In 2010, Aapo Bovellan spent his days working in the London offices of Nokia, and his evenings and weekends offering branding expertise to a video game startup that gave him an opportunity to become an early shareholder. Last year, that company, Supercell, raked in $2.3 billion in revenue on the strength of its first release, Clash of the Clans, and several spin-offs. Not long after completing that project, Bovellan and his wife teamed up with a colleague from Nokia to form Proxy Ventures. In the four years since, they’ve carved out brand identities for 14 startups, including game maker Another Place, Frill frozen smoothies, and apps like CurrencyFair and Peak—and they became early-stage investors in each of them. Clearly they’re doing something right: Proxy’s clients have seen average revenue growth of 202% year over year, and an average share price increase of 91%.
As venture capitalists continue to throw startling amounts of money at nascent businesses, more design firms are offering work in exchange for equity, and when they hit the jackpot, the world hears all about it. But not long ago, an equity deal was considered a sucker’s bet, like buying a lottery ticket or purchasing a can of magical beans. Is it a short-lived trend destined to fizzle out or a promising new approach that’s here to stay?
“The model we work with is sexy and shiny, but too many people think that there are a couple of ways things can go wrong and a lot of ways things can go right, when in reality, it’s the opposite,” says Red Antler cofounder and CEO J.B. Osborne, whose agency made a name for itself with the launch of mattress brand Casper. “And most of those factors are out of your control—someone goes to market faster, someone raises more money, the founders fight and break up the business, or they overhire. It’s an incredibly risky investment with only a small percentage of deals that are likely to pan out, so you have to be able to make quality bets and play the game enough times to make it worthwhile.”
Perhaps it’s smarter to say that taking an equity stake is more like playing poker than playing the lottery—an intelligent player who’s seen thousands of hands will always have the advantage. But for Osborne, it was never about the money.
“I’ve always been fascinated with the business model for creative services,” he says. “It never really made sense to me why someone should pay by the hour for something that could be incredibly valuable in the long run, so I was curious about how to structure things in a way that was aligned more with value creation than time spent.” When colleagues in the design industry heard he was accepting equity along with a portion paid in cash, they told him he was crazy. But as someone who doesn’t like being told what to do, those comments just added fuel to the fire.
“The vision was always to partner with our clients as much as possible, where our success comes from their success,” he says. “If we do good work, their business grows and if we create something that’s truly valuable, it builds our reputation, and we get piece of the upside.” Case and point: Red Antler’s first project was to establish the branding and identity work for Behance and 99U—launched by Osborne’s old college friend, Scott Belsky—in exchange for equity. When Belsky sold the company to Adobe in 2012, the small agency saw a nice payday.
So, if you’re considering adapting an equity model, what are the most important to ask of potential clients?
“I ask a lot of entrepreneurs to talk about analogues,” says Alain Sylvain, founder and CEO of New York-based Sylvain Labs. “If I asked them to tell me about companies in other industries that they look up to, they’ll usually say Tesla or Patagonia—you can learn a lot about how they view creative work through that response. I’ll also ask what they know about manufacturing and whether they have an in-house chief technology officer or outsource their tech, which is a big red flag. And I’ll find out about the company of investors that I’m joining, so that I can be sure we all share the same vision.”
That first meeting can be crucially important, too: “If a client suggests equity in the first meeting, I never touch it,” says Sylvain. “The only projects I’ve done in exchange for equity are projects where I brought it up.
Bovellan and Osborne both say that the source of the referral also carries a lot of weight. Agencies involved in venture capital deals aren’t passively standing by, waiting for opportunity to come knocking—they’re meeting with VCs, reading the trades, and talking to experts who can offer background on any potential client. Because combining creativity with venture capital requires the ability to speak both languages fluently.
