Category Archives: Consulting

Service for Equity Formula

Say you are a service provider – consultant, designer, coder – and somebody offers you startup equity in exchange for professional service. I pondered this question after seeing it on Quora. I turned back to decades as a consultant, and decades dealing with startups, to come up with this sure-proof service for equity formula. Try it. You’ll be glad you did.

Background: My actual experience with service for equity

I dealt with this problem a lot during my consulting decades. I was based in Silicon Valley from late 1970s through early 1990s, doing business plans, business planning, and market research for high-tech companies (Apple Computer more than any other) and startups. No big established company ever offered me equity – meaning a portion of ownership – for my services. Several startups did.

I was gullible and optimistic. I worked for several startups, as a consultant, for small pieces of ownership. I learned the hard way that startup equity is an extreme long shot, million-to-one odds at best.  It got so bad that I promised my wife that I would never consult again for equity.

But then something happened to trip me up. One of my service for equity clients took off. It became a big success. And I had equity. So I made a lot of money with it. Oops, There went the assumptions.

Specifics: My service for equity formula

First: you decide what you’d charge without the equity offering. Call that the fair value.

Second: figure out the minimum that you’d charge in order to not hate yourself, your client, and the job if the equity works out to be worth nothing. Call that the absolute minimum.

Third: Subtract the absolute minimum from the fair value. Call that the difference

The kicker: consider whether or not you like this client, like working with him or her, will learn from the job, and experience you can gain. Rank that as a number between 1 and 10, in which 1 is a very positive job and relationship, with a lot to learn, and the pleasure of working with somebody you want to work with; and a 10 is that total idiot client you can’t stand working with, you don’t respect, you don’t learn from, and is likely to hassle you for more work for less money. A 1 is somebody with whom you’d work for free if you didn’t need the money. A 10 is a loser who makes your life miserable. Call that number the “life is too short” ranking.

Here is my recommendation, in numbers, with formulas based on these variables:

service for equity formula
And here’s another rendition, this time one with more difference between fair value and absolute minimum:

The adjustment for value of equity

But wait, what? You’re noticing, I hope, that I’m entirely ignoring the alleged value of the equity involved. What a dufus! This whole thing is about the trade of service for equity. Right?

No. This is the real world. The odds on a startup getting from this point to having its equity actually worth money are about one in a million. Make your decision based on the life is too short ranking, not the value. Startup equity is so unlikely to ever generate real value that you can’t survive in a professional service doing your work for equity. Believe me.

Still, if you insist that this is a great startup, here’s how to adjust for the equity that is driving you crazy. Do this adjustment for that great startup that you love. It has a great team, great market, real potential. You really want a piece of it:

  • Do the ones you’ve ranked 5 or less on the life is too short scale for the absolute minimum.
  • Do those you’ve ranked 6 or 7 on the life is too short scale for the fair value.
  • Do those you’ve ranked more than 7 on the life is too short scale for exactly what the formula says. Why? That makes no sense, you say? You do it that way because in those cases, you’re wrong. They are far less likely to succeed than you think. People who rank that high on the life is too short scale end up messing up their opportunities, and failing.

But how do you charge 2 or 3 times market value?

Of course you won’t be able to charge what my formula suggests for the clients in the 7–10 range in the life is too short ranking. That’s okay. You don’t want those clients. They kill your productivity for the other clients you do want. So you price so high that if – heaven forbid – they do say yes, at least your pricing has made it worth it.

For the record, this post started as my answer to this question on Quora: My client wants me to work partially on equity, how do I calculate my costs?

Going Into Consulting? Prepare for Scope Creep

Are you new to consulting? Planning to start soon? Beware of scope creep. It’s a real problem in a lot of professional services. I ran into it in my years of consulting related to high-end planning and market research.

