How to successfully match work for equity and crowdfunding

Work fof equity e crowdfunding

In the evolving business environment, the concept of work-for-equity is rapidly gaining ground as an innovative strategy to compensate employees, contractors, and consultants. Basically, it is a mechanism that allows companies – particularly startups and innovative enterprises – to remunerate the work of professionals by offering them shares, stocks or participatory financial instruments instead of cash compensation. But that's not all: work for equity can be effectively combined with crowdfunding and, if used in the right way, can be a real source of income for the company. Therefore, in this article we will go over how to make the most of the synergy between these two tools.

Disclaimer: This article cannot be assimilated in any way to legal or financial advice. Furthermore, the article was written with reference to the Italian business context. For these reasons, before taking any action, we invite you to learn more about the regulatory aspects related to work for equity and crowdfunding in your country. 

Work for equity: what is it about?

In general terms, work for equity is that practice that allows companies to remunerate employees, contractors and consultants by offering them shares, stocks or participatory financial instruments of the company, rather than a cash reward. In other words, with work for equity, professionals do not get immediate financial compensation, but shares in the company that will hopefully earn them earnings in the future.

This is a solution designed specifically for startups and new ventures, where financial resources are often limited and founders are always looking for alternative ways to attract key talent. Those who work for equity become part owners of the company, participating directly in its corporate profits, and can therefore benefit financially from its future success. 

Work for equity also makes individuals feel more involved and motivated, improving their performance. In fact, if the company grows, the value of their shares also grows, and consequently so does the profit they can earn through their resale: a powerful incentive to do things properly, since workers benefit firsthand from the results they achieve.

How to match work for equity and crowdfunding

Work for equity is not only a way to reward employees and contractors, but it can also be a great complementary tool to a SAFE or equity crowdfunding campaign, if used in the right way. In particular, through a work for equity contract it is possible to effectively engage a category of investors that is often not even considered when it comes to raising capital, but instead can really make a difference in the success of the campaign: that of suppliers.

Basically, this involves proposing to the suppliers the possibility of investing in the company they work for (through SAFE or equity crowdfunding) by exchanging cash remuneration for remuneration through company shares (as the work-for-equity mechanism dictates). Crucially, it is also essential to add to the proposal an improvement in the contract, for example, offering exclusivity, an extension of the duration, or an increase in the amount. In this way, the supplier will be very likely to accept since, in addition to acquiring shares in the company with which they are in business, they would also gain benefits from the labor point of view.

Work for equity as a business tool for your company

In the previous paragraph, we talked about how to use work for equity as part of a crowdfunding campaign to engage suppliers, but the benefits offered by this practice do not stop there. In the next few lines, we'll look into how the pairing of work for equity and crowdfunding can be an effective business tool for your company, capable of generating greater corporate value.

The strategy is structured in three phases and involves self-subscription, an aspect of work-for-equity that allows companies to subscribe, precisely, to shares of their own capital and then give them to stakeholders as rewards/incentives. [Please note: in Italy, self-subscription of shares is only allowed as part of an incentive strategy. Always check your national regulations on this matter to avoid possible legal complications].

In the next few lines we see how to implement it through a concrete example.

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Step 1: Self-subscription of shares at nominal value

Company XY decides to subscribe to its own shares with the intention of using them in the future as a reward for its suppliers. Specifically, the company subscribes shares for 15% of its share capital, which is €10,000. Thus, the value of the shares subscribed is €1,500 (corresponding to the nominal value, i.e., the value of the share capital).

Step 2: crowdfunding launch

Over time, the shares increase in value. At this point, company XY launches a crowdfunding round. Based on analysis, the premoney value (the estimated value of the company before crowdfunding) is €1,500,000. By crowdfunding, the company gets to raise €300,000 and thus ends up with a postmoney value of €1,800,000 (i.e., premoney value + capital raised).

Step 3: Share disposal to stakeholders

At this point, the company will be able to use the shares it had previously subscribed to implement its incentive plan toward employees and suppliers, which involves the transfer of shares in exchange for work (according to the work-for-equity principle). And this is where the real magic happens: the value of the shares, acquired during Step 1 at nominal value, will now be determined on a post-money valuation basis and will therefore be significantly higher. Essentially, thanks to this strategy, the company will find itself with a much better negotiating margin than it would have had if it had sold its shares immediately after subscription.

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