Equity for Build Work: When It's Worth It and How to Structure the Deal

Every agency founder gets the pitch eventually. A charming early-stage founder walks in, cash is tight, but the vision is huge — would you take 5% of the company instead of your invoice? The honest answer is "probably not, but let's talk." Here's how we think about it after doing enough of these deals to have both scars and one or two wins.

Why most equity-for-build deals are a bad trade

Agencies sell time. Startups sell lottery tickets. When you swap an invoice for shares, you're converting a near-certain cash flow into a highly asymmetric bet — and you're doing it at the worst possible valuation point in the company's life.

A few uncomfortable truths:

• Roughly 3 out of 4 seed-stage startups return zero to common shareholders. Your equity, if it's common or an advisor-style grant, sits behind every preferred round.
• The valuation the founder quotes you is almost always the post-money cap of the last SAFE, not a real price. It will be repriced downward by any priced round with a liquidation preference.
• Your team still needs to be paid in currency landlords accept. Every hour you burn on equity work is an hour you can't sell for cash.
• Dilution is relentless. That 5% becomes 3.5% after a seed round, 2.5% after Series A, and often less than 1% by the time anyone talks about liquidity.

If you take these deals reflexively, you're running a very expensive venture fund with none of the diligence discipline of an actual venture fund.

When equity actually makes sense

That said, we've done a handful of equity deals we don't regret. The pattern is remarkably consistent.

The founder has done it before

A second- or third-time founder with a prior exit is not the same risk profile as a first-timer. They know how to raise, they know how to hire, and they usually already have soft-circled investors before they talk to you. If the founder can't name three angels who've verbally committed, the round is a hope, not a plan.

The product is close to your core competency

Equity deals only work when the marginal cost of the work to you is low. If you already build React Native apps with a Rails backend every week, and the startup needs exactly that, your incremental cost is mostly opportunity cost. If they need something exotic — hardware, ML infra, a payment license — you'll subsidise their learning curve with your margin.

There's a cash floor

We won't do pure equity anymore. The deals that worked were always hybrid: enough cash to cover our direct costs (salaries, cloud, PM time) plus equity as the upside kicker. A rough shape we've used:

• Cash covers 100% of loaded engineering cost
• Equity replaces the margin (typically 30–50% of what the full invoice would have been)
• Equity is priced at the next round's valuation, not today's optimistic cap

That last point matters. If they raise in six months at a lower valuation than the cap you agreed on, your effective ownership shrinks. Anchor to the priced round.

How to structure the paperwork

This is where founders get sloppy and agencies get robbed. The verbal handshake is meaningless; the docs are everything.

Use a warrant or a SAFE, not a direct share grant

A direct common-stock grant creates immediate tax liability in most jurisdictions and gives you the worst class of security in the cap table. A better structure:

• Warrant: gives you the right to buy shares at a fixed price for a set period. No tax event on grant. Exercised at liquidity.
• SAFE with a discount: converts into the next priced round's preferred stock. You get the same protections as investors.

We now default to a SAFE. It's cleaner, better understood, and puts us pari passu with real investors.

Vest the equity against milestones, not time

Time-based vesting punishes you for the founder's execution problems. Milestone vesting keeps interests aligned:

Milestone 1 – Signed spec + design system   → 20%
Milestone 2 – Beta shipped to 50 users      → 30%
Milestone 3 – Production launch             → 30%
Milestone 4 – Post-launch support (90 days) → 20%

If the founder pivots and cancels the build halfway through, you keep what you've earned to that point. If they succeed, you're fully vested by launch — before the dilution starts.

Get anti-dilution on the first round only

Full ratchet anti-dilution is a non-starter for real investors and will get you removed from the cap table in the next round. But one-time anti-dilution through the next priced round is defensible and often accepted. It protects you from the founder raising at half the cap you agreed on.

Information rights

Insist on quarterly financials and cap table updates in writing. If they won't give it to you, they're either disorganised or hiding something. Both are reasons to walk.

A quick decision framework

When a founder asks for equity terms, we run through this in about ten minutes before we even quote:

1. Can they pay our loaded cost in cash?           [Yes/No]
   → If No, walk. This isn't a deal, it's charity.

2. Is the work within our core stack?              [Yes/No]
   → If No, quote cash-only. Don't subsidise learning.

3. Has the founder shipped and exited before?      [Yes/No]
   → If No, cap equity portion at 15% of deal value.

4. Is there a signed term sheet or LOI from        [Yes/No]
   named investors?
   → If No, price equity as if round happens in
     18 months at a 30% haircut to the current cap.

5. Would we buy this equity with cash at this      [Yes/No]
   valuation?
   → If No, don't accept it as payment either.

That last question is the one most agencies never ask themselves. If you wouldn't wire $50k to this company at this valuation, why would you accept $50k of their equity in lieu of an invoice? The transaction is economically identical.

What can go right

We took equity in a fintech client in 2019 in exchange for a 40% cash discount on an eight-month build. The founders had prior exits, the round was soft-circled before we started, and we structured it as a SAFE at the seed cap. Four years later, that SAFE converted through two priced rounds and returned roughly 6x our discounted margin.

We took equity in a marketplace client the same year. Cash was thin, the founder was first-time, the round was "any day now." The company shut down 14 months later. The paperwork was clean but the shares were worthless.

One win, one loss. On the two deals combined, we were still slightly ahead of cash-only — but only because the win was structured properly. The loss would have destroyed the arithmetic if we hadn't insisted on the cash floor.

The cultural cost nobody warns you about

Equity deals distort how your team treats the client. Engineers subconsciously deprioritise work when the invoice value feels lower. PMs get resentful when scope creeps and there's no invoice to defend against. And when the equity portion is meaningful, senior staff start asking — reasonably — whether they get a cut.

We now ring-fence equity work: separate P&L, separate margin targets, and a documented policy that a portion of any realised equity gain is distributed to the team that built it. Without that, you're borrowing goodwill from your staff to buy lottery tickets for the partners. That gets found out fast.

Where we'd start

If you're an agency considering your first equity deal, don't optimise for the perfect term sheet. Optimise for the walk-away. Write down, before the call, the minimum cash percentage you'll accept and the maximum equity exposure your P&L can absorb this quarter. Bring a template SAFE and a milestone vesting schedule to the meeting. If the founder pushes back on any of it, you've learned everything you need to know about how they'll behave when the build gets hard.

And if you want a second pair of eyes on the commercial structure before you sign, that's exactly the kind of thing we help other founders think through — quietly, and without trying to take the build off you. Start with a conversation via our services page or read more of our agency and founder pieces.