Despite the plunge in the value of high-tech stocks last spring and a continuing chill throughout the dot-com community, two highly paid professionals were so impressed with their client, the founder of www.1stWindows.com, they decided to take equity in his new online window venture rather than be paid their regular fees.
“I loved the idea of reinventing an industry,” said Robert Klug, founder of Microscape Web Solutions, a Web design firm in Newport Beach.
Klug, who designed the Web site in exchange for a share of the online window business, takes an active role in its management. “It’s an all equity deal. …I did all the Web work for the equity because it was a great idea at the right time,” he said.
While many entrepreneurs wish their advisors and suppliers would take a piece of the company in lieu of cash, it’s tough to make it happen. A year ago, everyone from landlords and gardeners to skilled employees were willing to take stock in high-risk dot-com firms as part of the deal. Then, the stock market tanked, and hundreds of people and companies that accepted equity failed to cash in, leaving many with worthless stock certificates.
Christine Soderbergh, president of Keefer/Soderbergh Public Relations in Pacific Palisades, said she also opted to take equity in 1stWindows.com, in lieu of a full monthly retainer because “1stWindows met all the criteria that venture capitalists look for in e-commerce startups.”
“This is the first time I’ve taken equity in any of my client companies,” said Soderbergh, who has represented high-tech firms for the past 16 years. “I found that having a vested interest provides a little more incentive and motivation to tell their story.”
Klug said he agreed to take stock in Lopez’s online window company because “Doug Lopez was passionate. He was eating and breathing windows, and he really wanted to attack the marketplace.”
Lopez has been selling windows for five years, mostly serving clients in Southern California. A few years ago, he started extending his reach, selling windows to contractors in Central California, confirming orders via fax.
“The construction industry in general is perfect for the Internet because we have such a fragmented market,” said Lopez. “For a brick-and-mortar company like mine, a Web site becomes the ultimate Yellow Page ad.”
Lopez was so committed to creating the best online site for windows he sold his rental properties and moved into a small apartment to raise the cash he needed. Now, homeowners and contractors alike can order windows from most major manufacturers and receive them within a few weeks, if not sooner.
“The best thing for me about this business is that orders are paid in full, up front,” said Lopez, who says sales sometimes reach $100,000 a day. “We put the money from the orders in a money market fund and earn interest, which helps to pay the rent.”
Meanwhile, Klug said he is happy he took a risk and invested his time and efforts in Lopez’s business. “I’m an entrepreneur, and I love other entrepreneurs,” said Klug. “It was the right time, right place, right product, and he was the right person to run the company.”
He has this advice for other professionals interested in taking equity in their clients’ firms: Take a good look at the market to understand the potential earnings. Are there big players who can get together and cremate you? Does the company have the right product, placement, price and distribution?
Jane Applegate is the author of “201 Great Ideas for Your Small Business,” and is founder of ApplegateWay.com, a multimedia Web site for busy entrepreneurs. She can be reached via e-mail at [email protected].