Services for equity: how startup partnerships can be structured

This article is commercial commentary. It is not legal, tax or investment advice, and it does not describe a structure that is suitable for every startup.

A services-for-equity arrangement is a way of paying for professional work with a mixture of cash and a right to shares. The commercial reason is straightforward. A young company may not be able to fund the whole fee in cash, and the firm doing the work may be willing to take part of its reward as ownership if it believes the venture can grow. That exchange only works when both sides can see what is being bought, what is being deferred, and what happens if the work stops.

Cash and equity are one agreement, not two moods

The cash portion pays for capacity that has a real cost: people, time and risk. The equity portion is not a discount sticker. It is consideration, and it has to be capable of being documented. Pixelette’s public description of Hybrid Sweat Equity is that professional services are contributed in exchange for a combination of cash fees and equity participation, with the allocation, milestones, founder rights and governance set out in the agreements. There is no standard percentage on this website, because a standard percentage would be false.

A founder who wants less dilution pays more cash. A founder who wants to conserve cash may discuss a larger equity component. Whether that option is available depends on the venture, the scope and the risk. It is not a menu that every visitor can select.

Ownership is not the same thing as a headline percentage

A percentage only means something once you know the share class, the dilution that can still happen, and whether the shares are issued now or earned later. Economic ownership and the right to decide are different, which is the subject of the article on founder control. Under the Companies Act 2006, a company’s constitution and the agreements around it are what members and directors have to live with. A conversation that never reaches those documents has not agreed ownership.

Milestones and governance

If equity is linked to delivery, the milestone has to be describable by someone who was not in the room. “When the product is ready” is not a milestone. A build that can be demonstrated against a written acceptance note is closer. Governance should say who accepts the work, what information is shared, and which decisions need more than one party. Those clauses are how a partnership stays intelligible when the relationship is under pressure.

Termination belongs in the same draft. What is paid, what is vested, and what intellectual property has transferred should not be left to goodwill. None of those outcomes is universal. They are negotiated.

What this is not

It is not a promise of customers, revenue or a later investment. It is not an invitation to the public to buy shares. Offering shares, or inducing someone to engage in investment activity, can be a financial promotion under section 21 of the Financial Services and Markets Act 2000, which is a reason to keep marketing language and the actual instrument apart. A page that explains a commercial model is not a term sheet.

Founders who want to see whether a conversation is even relevant can start with the startups page or read how recorded venture relationships are classified. Classification is not a measure of success.

References

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If the questions in this article match a venture you are building, the next step is a conversation, not a commitment.