“Most designers don’t really feel like looking at term sheets and doing due diligence, whereas most venture capitalists don’t feel very compelled to produce mood boards,” says Proxy’s Bovellan. “To run a good design studio, you have to be able to attract good designers and establish a solid creative process, whereas the venture capital side has to be extremely disciplined—it can be hard to get all of those skills under the same roof. So one of our partners is focused purely on investments, another is completely design driven, and I’m half and half. ”
Proxy has found more success working with companies in the A series stage rather than those in the early seed stage. “By series A, companies probably have revenues of $500,000 a month, so they’ve already found out who’s buying their product and why,” says Bovellan. “And that means they won’t flip [their business model] to become, say an enterprise SAAS company or a B2B company, which means they’re more prepared to pursue branding and positioning [for the long-term.]”
Even after the due diligence is complete, the agency CEOs interviewed for this piece generally insist on taking a portion of their fee in cold, hard cash, for several reasons. For one thing, you’ve got to pay the bills long before your client is bought out for millions. Second, a little cash can minimize the pain when things go south, which will happen on occasion, no matter how careful you are.
One horror story: Sylvain Labs partnered with an entrepreneur creating technology that would produce custom shirts at a fraction of the typical cost. But after the agency spent thousands of hours on the project and developed a deep expertise, one of the partners walked out on the other, to pursue the work on his own.
“The whole thing completely fizzled overnight,” says Sylvain, “It was really painful, not only because we had spent money on it, but because we’d invested in the idea emotionally, and it was now irrelevant. That’s when we learned a mix of cash and equity is critical, and we started to evaluate every project more seriously—looking at business plans, doing our due diligence, asking lawyers and accountants to review balance sheets. That work really changes the relationship from a client and a consultant to an entrepreneur and an investor.”
And that deeper relationship can have a radical impact on the process.
Jonathan Levine, founder of Master & Dynamic, approached Sylvain Labs looking for help with branding and strategy for a new line of premium headphones. Sylvain’s team was engaged in pivotal decisions around pricing, naming, and launch strategy, even producing the materials that persuaded Apple to include the headphones on its website and in its brick-and-mortar stores.
“Entrepreneurs are desperate for creative energy, and the ones who are willing to give up equity tend to be the most progressive and open-minded,” says Sylvain. “Clients who pay us directly may say, ‘We want you to really push us creatively,’ but they don’t always want to be pushed; they rein us in all the time. Our entrepreneurs are always asking us to help them accelerate their brand to make a real impact, and when they say, ‘Push us,’ they really let us go for it.”
“When you and the client ultimately want the same outcome, that can shift the tone of the conversation,” says Osborne. “If you’re the agency that keeps saying ‘No,’ you’re just going to get fired, because the person who writes the check has the power, and that’s a dangerous thing. So it’s really important that you have the rigor to push and pull to get the best outcome. Our clients respect us because they know we’re not pushovers—they know we’re not just going to say yes and phone it in; we’re going to put in the extra effort to get to that outcome and ultimately work beyond what we’re getting paid, and that leads to a much deeper, more trusting relationship.”
That level of trust allowed Red Antler to launch product and marketing for All Birds, whose founders aimed to create a shoe that’s comfortable, stylish, and environmentally sustainable. “As we were figuring out how to position the brand, we knew we wanted to get away from a mission-first business, and instead focus on what will make people care about the product. And that meant style, comfort, fitting with your life, and a focus on travel and exploration.” Red Antler designed custom packaging that uses 40% less materials, an integrated e-commerce site, and a unique “unboxing” experience that seems to be connecting with consumers.
Of course, breakout successes will always be rare, and few agencies have the time, the expertise, or the stomach for the inherent risks that come with equity deals. But in a world that glorifies the entrepreneur, it’s a trend that’s likely to continue.
“I don’t think it’s a coincidence that 12 years ago, The Apprentice was one of the country’s top reality shows, and now we’re all watching Shark Tank, which celebrates the entrepreneur,” says Sylvain. “Today, everyone seems to aspire to be an entrepreneur and invite a little risk into their lives. Even with our clients who pay for the work directly, there’s always risk: Will our work be successful? Will we get a second project? In some ways, it’s almost easier to have all risk encapsulated in a single project, where the results are plain for everyone to see.”