The Hidden Cost of Equity Used as Currency

1. THE "CURRENCY" OF EQUITY IS
THE HIDDEN COST FOR START-UPS
Published on October 28, 2019 By Theodore Sprink, CEO of Integrated Growth Strategies
An important element of achieving business success, is gaining the respect and recognition of
your employer’s management team, co-workers, customers, competitors, trade
groups, influencers, subject matter experts and market leaders throughout your industry.
Respect and recognition often result in promotions, and in many cases, offers of employment
with those who have witnessed and perhaps benefitted from your honesty, integrity, character,
work ethic, experience, knowledge, IQ and EQ.
But for many of us, respect and recognition have for years been associated with requests for us to
serve as Mentors and Consultants, contributing our time and reputation to Advisory Boards of
start-up businesses.
Changes in Corporate America
Evolution of corporate America is evidenced with a changed landscape whereby more than
anytime in American history, it is not just “small businesses” providing the foundation for
employment. As firms have downsized, or mergers have led to right-sizing of duplicate functions

2. at all levels in the newly constituted company, millions of men and women have been released
into the vast new world of “start-ups”.
This ”American dream” of owning one’s own company, or working in an innovative, agile new
entrepreneurial start-up has created two new constructs. The first, as we all recognize, is that
traditional long-term careers with one employer, providing security, a pension and gold watch at
retirement are over. According to the U.S Bureau of Statistics men and women will have 10 jobs
by the time they reach 40 years of age, Forrester Research projects that most of us will have 12-
15 jobs with 6-8 different companies in 3-5 different industries during our careers.
The second is that entrepreneurial start-ups have changed, perhaps because of the sheer number
driven by technology, innovation and a mobile work force. One change is that many start-ups are
established by entrepreneurs willing to perform as independent 1099 contractors while working
for several companies simultaneously. The other change is that most start-ups intend to disrupt a
well-established business or industry…with insufficient capital and without a full understanding
of what it takes to disrupt the status quo.
Capitalization of the Start-Up
Very few start-ups have sufficient capitalization by which the company can fully develop a
realistic, investor-worthy business plan that can be implemented in the form of a functioning
business, capable of raising capital, perfecting its products and services, building the appropriate
infrastructure, crafting a marketing plan, creating brand equity and launching effective sales
initiatives.
And, start-ups often lack professional management and leadership skills, contributing to the
problem of credibility to raise capital from investors, obtain customers and recruit, hire and
retain key employees.
According to the U.S. Small Business nearly 66% of “small businesses” fail within 5
years. But, the failure rate of “start-ups” is 90%.
There are a number of reasons for small business failures, such as market demand for products,
cost miscalculations, competitive factors, poor planning, weak management, workflow, supply
chain and the like. The leading reason for start-up failure is generally attributed to insufficient
capital.
Thus, a conundrum for those accepting readily available equity. The equity is typically in an
under-capitalized firm with a negative net worth, no product, no customers and no cash
flow.This raises the issue of “chicken or egg”. Does the firm raise sufficient capital and then start
up...or does it start up in order to raise capital?
In either event, entrepreneurs, investors, advisors and service providers, all competing for equity,
need to have their eyes wide open with respect to achieving the 10% success rate versus
suffering the consequences of the 90% failure rate.

3. Equity Mis-Used as Currency
Enter the concept of Advisory Board Members, Mentors, Consultants and the use of
“Equity” rather than cash with which to operate the fledgling company. In my
experience, today’s entrepreneurs have oftentimes tapped themselves, friends and
family members out of the cash that was intended to lead to a commercial loan,
venture capital or angel investor. A sale of the company or an IPO has become a pipe
dream.
As a result, there is no working capital…which leads to the use of equity as the only “currency”
available to keep the doors open, hopefully nurturing the firm into a niche that will lead to its
products or services being attractive to lenders or investors. This is a very slippery slope for the
entrepreneur in that so-called “Vulture Investors" will require an enormous percent of equity for
a fraction of what was anticipated to be dollar valuation and business potential.
My perspective is that while entrepreneurs are ultimately responsible for the development of an
unrealistic or under-capitalized business plan, in many cases Advisory Board Members, Mentors
and Consultants fail to protect the client from themselves.
In a sense, this is to be expected. Indeed, professional talent should be properly
compensated. However, the “Cap Tables” prepared by start-ups, shifting equity to Advisors,
Mentors and Consultants, with further dilution to cover product development, operating costs,
payroll and third party vendor invoices, is considered by many to be a modern form of bait and
switch.
Advisory Board Members, Mentors and Consultants should either be paid in advance, or
recognize and accept that their time and expertise is being volunteered…perhaps subject to a
modest and appropriate equity stake. Growth-stage firms, with marketable products, customers
and cash flow are more appropriate clients in order to earn professional fees, plus a reasonable
slice of equity in the form of a “success fee”.
Entrepreneurs should line up sufficient capital pursuant to a realistic business plan, before
attempting to be the next Bill Gates. They should be acutely aware that personal and family
fortunes are likely to be lost to hungry, willing and well-practiced third party “advisors” who,
given a modicum of business success, are likely to own the lion’s share of the business as a result
of equity being used as currency.
The Dynamics of Entrepreneurs and Third-Party Professionals
One thing that has not changed: Let the buyer beware. What has changed is who the buyers
are. On one hand they are the entrepreneurs, excited to pursue the American Dream. On the other
hand, the third-party professionals may see an opportunity to obtain value with limited
contribution. With that said, in some cases the entrepreneurs, particularly when desperate for
new cash to protect the old cash, may assume the characteristics of less-than-honest con men,
opportunists or simply naive dreamers.

4. Theodore Sprink is the Managing Director of the advisory firm Integrated Growth
Strategies. The firm specializes in developing business plans and investor
presentations that establish operational and marketing strategies that generate
revenue, enhance brand equity and lead to value that justifies the original dream of the
start-up. Ted’s belief is that equity interests are appropriate for individuals assisting
“growth stage” businesses, not under-capitalized start-ups.
Ted can be contacted at tsprink@integrated-growth.com or 866-494-
3727. The firm’s web site is www.IntegratedGrowthStrategies.com.
www.linkedin.com/in/theodoreSprink