day,

00:04:25.880 you're giving up equity, which to me has got a lot of value.

00:04:28.780 In the long term, you know, a half a percent,

00:04:31.180 a percent of something that could be worth

00:04:33.020 a hundred million dollars is a big deal.

00:04:35.320 And you don't wanna be too loosey goosey

00:04:37.420 with just giving that to people for whatever.

00:04:39.920 So asking somebody what the work would be worth

00:04:43.060 and then just thinking to yourself,

00:04:44.840 well, you know what, do I really wanna give them the equity

00:04:47.840 or do I want to just pay them because I can go raise money

00:04:51.080 once I've got this prototype and I'll just pay them.

00:04:53.180 So that's the way I think about it is like,

00:04:55.440 let's just quantify the work.

00:04:56.880 What are they building?

00:04:57.720 How much is it going to cost me right out of the gate?

00:04:59.960 And then that way, we at least know what number,

00:05:02.680 essentially, they're investing into the business

00:05:04.820 for in-kind services.

00:05:06.760 Number three, give it a bump. 0.99

00:05:09.360 So if they are, you know, doing the work,

00:05:12.400 and let's say it's $100,000 worth of development

00:05:14.600 or marketing support or whatever it is,

00:05:16.460 then to me, it's higher risk.

00:05:18.180 Because if I give you $100,000 check,

00:05:20.940 that's a totally different scenario

00:05:22.880 than if I give you $100,000 worth of consulting hours,

00:05:26.300 or services, or whatever it is.

00:05:28.220 So to me, there's a higher level of risk.

00:05:30.220 So what I suggest is give it a bump.

00:05:33.080 So if you know that it's super early stage

00:05:36.220 and a super high risk, meaning you haven't raised any money yet

00:05:39.960 from other external investors, then maybe give it

00:05:43.560 a, you know, 30, 40, 50% bump, okay?

00:05:47.840 And this is a negotiation.

00:05:49.200 You could just say, look, maybe the person doesn't know.

00:05:51.360 So they're like, okay, well, normally this costs $100,000.

00:05:54.000 Like, great, we're gonna give you $100,000 worth of equity.

00:05:56.540 This is the valuation, so here's the percentage

00:05:58.600 that you would get once you're completed the work.

00:06:00.880 And if they're happy with it,

00:06:01.920 then don't give them the bump.

00:06:02.980 But maybe they say, well, geez, this is super high risk

00:06:05.920 and, you know, I would feel better if maybe, you know,

00:06:09.620 we did at a higher valuation than what I would normally

00:06:12.320 get paid because that's a real dollar that I'm not getting

00:06:14.520 paid that I'm giving you.

00:06:16.160 So maybe the number is a little bit higher.

00:06:19.220 So number three is really just give it a bump

00:06:21.100 so that everybody feels like it's win-win.

00:06:23.760 Number four, allocate the equity.

00:06:26.800 So now that you've got the valuation set for the startup,

00:06:30.780 you know you've quantified the work

00:06:32.700 and you've got the bump added to it,

00:06:35.540 some kind of multiple kind of enhancer,

00:06:38.320 then it's really to allocate it using

00:06:40.720 some kind of legal framework, okay?

00:06:42.820 And I'm not a lawyer, I do not play one on the internets,

00:06:45.020 on the YouTubes, so you're gonna have to work

00:06:47.960 with a startup lawyer.

00:06:48.800 I will say this, there is enough in today's world, okay,

00:06:52.140 and trust me, when I started off building tech startups

00:06:54.360 and venture backed companies, there was no best practices,

00:06:58.600 templates, docs, those exist today.

00:07:00.300 If you just search startup fundraising documents

00:07:03.280 or seed round documents or legal fundraising startup

00:07:06.880 templates, you will find a ton that you can use

00:07:09.880 and you'll find some incredible lawyers

00:07:11.640 that you can reach out to.

00:07:12.640 But the key at this point is to actually get it put in writing.

00:07:15.460 And what I would do is do it in releases.

00:07:17.920 If they're developing code and their normal invoice cycle

00:07:22.460 is every two weeks, I would release the equity

00:07:24.560 every two weeks.

00:07:25.400 I would not allocate it straight out.

00:07:27.160 I would do it as per the work is getting done in case,

00:07:30.640 which is sometimes what happens.

00:07:33.140 They totally missed the mark and the code doesn't work

00:07:35.980 and all of a sudden now, if you've allocated it all up front

00:07:38.980 and the work isn't even done,

00:07:40.280 then you've got no leverage to hold them accountable to it.

00:07:42.860 So you wanna make sure that you set the allocation

00:07:45.820 in proportion to the work being done

00:07:49.020 and that's how you make it all work.

00:07:50.600 So four steps for exchanging services

00:07:52.600 for equity in your startup.

00:07:54.020 Number one, set a valuation to use

00:07:57.140 as the price of your startup so far.

00:07:59.560 Two, quantify the work being done

00:08:02.060 so we know the number that we're exchanging it for.

00:08:04.300 Three, give it a bump maybe, if they're negotiating right,

00:08:07.940 so that they feel like it's win-win.

00:08:09.540 And four, allocate the equity in proportion

00:08:12.940 to the work being done.

00:08:15.600 As I mentioned in the beginning of this video,

00:08:16.980 I want to share an incredible resource

00:08:18.580 called the Fundraising Like a Pro Training.

00:08:21.180 Click the link below in the description

00:08:23.300 to download or to get access to that.

00:08:25.240 Essentially, in it, I break down the fundraising process

00:08:27.740 into three distinct phases.

00:08:30.040 The first one is the most important.

00:08:31.740 It's called the pre-marketing.

00:08:33.180 You don't want to miss how to do that properly

00:08:35.200 because if you do, you'll get a 98% confirmation rate

00:08:39.400 for meeting with new investors.

00:08:41.200 Here's the big idea behind this whole training

00:08:43.140 is investors don't want to hear from you,

00:08:45.200 they want to be introduced to you.

00:08:47.140 So you can click the link below to get access to that

00:08:49.580 and if you like this video, be sure to click the like button,

00:08:52.020 just smash that like button. 0.86

00:08:53.660 Subscribe to my channel if there's anybody that you care

00:08:55.820 about that you think this could serve,

00:08:56.960 feel free to share it with them directly

00:08:59.120 and as per usual, I want to challenge you

00:09:00.800 to live a bigger life and a bigger business.

00:09:02.760 I'll see you next Monday.

00:09:05.000 we can have lots of fun.

00:09:07.000 Step two, two, two, there's so much we can do.

00:09:10.580 Step three, three, three.

Dan Martell - December 24, 2018

How To Exchange Startup Equity For Services

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