Scope creep is what happens when you’ve done the consulting (or programming, design, engineering, etc.) you promised but your client wants more. I ran into it a lot during my consulting years, doing business plans for clients. Imagine my disappointment as I delivered a finished plan along with an invoice for my fees, only to be asked for more work. Suddenly, my money was being held hostage. And, in my case, the kids needed shoes. But the client said assumptions had changed, or the product had been revised, or the financial analysis needed more scenarios.

You Can Avoid, and Manage, Scope Creep

It’s always worse with new clients. With repeat business with existing clients, you know each other, and you can take some of this for granted.

At the outset,

  1. define the deliverables carefully, with specific, concrete, agreed-upon definitions for each step, with approvals and approval process laid out.
  2. And while you’re on the subject, you should also build timing of deliverables in terms that protect you from the client’s delays, such as having milestone 2 coming due not on a specified date, but rather on a specified amount of days after approval of milestone 1.
  3. And, better yet, that plus days after receipt of payment for milestone 1 (solving another problem while you’re at it).
  4. And also, point out from the beginning that things do change, and progress can lead to change, and when things change requiring work different from what is specified, that takes place at a given billing rate.

Then, as the engagement rolls on, you have to stick to it.

Very Hard To Do After the Fact

What’s difficult is that you have to deal with scope creep in the beginning, with the way you define the engagement, and your billing structure. It’s very hard to manage when you’re delivering, and your terms of engagement haven’t built the precautions into it, ahead of time.

If you get into that situation, of course you know you are dealing with ambiguity. Reasonable people can disagree about what’s a prototype and how that relates to the entire product. Details that should have been specified weren’t. So now what do you do?

Try to configure your response as “yes, we can do that for you … and here’s how much it will cost.” Follow that with details of the difference between what you promised and what more they want. Be specific. Have a good list of additional development required to go from your vision to theirs. Try to explain your point of view. If you have to, it will save the relationship, and you can afford to, offer a big discount on additional work. Take the high road, blame yourself for the misunderstanding, and keep the client happy.

Remember that repeat business is the life’s blood of professional services. Try not to lose your client.

The client is not always right

You may run into a client whose demands are unreasonable. The first time is the client’s fault. From then on it’s your fault, not the clients. Specify your jobs better and stick to your policies.

You might find this helpful: in my years of consulting, I ran into one client who played scope creep on me more than once. I guess it had become a standard tool in his toolbox, to get more work from consultants for less money. After the second time I started taking the price I would have charged to anybody else, and tripling that price for him when he asked me for consulting. I didn’t get the engagements, but also I didn’t have the aggravation. I was better off.

But I also, for my own peace of mind, stuck with the general rule for consulting: you don’t say no. You say yes, and here’s how much it will cost. Build the aggravation into the price. Make it so that if you do take it on, it’s worth the extra problems.

10 Tips for Starting a Consulting Business

Money DetailsAre you thinking of starting a consulting business? Let’s say consulting, engineering, graphic design, SEO or marketing help, something you can do yourself? Here are some tips I’ve garnished from several decades of it. I took my business from high-end professional service to software products, but I’ve never stopped watching the service businesses, and I’m actively involved in several. My favorite, at the moment, is Have Presence, which does social media posting for business owners.

Here are those 10 tips:

