Five years ago I went to an entrepreneurs’ retreat at a race track in New Jersey.
I ended up meeting a fascinating guy there who ran an ad agency. It quickly became obvious that he’d built a monster business, so I started asking some questions.
Whatever he was doing sounded way more lucrative than a typical agency…
He explained that in some cases – if a client’s business looked like it was going to blow up – then instead of charging all of their fees in cash, they’d also be given equity in the client’s business.
And the “prices” for things that were paid in equity were much higher (since it didn’t cost the client out of pocket). So if they hit a target milestone, then instead of charging, say, $25K in performance fees, they’d be issued $75K in equity instead.
Definitely a gamble – but in the most recent case, it had really paid off. One of their media-buying clients had recently been acquired at a valuation well over 10X higher than the equity they’d been “paying” this agency.
So instead of collecting maybe $500K in fees over a couple years for hitting performance targets, they cashed out their shares… which were now worth roughly $25 Million.
At this point he had my undivided attention.
This is an extreme example – and honestly not one I recommend – but being exposed to this type of compensation model completely changed my perspective on how profitable a client business could actually be…
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