How to Approach Raising Sweat Equity

Starting a business is a daunting task with many unknowns to solve. It’s a deliberate and constant march to advance on the journey of having a successful business, and adding a capital raise to the mix can be extremely overwhelming. As a startup, you may be looking at many different options when it comes to avenues to get the services you need to scale your business. At Lynx, we’d like to simplify that process and connect you straight to the service providers who can help you and your company take the next step. In order to make the most of these connections and ensure you find the ideal partner, we recommend startups use the following information to put themselves in the best position to succeed.

Determine if Sweat is for You

First, you’ll need to evaluate if sweat equity is right for you. While sweat equity partnerships can be useful for all businesses, the type of convertible note deal discussed in the docs is useful mostly to companies that are going down the venture capital route and raising money from angels or VCs. Not all companies going down this route are candidates for sweat equity, however. The key to finding out you’ll benefit from sweat equity lies in the use of proceeds. As a rule of thumb, if any line item in your use of proceeds makes up more than 10% of the entire round, you should look to convert that service to sweat equity. You can read more about all the benefits of sweat equity, but the headline here is anyone you’re spending that much money on should be invested in the success of your business. Outside of the 10% rule, founders should evaluate if/ and what services are essential to the success of their business, regardless of how much you’re spending with them.

As a dog food example, a product like Lynx is extremely legal intensive, and the legal documents that power sweat equity deals are the cornerstone of our services, and so it’s important to us that our law firm is bought in on the Lynx vision.

Create a Compelling Partnership Pitch

If you decide sweat equity is right for you, you’ll then need to put together some information about your startup to share with service providers. We recommend putting a deck together focusing on the following five core areas:

• Vision - how do you see the current landscape and how does the company/product fit inside that landscape (now vs 5 years from now vs 10 years from now)

• Market size - specifically how large is the customer market and what percentage is reasonably attainable to your company

• Competitive advantage - who are you competing with and how do you stack up against them? What can you do that no other competitor can.

• Monetization - how will you generate revenue and what do you expect annual revenue to be after the product launch / 5 years from now / 10 years from now

• Raise - use of proceeds, what will milestones are you looking to achieve, what are the investment terms you will offer to investors

Shop Providers and Investors

Lastly, you’ll need to evaluate service providers to know which provider is right for you and your business. These providers will become your partners through this process, so it’s important to make sure you have thoroughly vetted both the company and its management team. To evaluate providers we recommend meeting with their management team and their customers. Ask for a few references that can speak to the quality of work as well as the management style of the company. You’ll obviously want to assess the work they do but at the end of the day the management team will effectively become your business partner, so you’ll want to ensure there is a good culture fit between you and that team. If possible, meet the team in person outside the office. Get to know them on a personal level, and remember, you’ll be partnering and working with this person or persons on a daily basis for years to come. If it’s not a perfect fit don’t be afraid to meet with other providers, and don’t sacrifice your long-term happiness for work you feel you need to have now.

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