  1. Find a focus. Be different from anybody offering similar services to similar clients, in a way they can understand immediately and will share with others. Example: Have Presence isn’t a social media strategy firm that advises you; it’s a do-the-work business that does the posting every day for business owners who don’t have time to do it themselves.
  2. Set your goals right and define success well. Service businesses generally take less start-up capital but are also much less likely than product businesses to offer eventual leverage and scalability. There are exceptions, but in most service businesses the assets walk out the door every night. Those businesses are relatively easy to start, relatively easy to survive and prosper with, but also hard to grow beyond small, hard to sell, and hard to attract outside investors.
  3. Look for a business anchor. That’s a former employer and/or a strong client.  For example, before I left a salary position and went on my own, I had Apple Computer, a former client, and Creative Strategies, a former employer, both willing to contract my services from the beginning. Apple remained critical to – and loyal to – my business services from the beginning in 1984 until Business Plan Pro changed the business to product-driven in 1994.
  4. Understand your first client is twice as hard to get as your second. And the second is a third harder than the third. Land those first few clients well. Make sure they’re happy. Give them a huge discount to get the relationship going, and expect to keep your rates low for them, but ask them, in return, to not tell strangers what they pay you. Work free if you have to. You need references and testimonials.
  5. Use social media and content marketing. Create and share content that validates your expertise. Your marketing today is so much easier than it was when I went out on my own; where I had to get through editors and publishers and conference organizers to get my expertise in front of clients (specifically, I wrote magazine articles, and books, and I spoke at conferences), you can do it yourself by posting on blogs and Twitter and Facebook and LinkedIn. And don’t
  6. Spend wisely on your logo and look and feel. Look into 99Designs, I’ve seen some sensational work from them. A professional look to your logo and website (or Twitter or Facebook or LinkedIn profile, if that’s all you do for a website) is really important. It isn’t a matter of business cards or stationery anymore, but it is how you represent yourself.
  7. Don’t ever spend money you don’t have. You’ll get lots of suggestions for ways you can spend money now to make money later; mail lists, marketing programs, they never stop.
  8. Don’t ever lose a client. Repeat business is vital. Keeping your existing clients is way cheaper and easier than finding new ones. Always go that extra mile, when you have to, to keep your existing clients happy.
  9. Know your numbers. If you don’t know the difference between sales and money in the bank, between profits and cash, learn it. It’s vital. Know your numbers like the back of your hand.
  10. Never compromise integrity. You’re going to succeed or fail based on your reputation. Don’t cut corners with credibility.
  11. (Bonus point) Expect to make mistakes. If you can’t acknowledge and learn from and apologize for your mistakes, then you’re doomed. You will make them. If you think you won’t, keep your day job.
  12. (Second bonus point) Do your own simple, practical business plan. Do it for yourself, not outsiders. Make it just big enough. Keep it fluid and flexible and review it often and revise it frequently. Read Lean Business Planning, by me. Sign up for [Disclosure: I’m the author of that book (but I’m linking you to where you can read it free) and I own Palo Alto Software, which publishes liveplan, a web app for business planning.]

Just Turned Down a Consulting Job and I’m Glad

I just answered a social media consulting inquiry with this…

No, I’m sorry, that’s not what we really do well. We’re a business, so we’d have to charge you; and we wouldn’t be giving you your money’s worth.

… and I went on to recommend somebody else. The person I recommended as a consultant does do what my inquirer wanted. 

square peg round hole rosipaw flickr cc

I won’t bore you with details, but to me this transaction is a great example of the right attitude about sales. I don’t believe in selling as tricking somebody into buying something other than what they want. Selling is matching wants and needs, figuring out whether what you do is what that person needs or wants, and making a good match. 

Jumping on this kind of inquiry with a yes, making a pitch, while hoping to beef up your capabilities midstream, is tempting. But leads to a lot of problems. 

Ending up with “we don’t do that” is great for credibility, gives you a chance of future business, avoids the danger of a bad consulting engagement with unhappy clients, and keeps your self and your spirit whole. 

(photo credit: rosipaw via photopin cc)

Why Would Any Business Ever Hire A Consultant?

True story: Charles Steinmetz. They called him the wizard of Schenectady. I’m quoting Smithsonian Magazine here:

Before long, the greatest scientific minds of the time were traveling to Schenectady to meet with the prolific “little giant”; anecdotal tales of these meetings are still told in engineering classes today. One appeared on the letters page of Life magazine in 1965, after the magazine had printed a story on Steinmetz. Jack B. Scott wrote in to tell of his father’s encounter with the Wizard of Schenectady at Henry Ford’s River Rouge plant in Dearborn, Michigan.

