Ideally, everybody wins when a company enters into a services-for-equity agreement with an entrepreneur. Those on both sides of the equation are all in. Their goals are aligned. The entrepreneur gets a valuable service, and if the supplier does its job, it too will reap the benefits in the long run.

Everybody’s in lockstep. Everybody benefits from the “human, emotional element of building something big together,” as Alain Sylvain, CEO and founder of Sylvain Labs, once wrote for Inc. Sylvain calls it “a great equalizer” since “it changes the way companies value their time.” He emphasizes a “partnership” where the two parties must succeed together instead of treating it like a “transaction.”

Perhaps the most extreme example of the way in which a service provider might benefit from such a partnership is that of David Choe. The Los Angeles-based Korean-American artist was enlisted in 2005 by Sean Parker, Facebook’s president at the time, to paint murals on the walls of the then-fledgling company’s Silicon Valley headquarters. Rather than taking $60,000 in cash, Choe chose stock options instead, even though he would later say he regarded Facebook as “a joke” at the time. He would learn otherwise, as many of us would. And when the social media platform went public in 2012, his stock was worth $200 million.

Again, that’s certainly a best-case scenario. But as I’ve learned as CEO of a Detroit-based advertising agency, many a company can reap the benefits of a services-for-equity approach. My company invests a given amount of resources into a startup in exchange for an agreed-upon percentage of their company, the thinking being that if you do your job right, both parties stand to benefit.

Others are of the same mindset. Dan Hussain, founder and president of the American Patent Agency, wrote in a 2019 piece for Forbes that he invested a “little more than $1,000” in his company upon launching it in 2006. Thirteen years later, his portfolio exceeded $1 million. He added that he finds it particularly inspiring when he comes upon a startup that shows promise for the future (as opposed to one that is stagnating in the present), and conceded that while there will likely be initial growing pains, “exponential success” is a very real possibility.

Best Practices For A Services-For-Equity Business Model

In a piece for, investor and author Hal Shelton stressed that suppliers must do their due diligence by reviewing the brand’s records in order to ascertain its current financial position, and assessing its business plan and financial forecast. To that end, I have always found that a capitalization table is invaluable in this form of business arrangement, as it provides an outline of ownership percentages between investors and the entrepreneur in startup companies. It’s also a useful tool to set proper valuations.

It is also important to keep in mind that most startups utilizing services for equity are typically low on cash, so receiving any and all necessary information into a business’s financial forecast to ensure its profitability is crucial since this model is designed for the big picture.

Further, it is essential to gain a full understanding of the brand’s management structure and decision-making process so that the service provider can be secure in the knowledge that its interests will be protected. The only real decisions you can make in this kind of model are on marketing, so if the organization you are trading services for equity with does not have sound leadership, it is usually best to avoid such an investment.

One other cautionary note: Having your own team in line and providing services (i.e., holding up your end of the bargain) is also important, as showing the contribution to the big picture is vital to not losing out on any future profit.

The point is that this is a two-way relationship. There is a give-and-take between the brand and the service provider. Both sides need to understand that, and enter the partnership with eyes wide open. If both do their homework, the odds are good it can be a productive relationship, and that over time, both can reap the benefits.

Originally published on Forbes>>