

Ask HN: Is Sweat Equity a viable idea? - mannylee1

My cofounder and I are discussing the idea of making a startup based on Sweat Equity. Meaning, startups have many needs, not just money, like development tasks, marketing help, legal advice, content creation, etc...<p>Our site would allow startups to exchange equity for those needs.<p>As part of our discovery process, we&#x27;d like your feedback.<p>Would you be willing to exchange equity in your startup for a particular resource mentioned above?  Why or why not?
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tptacek
No. So many reasons.

* Even people with long-term commitments to companies have a hard time valuing equity.

* In order to value equity, you need to be given access to confidential details of the company.

* It's legally expensive to give different kinds of equity to people, and every time you do it you create a small (or worse) amount of risk.

* The rules about employee equity are well-tested and understood. The rules about equity offered like this aren't.

* Offers for exchange of equity for in-kind services could be construed as unlawful solicitation of investment (I don't know, and am not a lawyer).

* Having a web design contractor on your cap table is going to make it harder to close VC rounds.

* Screwing up your equity grant to a web design contractor so that they have an effective veto on a VC round is going to make it impossible to close VC rounds.

* Employee equity vests.

* At good companies, a grant of equity has uncapped upside. Nobody buys web design for "potentially unlimited dollars".

* So now you also have adverse selection to deal with: the companies whose equity is available in a program like this won't be the Airbnbs and Dropboxes of the world.

* Similar barter programs (based on pure in-kind/in-kind exchanges) have been tried for decades (the ISP I worked at in the '90s was involved in one) and they appear to reliably fail; once people start to believe their contributions aren't fairly valued, a vicious cycle sets in.

I wouldn't just not participate in a program like this; I wouldn't work for a
company I found to be participating in one.

~~~
glurgh
_I wouldn 't just not participate in a program like this; I wouldn't work for
a company I found to be participating in one._

Many (I'd even say most, maybe?) venture-backed startups engage in something
like this, though, just not for very concrete things like design or
engineering or marketing. Members of 'Advisory Boards' or 'Technical Advisors'
or similar often get some nominal amount of stock [options/RSUs/whatnot].
Maybe this just flies under the radar with the expected value by both
participants in the transaction being close to nil.

~~~
tptacek
That's true, but the stock they receive is more in the notion of an honorarium
than a payment for services rendered, and there's often mutual benefit aside
from the stock (being on advisory boards is, or used to be, a high-status
thing). Advisors don't so much try to value the stock they receive. But a
lawyer or a web designer has to do that.

Also, the value a company gets from an advisor is long-term. Not the advice,
but the NASCAR-sticker-like endorsement the company gets from the name on
their website.

~~~
glurgh
I think (and I should have said so) I was mostly responding to the
categorical-sounding 'No' at the start of your comment - such transactions do
occur, occasionally even for straight up 'services rendered' (with the other
party generally having to pass the 'qualified investor' bar).

I'm probably in violent agreement with you that there is no sensible way
someone's going to be able to offer some magical web-based marketplace for
such exchanges, for all the reasons you listed.

~~~
tptacek
Oh, sorry, the categorical no was just an answer to his question of whether
I'd get involved in something like this.

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bdfh42
I took part in this program [http://www.inventorium.org/events/swequity-wales-
spring-2013...](http://www.inventorium.org/events/swequity-wales-spring-2013/)
that runs in Dublin and now North Wales. Great idea - check out the info packs
to see how it works. No reason that you could not harness something like this
to an accelerator or incubator program for a share in the best ideas.

~~~
mannylee1
Thanks for sharing the link. Building up our customer base, from the ground
up, via accelerators/incubators, is something that is definitely on our minds.

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notahacker
I'd have thought the reverse was the bigger part of the problem: finding
skilled people willing to work solely for a small slice of equity in a company
they had no influence over.

I'd expect there to be an adverse selection issue too (startups most likely to
succeed are those that can pay for stuff with revenue or investors' cash;
startups most likely to hand out equity like candy are those that know they're
struggling)

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jsmith72
Our firm has played with that concept already for number of years. However in
the last few years with easy access to funding capital it begs the question
why exchange equity for those items? It would seem then that this would appeal
to startups only if they can't get funding, which raises another question on
how viable of a startup is it?

With that said, we concluded that a capped equity swap might be acceptable. As
in where the service provider would be rewarded with up to 4x to 8x their or
the industry normal business rate for the services they performed. So a lawyer
normally charges $150/hr. He choose to only charge $50/hr in exchange for the
other $100/hr be some sort of investment. At payout time he could receive upto
$800/hr for services performed. Payment could be tied to any company metric.
This would be much easier to track then say % share of equity.

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sharemywin
The equity in business is pretty low until it generates cashflow or contains
assets(traction). For businesses with traction their are already established
ways of getting investment capital. Also, I don't know if it makes sense for a
business to dillute it's equity for one time costs. If it were to be done, you
would need somekind of project plan to profitablity. And some kind of model
were nobody puts in effort until all the peices are in place. And how does the
project adapt if people don't deliver on their promise?

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dmgrow
I'm never a fan of giving up equity in exchange for short-term services,
rather than a long-term commitment from an employee or investor.

I wonder if you would have success attracting high-potential startups. It
would seem that most of these are able to raise money for the needs you talked
about, especialy since it appears easier than ever to raise a small seed
round.

As a result, you could be left with mediocre to low-quality startups only
which threatens the model.

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BinaryAcid
I would be willing. I'm a believer in multiple streams of passive income so
this idea is a natural byproduct. I would love the opportunity to do small
pieces of development work in exchange for micro equity. In this way, I could
'invest' in a dozen different startups and thereby make some long term bets.
In todays climate, one win in ten has enough ROI to cover the cost of the
other nine.

