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Betting on equity


EquityPremise: The key to success is transformation, not free labor.

If you are an SME consultant, chances are that you would rather take an equity stake in a company rather than get a sales commission. You bet your time against the success of the venture and thereby condemn yourself to free labor. I did this for years until it dawned on me that I was working for the wrong client!

SME management is usually bootstrapped with little capital to spend on consultants. It is usually as delighted to get a consultant on board that will work for equity as the  consultant is to get that equity. While it looks neat on the surface, it really stinks like Icelandic skate (“… has a smell that can clear your sinuses from a mile away.”). The two parties have literally signed an agreement whereby the company will gain little from the relationship as the consultant is starving to death! If consultants aren’t paid, they won’t deliver; simple as that. They intend to, but the reality is that paid projects always take precedence leaving the client in the low priority category. The problem is easily solved but it takes a dose of confidence to do it (and that confidence is based on your own skills plus who is in your network).

Consultants that are new to the game want to prove themselves by taking a company from nothing to billions. The first month, they still believe they can do this and deliver excellent material that the client can use. The second month, the consultant realizes that the task at hand is actually more difficult than expected and goes into overdrive to prove him or herself to the client. Month three, the client begins inquiring when the consultant expects to deliver tangible results and the consultant snaps into defensive mode. Month four, this deteriorates into a situation where the consultant begins to regret having committed to a deal lacking cash inflow and starts looking for a way out. During this period, the company is relying on the consultant who is delivering nothing. This is why I advise against equity-linked consulting as a starting point for a consulting career; the consultant is committing financial suicide and is dragging the client down as well!

The root of this problem lies in targeting SME management. SMEs are financially starved – bootstrapped – and can’t really afford consultants. SME management will never allocate 30 – 40% of their budget to a consultant as it believes itself more than capable of delivering expected results. Subconsciously, management does not really believe in the consultant either as he or she operates outside the budget – anyone that works for free is basically sending a message that the work done has no value (there a exceptions to this). An equity consultant can rarely convince management to allocate capital toward specific channels to accelerate growth if those channels do not suit management. Working for equity therefore puts capital constraints on the consultant, which literally puts him or her in chains. In order to reverse this, the consultant should consider changing the target from SME management to SME investors.

Working for investors changes everything. Investors want to recover their investment and make a solid profit and have the power to override management when it comes to budget allocations. A consultant with the right network and has the ability to lay sound strategic plans concentrated on driving up revenue and profitability will get the funds required to execute. In return for a fixed fee and sales-based commission, the consultant is very likely to deliver as he or she has the funds needed to execute the strategy. The consultant that works for equity does not have that luxury. In addition, working for one investor causes other investors to pay attention (investors talk and word spreads quickly).

Equity consulting usually becomes free labor whereas commission-based consulting enables the consultant to quickly build reserves that will later be used to convert the consultancy into a hands-on investment firm that is already connected to investors. In my opinion, a consultant that works for equity is unsure whether he or she can deliver the expected results within a given time frame whereas the consultant willing to accept commissions instead of equity has complete confidence in own ability to deliver the results by managing resources – including human – efficiently. The reason is not that equity consultants are unable to do this; they simply have no immediate incentive to do so other than possible future gain which largely relies on company management. A commission consultant takes charge backed by investors, an equity consultant is unable to do so as management will not allocate capital in that direction.

I have a lot of very close friends who operate as equity consultants and are very good at it. Some have managed to build up a nice cash cushion which enables them to work for free, others are struggling. In my opinion, working against an equity stake is fine as long as the consultant has no need for a fixed revenue stream. If that is not the case, the consultant needs to step up the game and be sufficiently confident to take on projects on fixed income/commission-based terms. Do not confuse confidence with fixed income; if the consultant fails to deliver, the reputation goes down the drain,

This is just my opinion based on my personal experience in this field. I consider the consulting phase to be the preliminary phase to becoming a hands-on investor and am taking the transformation path. Once projects have generated sufficient reserves, our consultancy will transform into an investment agency and then fun begins.

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2 Comments

  1. Beggi Dan says:

    Very impressed with your article Snorri. I have been down this road once or twice. Today though, since I am not depended on the money, I am more interested in “equity for work” projects rather then charging by the hour for consultation.

    • Hi Beggi and thanks for sharing your own experience. Just curious, are you considering converting your consultancy into an investment operation or are you already at that stage? Or perhaps that is not the objective at all?

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