Why I Rarely Take "Free" Equity in Other People's Businesses

Hey, what's up, everybody? Stefan Georgi here and we're gonna talk about why I rarely take free equity in other people's businesses. And I think you'll find it really valuable whether you are early on in your journey or you are much more experienced. So as we begin here, one kind of note is that a sub. An alternative title for this could have been an entirely different way to look at how you're allocating your time. And I hope that you find this to blow your mind, frankly, because I think it's actually the way I talk about this with time. I don't see a lot of other people talking about it this way, but I think it's extremely valuable and it can really shift a paradigm for you. So let me give you the quick context here. Right? Because of my track record as a direct response copywriter and marketer who's really good at direct to consumer type stuff, I get offered equity in businesses pretty often. And that's without looking for these deals. And I mentioned that simply because if I was looking for them, I could probably get equity in a ton of companies. But here's why I don't. This video is about why I don't take it. Right? So let me give you a couple of assumptions and we'll explain here. Right? So let's assume that I'm gonna get 5% equity in a company on average. Let's assume that for each time I do, it's gonna be. It's going to be five hours of my time per month per company. Let's assume these are all good opportunities to have a shot. I'll talk about that for a second. So what kind of sparked me wanting to make this video was the earlier this week I was talking with somebody who has a direct to consumer thing for like a pharmaceutical drug. I don't want to go too deep into the details of it, but essentially, you know, they have an opportunity to capitalize on a very popular drug right now and wanted my help and stuff. And they're, they're open to giving, you know, equity, things like that. There's lots of reasons that I could convince myself that this is like a home run type of thing. And so frankly, I'm still thinking about it a little bit, but I kind of thought about why I'm always so resistant to these deals. You know, I've been whatever, I've been offered this tons of times, right? So. But the point is it's a good opportunity that has a shot. It's not like something where it's like A random crap project. You know, assume good operators, things of that nature. You know, let's also assume though, three to five years until a liquidity event, meaning until the business might be sold to a buyer. And then let's say that one out of 10 companies, I mean, offered equity in, will actually sell, will actually have one of those liquidity events, which is frankly being super generous. And we'll get into that more in a minute. So here's some facts though, that aren't assumptions, right? The vast majority of companies will never have a liquidity event. They will never sell. I've seen anywhere from that 20 to 40% of companies that get listed for sale on like online or wherever else, you know, who, through investment bankers, whatever it is, actually sell. But I mean, that doesn't take into account, you know, all the millions that never even got to that, that phase. So it's pretty low percentage of companies are ever going to have a liquidity event. And then of those that do sell, the vast majority are going to be for way less than $10 million. A lot of them might be for a loss or a break even, you know, one times revenue. Maybe it's like, you know, saying off of ebitda, whatever it is. But basically it's, it's gonna, and that's really important, as you'll see here. Okay, so like, what does this mean, right? Why, why does this matter? What the reason it matters is because in order to achieve a liquidity event and get paid out, if we're assuming that 10 businesses, like, you know, one in every 10 is going to actually have that happen, which again is a very, very, very generous assumption. So I need to take equity in at least five business, or sorry, 10 businesses. And if I'm saying that for each one of those businesses, I'm getting 5%, but I am committing five hours per month, right? That means I'm committing, you know, five times 10, 50 hours per month, 50 times 12. So 600 hours per year that I'm committing to those 10 businesses. And then, you know, with our assumption that going to take three to five years until there's a liquidity event, it means that really it's going to be somewhere between 1800 and 3000 hours of my time, right? So 600 times 3 is 1800, times 5 is 3000. But then the question becomes like, all right, well, how much is my time worth? And this is a really, I really want people to watch this video to understand how important these kinds of questions are. So let's say my time is worth $2,000 per working hour. And it's very, you know, it varies, but we'll keep it simple. I've had times where. Or months or a year where maybe it's more like 3,000 or 4,000 or whatever it is. Right? And months where it's like, you know, earlier on, where it's significantly less. And I'm getting to people who are making $20 an hour later in this video. So. Well, let's just say right now my time's worth $2,000 per working hour, meaning hours I'm actually working. I don't really count time that I'm doing stuff with family, whatever it is. Right? So 1800 hours of my time, three years, right? At