The problem with working for shares instead of a fee.

This year, I have had several requests from several SME companies of all sorts to work for them—literally for free. As an ad agency, we need to charge a fee and earn a profit or we’ll go out of business.

Not sure if it's because of the economy, but our agency is being approached, more often now than ever before,  by clients who say they can’t afford to pay the usual service fees and would like us to consider some other means of compensation for the agency: “There must be a way we can work together?”

One potential client, a start-up technology business, came through our doors recently with his latest and greatest “opportunity”. The company, he said, has very little capital, has limited resources, and has had very inexperienced people create marketing and web design. "We are trying to raise money and hopefully will do so in the next few months.”

He added some icing to the proposition with: “It is open territory for people with your talent to really fix it. We have no dollars to pay at this time, we’re almost out of cash. Your fees need to be 100% in shares.”

Of course the client knew that asking us to work for shares was a long shot, but he wanted to give it a try.

Promises. Promises. Promises.

My partners and I have gone for a few of these deals in the past because the business ideas looked splendid.  Shares are promised. Options are promised. Some fees are promised too—”when the company is making money”. Or a percentage of sales may be offered—”once the company is selling product”. Even a small percentage ownership in the company may be promised.

Perhaps the opportunities reflect our passion for new ideas and new technologies, and in some ways, how innovative new products can be of help in our society.  Sad to say it, but a good number of these “opportunities” have turned into a big waste of our time and effort.

There is a problem with doing things for free.  Here’s one example:

Guess how long we’ve been trying to work with one of these technology companies? Since July, 2006. That’s 6 years! And I could write a whole list of promises made over that period of time.

And guess how many hours of our time we’ve wasting on this one?  Sorry, we didn’t keep time sheets, but I assume it's between 5,400 and 5,600 hours, (for all our people involved). That’s about $700,000 worth of time (at $125/ hour—our lowest preferred rate).

It’s a given that most high-tech start-ups are high risk - the mortality rate is astronomical. If you are dealing with start-ups—which can be some of the most exciting businesses to work on—you must understand from the outset that this is about the ad agency taking some risk too.

When it doesn’t work out, you have to simply write it off without too much disappointment. What we’ve learned over time is, if you are going to work with start-up companies,  make sure the payoff matches the risk, and make sure it’s only a small part of your business effort.

The hazards of working without proper fees

Doing things without a proper fee can be hazardous. Some people assume that because you’re not charging a fee for your time, your time isn’t worth anything.

I can’t begin to tally up all the hours we’ve spent doing inane things over and over again, either because the client CEO doesn’t take the time to read things carefully, or because he thought we can just wave our magic wand and spit out great work.  The CEO only sees a few shares going out the door—not fees. Of course, if this was a pure fee assignment, the clock is ticking. And that ticking focuses the mind, and the CEO is less inclined to screw around because time costs money.

No doubt about it—charging a fee both for services you receive and services you render – focuses the mind of both parties.

Recently, I had the following message sent to me by a friend who runs a small ad agency:

“I spent my second day in a row working on my “freebie” projects and have had maybe 45 minutes to do any actual work for paying clients. Somethings wrong here! Still, putting one of these projects to bed today gave me a sense of satisfaction, whereas wrestling with one of my paying clients and doing his third round of corrections made me feel like I’m just spinning my wheels. Which makes me think of a quote I read recently: “Time: the most important non-renewable resource.”—Roger H.

The "small" favours can hurt

The problem with doing work for free—without a proper fee, is that it’s just that: free. Because you’re good at what you do, it’s hard to put less effort into a project, no matter what you’re getting paid. This leaves the burden of recognition for the favour on the receiver and it’s a long shot that they’ll remotely understand the time and effort you’ll be putting into their “small” favours.

As soon as those emails start flying, you take the role of the battered advertiser and they the role of a high roller client that you can’t afford to lose and will do anything to keep happy.

Suddenly, your no-fees project is going through hours and hours of time and actually eating into your work for paying clients!

People don't respect things that are free

Free advice. Free ideas. Free work. None are valued.

People associate the value of service with the amount of money that is exchanged for it. How else do you think that lawyers can get away with charging $400 to a $1000 an hour? When you or a friend is in need of surgery, do you choose the heart surgeon who charges $200,000 per surgery or the one who works for beer? Some people naturally make the assumption that if it costs an arm and a leg, then it must be worth it.

My partner sums it up well: “In the context of shares instead of cash, it’s not “free”, it’s earning your shares. Truly free work in the hope that it will lead to something better, is the real folly.”

They will expect it forever

Gamblers playing at the craps table look at the past behavior of the dice to, mistakenly, assume that the good luck will continue. Clients will figure if you did work for them once without a proper fee, you'll do it forever for no fees. There is no reason why they should respect the hundreds of hours you have spent learning and researching the project. There is no reason that they should respect the professionalism you hold. When they come back and you try to get fees, they will meet you with resistance in the form of guilt. "I thought we were friends".

From the onset, you have to set up the expectation that they are going to pay you a fee. It’s the only way to demand the respect that you deserve. Make sure they understand you are a professional. After all, that is the difference between a professional and an amateur. Professionals get compensated for their skills.

It may give you butterflies, but ask for the money. Do it openly and notoriously. Your clients will take it as a sign of confidence.

Conclusion

At some point, we all swear we’ll never take on another no-fees project again. But I must admit, we still suck at making good on that promise—especially when someone comes to our door with the “next new revolutionary product.”

What horror stories do you have?

Do you have a horror story about a project you didn’t charge a fee for? Or one that promised you shares or fees based on sales?

We want to hear about it!  Leave a comment below with any tips you wish to share with our readers.

Mike Fromowitz

OCTANE