Equity Businesses
“Is Your Startup A Cash or Equity Business?,” post by Elad Gil
Elad’s post makes the point that there are two kinds of startups:
- Equity Business – the stock value will grow significantly with time.
- Cash Business – the company will generate a lot of cash on an annual basis, but the value of the stock will remain a low multiple of earnings.
Under his definitions, most tech startups are equity businesses. For instance, AccelerEyes is an equity business as follows using Elad’s categories:
- Raise Money – we raised friends and family money early on (which we have since paid back) to help us focus on building value over early cash.
- Employee Compensation – our employee compensation has an important and valuable equity component. We are strong defenders of the company’s equity in favor of providing maximum return to those working to grow the business. All AccelerEyes equity is owned solely by current or previous employees.
- Time Horizon – we went through early trough years, spending more than we made. The emphasis was on building big value over early cash.
- Other key characteristics:
- Re-investment – in the early years, we re-invested everything we made to build equity value.
- Network Effects – our customer successes continue to multiply into more acquired customers, and our brand and position in the marketplace has solidified over the years.
- Strong Barriers to Entry – we have strong barriers to entry, including patents, trade secrets, and the fact that our product is really hard to build (with others trying and failing).
- Customer Lock-In – our customers get great results with our product and come back to order more from the menu.
The goal of equity companies is not to generate the quickest cash, but to solve an important market problem through implementation of a technology-based efficiency. By solving this problem, equity value is generated and the odds go up that future opportunities will present themselves for converting equity into cash.
That does not mean that equity businesses do not generate cash. In fact, I suspect that most positive exit outcomes (those in which the outcome for the owners is rewarding) are from companies that are generating a good amount of cash.
We are proud to be an equity business. We are proud to also make enough cash to grow and invest more in our people.
Is your startup an equity or cash business? What characteristics define your startup?