five hours per month ends up. But for 10 companies, right? Ends up being basically equivalent to $3.6 million worth of my time. Whereas, you know, 3000 hours. So it takes five years. At $2,000 per hour, it's $6 million worth of my time. And if we average the two together, we can just sort of say, okay, $4.8 million in the value of my working time over the next four years for me to take 5% in 10 companies and give each of those companies five hours a month of my time. Right? Okay. So that means if I'm taking equity in those 10 companies and I'm giving up all those valuable hours of my time, and again, these are just working hours, I'm putting family and all these other things to the side. But just like time that I would be working, then one of those companies would really need to sell for roughly a hundred million dollars for it to have even been worth it, then check if that makes sense. So, right. If I'm giving up, let's say, $4.8 million worth of my time, even if a company, you know, that I'm a part of that 5% of sells for $50 million, and I have 5%, that means I'm only getting back $2.5 million. That's actually a really big negative ROI of my time. Right. Essentially, I'm only getting back 50% of what I put in. So I'm giving you. For every dollar I'm giving you, I'm getting 50 cents back. Right? That's not a good investment. Hopefully that makes sense. Right? This is really important. Now. If it sold for 100 million and I got 5 million back, then I made 200,000. But even then you argue, is that really a good investment? We'll get to that in a second. Right? And there's also more caveats to this. Anyway, so this assumes it's an all cash buyer, doesn't take into account taxes, which would obviously take my, my 5 million and cut it down by what, 30, 40, 50%. I know what the. Depending on a lot of factors, right. And it assumes zero dilution, meaning my 5% is not diluted because they need to raise money in the future. All these other things sort of happen, you know, and so which dilution is quite common, right, to happen. So your 5% becomes 4% becomes 3% becomes 2%, whatever. Unless you have an anti dilution clause, which you could put in. But you know, let's just say, fine, put those things to the side. 100 million is a number. How likely is that? Well, it's hard to say. Like when I just looked at some basic data, I can tell you that only 0.04% of companies founded each year ever receive $100 million in annual sales. Now that's not the same thing as evaluation, but it's telling, especially if I'm doing, in my case, a lot of direct to consumer type stuff. You're not getting a massive tech valuation or like a SaaS valuation or whatever it is you're getting, you know, generally valuations off of like ebitda. You know, maybe there's a case where you get something off of like gross revenue, but it's a multiple of like three or five or something. Right? You're not the. Even if companies have to do 100 million in sales, lots of companies need to do way more than $100 million in sales. Cause again, that's just gross. It's just gross sales, isn't it? Negative profit growth, all these other factors. Right. So they, like, you know, you're not. It's pretty unlikely that any of those 10 companies I mentioned are going to ever sell for a hundred million is my point. Right. And here's an even bigger issue with this, and my head's floating around. Hello. All right, so all that math assumes that my hourly rate of $2,000 an hour is staying constant for four years. But in reality, if I'm spending $4.8 million of my time on something, my working time specifically, I'm looking at that as an investment. I'm hoping that that's something that's going to hopefully yield me a return of 10 million, 20 million, 30 million, 100 million, whatever it is, right? And I put down there I'm in control of my destiny when I'm in control of the allocation of my time. And the opposite of that's True as well. If I am not in control of the allocation of my time, I'm not really in control of my destiny. But that's a really important point, right? So not only are you looking at what your time's worth today, but you're looking at what you're hoping to gain, you know, tomorrow or in the future by investing your time at that rate today. And so if I look at it this way, then it's really hard to sound, you know, I'm spending 4.8 million, you know, to what, get 5 million or 10 million back? So I have to. Then I should then weigh that against, like. All right, well, realistically, If I put $4.8 million worth of my time, you know, into my own businesses and things that I'm focused on currently, what's the return on that gonna be, Right? Over four years, my guess is it's significantly higher than what I'm gonna get from any one company selling. Of course, there's the unicorns that become billion dollar companies, but yeah, the.004% for $100 million in revenue, turns out it is a very much even smaller percentage that are going to make it to, you know, billion dollar status or sell for a billion dollars. Right. They might go public or IPO or, you know, are they raising more money? And again, you're getting diluted. So really, what's like the game there? Right? So kind of a huge takeaway here. There's a couple more slides because I want to go back to like, distributions and, you know, when you're starting out, those will be the things we'll finish off with. But it really makes sense to kind of