Show Me The Equity

image003

I’ve had a number of interesting conversations over the last three weeks with clients & candidates about equity which all prompted me to gather my thoughts and write this piece.

Last week we attended a number of the scheduled sessions and networking events at The Web Summit in Dublin – for those that haven’t been its essentially a gathering of the global tech industry with a whole heap of interesting 20 minute life experience sessions, ranging from Michael Dell & Sean Rad, CEO of Tinder. What’s less apparent in the marketing blurb, but so evidently obvious if youre around the event and socialising in the pubs is the sheer number of venture capital and private equity businesses in town casting their eyes over the next new thing. It was suggested by a friend of mine that there was well over 2000 VC & PE folks in town for the three days. 

I met three companies who were all at an incredibly early stage of their development – all had proof of concept applications developed but none that were ready to launch. None had sold one dollar/euro/pound of revenue yet, and none had received any VC/PE funding. All of them were saying that there was no way they were going to be giving away anything less than 5-10% equity in their businesses to the funders. 

We’ve just started working with a cloud UC provider who are doing incredibly well over the last 6 months disrupting a very mature and unexciting marketplace, doing some massive deals with clients, and delivering revenue and gross profit. They’re considering a floatation in the next six months, and it was really interesting hearing some of their senior sales folk saying that the float, and their ultimate earning from it, was the single most exciting thing that was going to happen in the next 12 months. I couldn’t help but think that when this business floats, and equity and shares get vested, they’re going to lose a huge amount of the talent that got them to floatation because these guys are actually “invested”. This is a small business relatively speaking, and I’m just not sure they’ll be able to cope with the mass exodus when it comes – but maybe in the cloud space that really doesn’t matter anymore?

I’ve recently been helping a friend qualify a potential senior hire to his fast growing, but effectively start-up, technology business – the senior guy had come with a rock star CV from a number of big roles at a number of big internet brands. He was looking for a big salary and a big bonus. And a big expenses package. Plus he didn’t want to be “hands-on” building the team as he was above that. Oh yeah, and he wanted equity!! My friend is “invested” – he’s put in months and months of late nights and weekends, he’s actively hands on in the development, presales, design, sales, post sales, delivery, billing, cash flow & management of each & every deal.

So far in 2015, only 14% of the Initial Public Offerings (IPO) done in the US were done by tech companies, which is the smallest percentage since at least the mid 1990’s. The market for IPOs has turned chilly and inhospitable, and many in the tech space that have floated have seen their stock suffer significant loses. This ripple is impacting on some of the most promising private tech start-ups in the US and Europe, which is certainly impacting on their ability to hire and keep key people. From speaking with a number of international VC folk last week, some of the financing/funding numbers are being dramatically revised down from earlier in the year. Those from the US have big fears about what a future Fed rate rise (expected in December) will do to the market.

I have a view on all of this which comes from being an equity owner in two businesses, but I guess this is all ultimately relevant to company size, ambition and whether you’re the giver or taker of equity! If you’re looking for equity as part of a package, it’s sometimes a case of be careful what you wish and ask for. In a small business, like mine and my friends above, are you willing to give blood, sweat & tears and some in return for a piece of the business? I would certainly expect so, and that expectation can carry huge responsibility. In a larger business, that will directly be impacted by some of the micro and macro factors mentioned above, know that equity may not be the golden goose you expect it to be. And if you’ve done no revenue or sales yet, and are talking about multiple of x10 and x12, go and sign some revenue generating sales!