Taking a risk to share rewards

Royalty or equity deals are good ways to benefit from a client’s success, but first you must do your homework and get advice from professionals

I am sure I am not alone, as a (graphic) designer, in envying the royalties received by other creative artists, such as musicians. When we finish a job, in effect we hand over copyright to our clients, so, sadly, every time I see the GlaxoSmithKline logo, cash registers don’t ring.

The challenge, then, is how can we change this situation?

When I started L&Co four years ago, with little in the way of income, the notion of royalties nagged me. Initially we were working with small clients on small projects and the impact our designers had was so immediate and clear-cut that surely there was a way we could tap in financially to our clients’ success.

As with all areas of business, the greater the reward, the greater the risk, and I realised that to share the success of any of our projects would involve risk. However, working out payment structures more complex than a flat fee is difficult, and inappropriate for most clients’ budgets. But when a company is starting out, and cash flow, not to mention cash, are in short supply, the idea of ‘buy now, pay (a little more) later’ can be an attractive proposition for both parties.

After reaching this conclusion, we were asked to work on our first start-up, a TV production company. Although we consented to a relatively standard fee structure, a bonus – based on a set of criteria – was agreed. We didn’t get any legal or financial advice on how to structure the deal, and the result was an ambiguous tangle involving lots of grey areas and not much black and white.

After this salutary experience, I decided to talk to others who had been involved in working with start-up companies, both on the inside and as external investors. The conclusion was simple: do your homework. As with any potential new project, it is easy to become carried away with the possibilities, and to let the enthusiasm of entrepreneurial types cloud your judgement. To guard against this, we came up with a list of questions by which to judge future opportunities. Do we believe in the new product? What is the track record of those involved? Is this an interesting project? Can we afford the financial risk?

If the answer to all of these questions is ‘yes’, the next step is to do some homework: read the business plan (if you don’t understand the business, then talk to someone who does); talk to your accountant and lawyer, as they always provide a note of caution; write a formal letter or contract setting out how you propose to structure your fee payment; think about discounting the initial fee with success bonuses; and consider asking for royalties or equity.

If these criteria are met, you can confidently work with a new business idea.

With one client, LateRooms – not quite a start-up, but a young pup with six seemingly successful years of trading and a potential sale in mind – we considered these options ourselves. However, despite talk of a discounted fee and a success bonus, the criteria just looked too ambitious, and so we opted for a flat fee. Within 12 months of launching the new identity and website, LateRooms saw a 48 per cent uplift in its bookings and then sold to First Choice Holidays for more than £100m. Despite this, we decided not to reassess the criteria, because at the time it seemed too much of a risk for us (and our cash flow), and the flat fee still enabled us to do well enough.

Our latest project is for a start-up cosmeseutical (better than it sounds) company called Lumos Products. Here, we have agreed a delayed bonus fee, and effectively a royalty on units sold, because as a physical product this is relatively easy to work out. Who knows if it will work, but fundamentally we’re doing it because we think it’s an interesting project, and it gives us the opportunity to work slightly outside of our comfort zone. On this occasion we can afford to take a risk, we are confident we will enjoy the ride and maybe, just maybe, we’ll make a fortune in the process.

Paul Barlow is founder and creative director of L&Co

QUESTION TIME

Assess business opportunities using these questions:
• Do you really believe in the product or service?
• What is the track record of the people involved?
• Is this an interesting project?
• Can you afford to take the financial risk?

If the answer to all of these questions is positive:
Read the business plan, talk to your accountant or lawyer, and write a formal contract setting out how you propose to structure your fee payment, with these options:
• a discount on the initial fee with a success bonus (make sure your criteria for releasing the success bonus is clearly defined)
• a simple royalties deal, based on products sold
• taking equity, which is more complex legally, but the rewards are likely to be more long-term

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