value your time. And I put busy versus intentional because I think people a lot of times with me will be like, I know how busy you are. But I don't actually feel busy ever. I just feel like I'm extremely selective and intentional with how I spend and allocate my time. So something is just, I know what I'm trying to do, I know what I'm working on. I also prioritize family and things of that nature. And so I'm extremely selective. But I'm not busy. Busy means like, I, oh, I can't even stop to think. Um, I have time. I, I prioritize time to think, time to read things of that nature. Right. So there's, it's valuing your time and, and being intentional with it and then treating, you know, any allocation of your working time as an investment. So like I just talked about on that previous slide Right. If I'm investing $2,000 an hour, my working time today, I better be doing it. I'm not doing it to break even. I'm doing it to, you know, get a return that is being worth 4,000, 6,000, $8,000 an hour. I'm trying to arbitrage my own time. And that means, like, projecting and tracking, like, what the ROI is going to be, like, I just did. So if I look at it all and I'm like, wow, this actually doesn't make sense. Why am I trying to, you know, like, why would I do all that extra work and give all that valuable time of mine when the ROI is going to probably be, like, best case, 50%, you know, a loss of basically half of the value and the probability of getting a home run that makes it so worthwhile is so extremely low. And I think this is really important for freelancers and those who are starting out so, because when I was starting out too, right, early on 2011, 12, I would have people offer me, like, potential equity to help them. And you might think that seems weird, though, because you're like, well, I'm only making $20 an hour, so the math would make sense for me. But it probably doesn't. And I'm going to show you why that's the case. Why says the slide, right? So if your time is worth $20 an hour, there's going to be very few people who are trying to give you 5% of their company. Instead, you'll get offered equity. So it does happen, but it's normally in businesses that are really just ideas or where they want you to do a lot of the work. Like, build out all the sales funnels, do client acquisition, right? Like, sort of like, I've had that a lot of times when I was starting out where it's like, oh, yeah, I just see customers, right? So just build the funnel and help me get customers, and I'll give you a percentage of the company. But it's like, that's a lot of work to do. And that ties in because you're gonna spend way more than five hours a month, right? It's more like more likely gonna be 20 hours a week, but you're also gonna just be doing it for one company. And as we talked about, any one company has an extremely low probability of ever experiencing the liquidity event and an even lower probability of that liquidity event being anything significant. So really, you just spent. You know, you're essentially just working a lot of. It's a really bad investment of your Time. So it's a really crappy gamble. Right. I used to play poker a lot. I still like poker. Met my wife at a poker table. She's also learned about copywriting through that. So if you just sort of do thinking and bets like Annie Duke talks about, and you think about the probability of this bet succeeding, it's just not a good bet to make. And I don't know a single person, really, who's taking like equity in something really early on when they were really early on and the company was early on, that's paid off for. I mean, I know I get it in Silicon Valley and things of that nature, but even then, people getting paid like a salary and all these other things, and most of the time, most of those companies don't ever actually succeed. And very few people get to become IPO millionaires or decimillionaires or whatever it is. Right. So last thing here, what about distributions? So that can actually make more sense. But you need to be really clear what the company's business plan is. Is it to be profitable or is it to be acquired? Because a lot of times companies that are going to get acquired, what they're getting acquired for might be the customer base or it might be for the growth. But if it's for the growth or acquiring a lot of customers to be attractive, that usually means you're taking all the money and profit or very high percentage of it, and you're just reinvesting it back into the business to continue to grow and to continue to acquire customers. So if the goal is to sell, then the idea that you're going to be getting fat distributions, meaning essentially, okay, there's 100k in profit. We're gonna, for simplicity's sake, 100k in profit. We're gonna share it out to all, divvy it out to all the owners. So you get five grand. I think I talk about this on the next slide, in fact. Right. That's not. If the company's being built to sell, then distributions are probably not going to be particularly likely at all. So, fine. But if it's like, oh, the goal is, you know, to make profit. So like, for example, if a company's already profitable, then it might make sense, like a company's already netting 100k a month on 500k a month in revenue, let's say, and they offer you, whoops, 5% equity for your sweat, then it could be worthwhile. If Your time's worth $20 an hour right now, just don't