How Much Equity Should I Give To a Creator?

When we talk to companies about doing equity deals with creators the most common question we hear is: how much equity should I allocate to the creator? In today’s newsletter, we provide a framework and several things to consider to help answer this question.

Happy Tuesday Friends,

The focus of the piece will be on Creator-backed Companies, which is when creators join as equity partners well after company inception. We see this happen most often when a creator can play a key role in one aspect of a company to help accelerate growth. As a refresher, below are the three general buckets of creator equity models we previously identified:

The Creator-backed Company model is the most interesting area to explore for long-tail creators and to create new systems for direct distribution. The first movers in the creator economy that have amassed massive audiences (ex://Joe Rogan and Mr. Beast) have paved the way for an entire generation of people to bypass the gatekeepers in nearly every industry and go direct.

Now, let’s get to creator equity.

Step 1: What does the company actually need? 💁 

First, clearly define what the company needs before contemplating bringing on a creator as an equity partner. You have to go much deeper than, “I want to leverage their audience to acquire new customers without paying money upfront.” It’s shocking how many companies believe that bringing a celebrity or creator on board to do a few posts, videos, and appearances will substantially increase direct sales. Spoiler alert: that’s not the case.

Bringing on a creator as an equity partner should fill a specific void and fit into the company’s overall strategy. A few questions to ask when looking at creator equity:

1. Do you simply want a creator on the cap table solely to promote and sell your products to their audience? If so, be honest and realize this is a tough one to make work.

2. Do you want the creator to help with other functions of the company such as product development, retail partnerships, fundraising, or PR? If so, clearly define what deliverables and outcomes you are looking to achieve.

If #1 is the case, the creator will be more of an ambassador. In #2,  the creator can serve more as a co-founder and the appropriate equity stake will be substantially different.

Step 2: What can you afford?  🗞️ 🗞️ 

Once you have a clear picture on the potential role for a creator, you have to step back and really think about what amount of equity makes sense long-term for the company. Many early stage companies do not understand how important it is to have a clean cap table (fancy word for people that have equity in the company) in the early innings. If there are people who own equity in an early stage company that are not active nor have invested money into the business, it can create issues with future investors. They will not invest in a company where any meaningful equity holder is not all-in on the business. Some key questions to ask when thinking about the amount of creator equity to allocate:

1. How does the creator coming on board change the overall capital needs of the business?

2. Will the amount of equity you are contemplating be attractive for the short list of creators you have identified?

3. Does the company have future capital needs to reach breakeven or accelerate growth after the creator joins the team? If so, make sure to project out what the ownership structure may be after future fundraising to avoid a common issue where the founding team does not end up with enough equity and has no incentive to keep building.

When a creator joins a company after inception we have seen equity stakes in early stage, product-focused companies range anywhere from 0.5%-20%. We will state the obvious - if you are an early stage company, giving a 0.5% equity stake to a large creator or celebrity and expecting them to be a true co-founder makes no sense. They have countless opportunities presented to them and will not roll up their sleeves for that amount. We often tell early stage companies building physical products a good rule of thumb is to allocate 5-10% in equity to get the creators’ attention. Some additional factors to that will affect appropriate equity amounts are:

• Stage of the business

• Current valuation

• Amount of dilution for existing shareholders (if a creator receives equity, current owners will own less of the business)

Our biggest piece of advice is to carefully think through what is in the best interest of the company and both positive and negative consequences of granting creator equity. Not an easy job, we know :-). And remember, creator equity is highly specific for each individual company, there is no one-size-fits-all. 

Step 3: Identify potential creators 👨‍🎨 👩‍🎨 

Now that you have a clear idea on what your looking for from a creator and what the company can afford, now it’s on to identifying potential creators. Most people would love to do an equity deal with the top 1% of talent. Mr. Beast, Selena Gomez, The Rock, etc.? But, for most early stage companies it will not make sense for a few simple reasons:

• Many celebrities and creators want a combination of cash and equity when structuring an equity deal. Larger creators will often ask for checks in the 6 or 7-figure range. Most early stage companies don’t have a cool million laying around to strike a deal.

• Most small companies don’t have the infrastructure to work with a big name. Let's assume you did a successful equity deal with Mr. Beast who is now promoting your company to his 200+ millions of viewers. Can your company handle it? Is your IT-setup capable of facilitating the website traffic and orders without shutting down? Do you have enough inventory? Customer support?

Everyone likes to talk about the same 30 biggest celebrities/creators when it comes to equity deals. We get it - the size of their audiences and influence is remarkable. But, what most people don’t realize is there are an estimated 40 million professional content creators and more than 100 million amateur content creators covering nearly every single topic all over the world. Each one with their own audience and following. Companies haven't even scratched the service on exploring equity deals with long-tail creators, which is why we are writing this newsletter.

Many companies have a shortlist of creators in mind they would like to work with. This is a great start, but we encourage companies to collect a minimum of 10-20 potential names. In order to come up with these names, it requires an investment of time and to be thoughtful. You have to do a deep dive analysis of the category and benchmark creators within that category to identify two key things:

• How will the creator’s career and life benefit from being involved with the company?

• Which creators can provide the most value to the company over the long-term?

When identifying potential creators, we find most people make the mistake of simply looking at audience demographics and engagement rates to determine the best match. This may be an effective way if you are looking to do paid sponsorships or to find effective affiliates, but an equity deal is a whole different animal. It’s a 10+ year partnership that requires a deep values alignment between the company and creator. The only way to identify this is by meeting the creator, establishing a relationship, and really talking through if it makes sense to partner up in an equity capacity.

If you are a company or creator exploring an equity deal, feel free to reach out and we are more than happy to see how we can help with structuring an equity partnership.

Have a great week and remember to Go Direct!

Build with love,

Jordan & Scott