Revolutionize Your Partnerships: The Dynamic Equity Model for Business-to-Business Collaborations
In a recent blog post, we wrote about an alternative equity distribution model called “Slicing Pie” or dynamic equity. This model determines the distribution of “equity” according to the risk contribution of individuals. As presented in the last article, this model offers an alternative to conventional models and is better adapted to the realities of small start-ups. But did you know that it can also be adapted for business-to-business collaboration?
Although the dynamic equity model was originally conceived for internal company management purposes, it represents an excellent alternative to the standard “joint venture” model commonly used by companies to join forces to complete a project.
The reality of small business is that it’s often not the ideas for projects that are lacking, but the technical and financial resources to accomplish them. However motivated, a small marketing company wishing to develop a software tool will inevitably need the skills of an external programming team. If it can’t afford to pay this team of programmers, the logical solution is to offer shares in the project in return for their work.
How exactly do you determine the percentage to be allocated to them? What happens if this percentage is not truly representative of the time and money invested by the programming team?
This is precisely what the dynamic equity model is designed to address. Building on the foundations of our last article, let’s illustrate the model’s application to the situation of a marketing company wishing to launch a software tool.
For a brief reminder, the model aims to distribute the shares of a company, in this case a project, among the various collaborators according to their contribution (“contributions”). These contributions can be in the form of money, time or anything else. For example, a person may be allocated shares in return for an hour worked on the project, or in return for spending $100. These shares are not fixed and their distribution evolves throughout the project, unlike traditional models in which the distribution for the future is determined at the outset.
Classic model vs. dynamic equity
So you’re a marketing company looking to launch a software tool of some kind related to your field of expertise. To do so, you decide to team up with a programming company. Here’s a portrait of the situation under the different models:
VS.
As shown in the table, you invest $10,000 in the project. In a classic equity model, because of this initial investment, you agree on a fixed share split of 60% for you and 40% for the programming company. In a dynamic equity model, shares are not agreed. You simply determine the value of the contributions.
Situation number 1: inequitable sharing
Your marketing company is heavily invested in the project at the outset. However, over the course of the following months, participation dropped off significantly, so that in the end the programming company invested more than double your time (200 hours for the marketing company vs. 400 hours for the programming company).
Under the classic model, the programming company contests the initially agreed 40/60 split, as unfair in relation to the time it has invested.
Under the dynamic equity model, a fair market value was assigned to the hours worked by the programming team, and all hours were compiled so that, despite the Marketing company’s initial monetary investment, the final distribution accurately represents everyone’s contribution (50/50). Here’s an illustration:
Situation 2: A fair but contested distribution
Your marketing company has invested a great many hours in conceiving the idea and launching the project. Over the following months, its involvement diminishes, but it remains well involved in the project and assists the programming company. However, at the end of the software development phase, the programming company contests the allocation, as it feels it has assumed a major part of the development. However, the latter fails to take into account all the hours invested by the marketing company at the start of the project.
Under a classic model, the programming company can challenge the 40/60 split without good reason, simply because the hours initially invested by the marketing company have not been accounted for.
Under the dynamic equity model, although the hours worked at project launch are a thing of the past, with hours accounted for and shares allocated in proportion to those hours, the programming company cannot deny the fairness of the final distribution.
Other types of contribution
In this way, the model ensures an evolving and fair distribution between the different partner companies, in order to determine their respective shares in the final product. Of course, the above examples are simplified to better illustrate the model. Other, more complex contributions need to be taken into account in such an agreement, such as intellectual property, the provision of equipment or premises, customer relations, etc.
It is therefore important to ensure that such an agreement between partner companies is properly contracted, both in terms of accounting for contributions and in terms of classic legal aspects such as intellectual property, confidentiality, liability of the parties, withdrawal of a party to the agreement, etc.
Transparency and trust between these different partners are also essential.
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