At some point most founders need help they cannot pay for in cash. It might be money, it might be a developer, or it might be early customers who will stick with you while the product is rough. The usual way to pay for that help is to share the upside: giving people a stake in what happens if the business succeeds.
There are several ways to do this, and they have very different consequences. Here is a plain comparison for UK founders.
Equity: selling part of the company
This is the most familiar route. You give someone shares in exchange for money or work. If the company is sold or floats, they get their share of the proceeds.
Good for: businesses aiming for fast growth and an eventual sale, where investors expect a large return on a small number of winners.
Watch out for: dilution, which adds up quickly over several rounds, and the fact that shareholders have legal rights and expectations. Giving equity to early helpers on a handshake often causes problems later, so put agreements in writing and consider vesting so people earn their shares over time.
UK founders raising equity from individuals should look into the SEIS and EIS schemes, which give investors tax relief and can make an early round much easier to raise. The rules and limits change, so check the current guidance on GOV.UK before relying on them.
Equity crowdfunding: lots of small shareholders
Equity crowdfunding platforms let you sell shares to the public in small amounts. It can raise money and build a community of supporters at the same time.
Good for: consumer brands with a loyal following who would like to own a piece of something they already use.
Watch out for: the work involved. A successful campaign is a marketing project in its own right, and you end up with hundreds or thousands of shareholders to keep informed. Platforms are regulated by the FCA and campaigns have to meet their standards, which takes time to prepare.
Reward crowdfunding: pre-selling the product
Kickstarter-style campaigns let people pay in advance for a product in return for early access or perks. No one gets shares.
Good for: physical products and creative projects with a clear thing to deliver.
Watch out for: delivery. If you underestimate manufacturing or shipping, you can raise money and still lose it fulfilling the orders.
Revenue-based finance: repaying from sales
Some lenders provide money in return for a fixed percentage of future revenue until an agreed amount is repaid. You keep all your equity.
Good for: businesses that already have steady revenue, often online or subscription businesses.
Watch out for: the total cost, which can be high, and the effect on cash flow when repayments come out of every month's takings. It is rarely an option before you have revenue.
Profit sharing: a slice of future profits
Instead of shares, you promise a percentage of future profits to the people or organisation that helped you. If the business never makes a profit, nobody is paid. If it does well, the people who backed you early share in that.
Good for: businesses that want to grow at their own pace and stay in control, especially when the help is in kind, such as development work, rather than cash.
Watch out for: definitions. "Profit" needs to be defined clearly in writing, including when it is measured and how it is paid. Vague promises create disputes.
This is the model MeWeBe uses. Startups in the network receive help building and growing, and in return pledge a share of their future profits to the community pool. No profit means no payment. You can read more about how it works and see the live pool status.
How to choose
A few questions help narrow it down.
- Do you want to sell the company one day? If yes, equity is usually expected. If you would rather run it for the long term, profit sharing or revenue-based finance may fit better.
- Do you need cash or help? Many early founders mainly need a product built. Paying for that with a profit pledge or a small equity share can be cheaper than raising money to pay a developer.
- How much control do you want to keep? Shareholders have rights. Profit pledges and revenue deals usually come with fewer strings.
- Do you have revenue yet? Revenue-based options are generally only open to businesses that do.
Whatever you choose, take proper advice before signing anything, and get every agreement in writing.
If you are an early-stage founder with an idea and no technical team, you can apply to build with MeWeBe. And if you want to hear how other founders have handled these decisions, the startups forum is a good place to ask.