Henry Ford was thrilled until he got an invoice from General Electric in the amount of $10,000. Ford acknowledged Steinmetz’s success but balked at the figure. He asked for an itemized bill.Ford, whose electrical engineers couldn’t solve some problems they were having with a gigantic generator, called Steinmetz in to the plant. Upon arriving, Steinmetz rejected all assistance and asked only for a notebook, pencil and cot. According to Scott, Steinmetz listened to the generator and scribbled computations on the notepad for two straight days and nights. On the second night, he asked for a ladder, climbed up the generator and made a chalk mark on its side. Then he told Ford’s skeptical engineers to remove a plate at the mark and replace sixteen windings from the field coil.

InvoiceThey did, and the generator performed to perfection.

Steinmetz, Scott wrote, responded personally to Ford’s request with [the invoice shown here]: $1 for making chalk mark, and $9,999 for knowing where to make the mark.

Ford paid the bill.

Why do I retell this story? Three reasons:

  1. The best consulting is providing pinpointed knowledge and experience to solve specific problems. For example, don’t have a consultant write your business plan; have a consultant read and critique your business plan, recommend financing strategies, and point you in the right direction.
  2. Make a distinction between outsourcing and consulting. Outsourcing is having somebody else do the actual work. Consulting, in theory at least, is buying targeted know-how and experience.
  3. Not exactly directly related to this story, but just a reminder: turn to consulting carefully. Search for the expertise you really need, and always check references and talk to past clients.

And, for emphasis, this Facebook update from a friend of mine, Erika Leaf, yesterday. It says it very well:





(Editing note: my thanks to commenter Tim (no last name) who provided the link to the real story after I’d published this post with a general reference to that story and an apology “I heard this story a few years ago. I’ve exhausted my web search capabilities, but failed to find a name, date, or any corroborating evidence. It may be just an old legend.”)



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Read This Before Hiring a Coach or Consultant

May I call it the expert business? It’s kind of like a zoo (no offense intended). There are coaches of all varieties, from business to life to style, to executive and leadership and others. And management consultants, planning consultants, strategy consultants, marketing consultants, public relations consultants, etc. And designers and programmers, project managers, event planners, graphic artists … I’ve been both seller and buyer, and I’m thinking I can help you figure out which section to go to, and which cage to rattle, by sorting through some of the species, and some of the differences.

I worry that people use these terms indiscriminately. To me, a coach teaches you to do it better, helps you, and trains you to do things better. A consultant delivers a report telling you what you’re supposed to do.

A coach watches you do it, then reviews your performance. A consultant studies, listens, concludes, and delivers the conclusions.

Can you tell I lean towards coaching? Maybe because I made a living consulting for 20 years, both on my own and as an employee of brand-name firms. And in my specialty, business planning, having it done for you doesn’t work. It’s like paying somebody to do your exercise. Coaching is more likely to work better. I’ve done strategy consulting, and that’s very similar. Strategies are to develop and implement yourself, over a long term. A coach might help, a consultant, not so likely. I’m immersed in social media, and I think that’s another example of something you so yourself, ideally, rather than have done for you; which means it’s another area for coaching more than consulting. And PR? Maybe you have somebody do the press releases, and arrange the meetings, and suggest tips and techniques, but do you believe in anything actually said by a spokesperson?

Ideally, you look for a relationship in which you are buying, and paying for, just the expertise. Pay the expert to coach you as you do it yourself. You pay for fewer hours, but you still get the benefit of somebody else’s experience and expertise. That’s the best of both worlds.

(Note: as the conceptual author of Business Plan Pro software, I’m completely biased on this point, but I’m amazed that any business plan coaching or consulting relationship doesn’t include two copies of business plan software, one for coach and one for client. That empowers the client, who has to own the plan to implement it, and focuses the consulting work on coaching, not doing. Both sides win.)

(image: REDMIRAGE/Shutterstock)