What IS an Equity Deal?
You provide products, services or other resources to a target company in exchange for an ownership interest, a revenue share, a profit interest, phantom stock – warrants, options or some other equity-like interest in the target company.
How Do You Structure An Equity Deal?
Roland breaks down one of his favorite types of equity deal. He uses this formula a lot because it’s very effective, dependable and comprehensive for all involved.
If you’ve been listening for any length of time, you’ll understand that Roland Frasier knows what he’s talking about and is speaking from a depth of experience and research. Read more about our host Roland here and to dig in further, sign up on our home page for exclusive content from Roland to your inbox.
The Cash Plus Equity Gap Multiplier Method:
- Especially good when there are attorneys, accountants, minority shareholders, VC’s, angel investors or other advisors are in the mix.
- Presents especially well when you need to have a mathematical justification for granting the equity that you want.
Let’s talk about Cash Needs:
It seems to go without saying but it comes before everything else. Be sure that you receive enough cash to cover your needed operating or living expenses.
“I’ve seen a lot of deals with tremendous upside opportunity fall apart just because the service provider failed to negotiate a cash portion to cover their operating or living expenses.” Roland Frasier
Let’s assume it is going to cost you $2000 to cover the contractors needed to deliver the service you’re contributing, and you need $3000 toward your own living expenses (total $5000).
Keep that number in mind, and then calculate the high-end of the scale market value on those services that you’re going to be providing for the company. So let’s say that would usually be $10,000.
$10,000 minus your cost of $5000 is the equity gap.
Multiply that gap by 3-5 times.
Because you’re taking the risk. You’re betting on the company.
Let’s base it on a multiplier of 3.
$5000 x 3 = $15k / month in equity BUY IN VALUE.
Multiply that by 300 (months) and that’s a $900,000 value over 5 years.
There’s the value you’re looking to have in the company.
Now let’s determine the Equity piece.
Your interest percentage in the company.
Let’s say the company has 5 million dollars in sales and EBITDA (Earnings before interest, tax, depreciation, and amortization) of 1 million, and the valuation multiple for that industry is 9, then the valuation of the company would be $9 million (1 million EBITDA multiplied by 9).
So your interest in the company would be 10%. ($9M divided by $900,000, or Value of the company divided by the value of your investment over 5 years).
In conclusion, you’d receive $5000 per month for 5 years PLUS a 10% equity share.
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