think you're going to have this big, you know, payout at the end when the company sells, because the probability of that happening is very low. Instead, what's going to happen is you're going to be making 5k a month. In this example, that's, you know, this is getting rough because if there's 100k profit, the company's still probably not just distributing all of that profit. They're probably, you know, keeping some of it in reserve. They're doing a lot of other things with it, but just keeping it simple. And sure, if you could help them grow to say like 500k a month in like net distributions, and let's say they're doing $2.5 million in monthly revenue, then you'd be making 25k a month and that's pretty good money for that period of time. It's like $300,000 a year. Like, you're probably pretty happy with that overall, right? So it could make sense. But keep in mind, again, most companies don't ever get to $2.5 million in monthly revenue, or if they do, it takes several years. So then the question becomes, you know, could you build something or learn a skill that's going to make it easier for you to make 300,000 a year in the same period of time it would take for this one company to maybe get to $2.5 million a month in revenue or $30 million a year? And a lot of times, you know, you want to be realistic with this because of course we can convince ourselves of anything. Man, this is going to blow up. Here's all the reasons it's going to be successful. I think this thing could sell for a billion dollars. Oh, they're going to scale to like, you know, all these pieces are in place. They have deals with distributors, but it's like part of us you're going to have to learn if you're new, because it just is what it is. Like, I just see inexperienced people make the same mistakes and then experienced people tell them, hey, that's not how it actually works, and then they just sort of ignore it because they want it to be true so bad. And it's not how it works. But, you know, if you learn something AI right now, or you build a business, build a company, you know, gain skills, things of that nature, like, that's generally be the better bet ultimately, I think with where we're at, like the best bet, depending on your goal, if you want to like really be like a millionaire and things of that nature, is to build businesses and I think because here's. I don't have this on the side, but actually this is extremely important as you have a way higher skill set. Then the equity offer has changed. It goes from like, help me build all of this to like, hey, we're already doing well. We need somebody to solve this one thing for us. You're already good at solving that one thing. We'll give you a percentage of the company. Like, I have a friend who I talked to him, talked to him, like, weekly. He just got a letter of intent for. I'm gonna choose a slightly different number just so I don't give away. Right. The stuff. Let's say it was about 40 million. And that's not far off, right. Sold a company last year for, let's say, 60 million and has sold, like, multiple other companies. He wants me to help him with a brand. And I could probably get like 5%, maybe up to 10%. And it's like, you know, I'm still not going to do it probably because of. I think in that case would be more than five hours of my time. Right. Per month. It's probably like 10, 15, 20. And I do the whole calculus. Right. But that's a better opportunity. I get that because of my skill set. Right. This is a proven operator who knows how to sell businesses, who sold multiple businesses, who has relationships, who has all the infrastructure. It's a way better deal for me. Right. So I go back to this with you assigning the idea that gain equity, you know, as a service provider, freelancer, whatever it might be, if you're in that camp or in that boat, doesn't make sense. It could actually be really amazing. But when you're early on, it doesn't. Then it's not the time, really, because again, you're just going to be working tons of hours for no money, essentially. But you're not in Silicon Valley, most likely. And so the actual, like, the odds of that paying out for you are really not good. It's better to, like, really develop an extremely lucrative skill and then either, you know, build something like build your own business, or at that point, then go partner and, you know, get percentage to do the thing that you're really great at within a company and get a percentage of equity. And again, it could be a company that either you think really does have a chance to sell, or it could be a company that, you know, has a track record of being profitable and taking distributions is a different conversation at that point. That's really. It had. I thought this video would be 10 minutes. About 20 minutes. I hope this is valuable. You know, it's not AI. I know people like it if I just show you, like, a bunch of prompts that do cool stuff, so. But I just felt like it was a really valuable way of looking at time and, you know, I don't know, helped me. I really thought about this week and was like, this really clarified some things for me. So I wanted to shoot this video. If you did find it valuable, please like the video. Leave a comment. Let me know if you agree or disagree. You think I'm a dodo or you think this is awesome? Make sure you're subscribed and all that to my channel and I'll try and do more videos soon. Thank you.