March 29, 2000

The New Economy's Currency Is Stock, Stock and Stock

 

By MARTHA BAER

 

AN FRANCISCO -- A Bay Area urologist treating a patient who works at an Internet start-up recently had an idea. For their next appointment, the urologist joked, he wanted to be paid in shares.

	Anne Dowie for The New York Times
	Scott Jamar gives stock in exchange for San Jose office space.

"Think of what the guy does all day, for a doctor's salary," the Internet executive said sympathetically. "Of course he wants to get into the game."

Like the bankers, lawyers and venture capitalists he reads about in the papers daily, the urologist wanted in on the action, and these days it seems that everyone but the doctor is welcome.

Today, hordes of business-to-business contractors who make deals with high-technology companies are trading their services for equity. While law firms have long taken slices of their clients' companies on top of regular fees, consultants are now doing the same, along with public relations agencies, executive search firms and commercial landlords. Even independent engineers and building contractors are participating in the equity swap meet.

"We're five for five," said Ed Niehaus, a cofounder of Niehaus Ryan Wong, a San Francisco public relations firm that serves technology-company clients. "We've taken cash plus shares as payment from five companies and have seen all five go public." A sixth company, spun off from one of the five, went bankrupt, but Yahoo and OnSale.com were among the group, according to an executive close to the deals.

For public relations agencies that work with high-technology ventures, the opportunities for such deals are rife. Because of a shortage of agencies that are expert in technology, firms like Niehaus Ryan Wong are picking and choosing whom they will work with and how they will be paid. And venture capitalists, or V.C.'s, warn start-ups that their business plans must incorporate publicity efforts, which sends 30 to 50 companies knocking on Niehaus's door every week, many offering stock.

All of which makes signing contracts with new clients resemble aggressive stock picking. "You're acting like a venture capitalist when you do this," Mr. Niehaus said.

Sunny Bates has placed about 20 such bets since she founded Sunny Bates Associates, an executive search firm, in New York 11 years ago. The firm serves high-techology companies and the news media. She said, "We've hit twice, once with Priceline and now with a company still in its quiet period.

"These sorts of deals not only help us develop the value of our company and get our recruiters involved," Ms. Bates continued, "but they also guarantee a different kind of relationship -- not a hit-and-run, but a mind-share involvement. If you're a stakeholder, you give freely of your introductions and your time, your contacts. You're not hoarding."

For recruiters, equity reimbursements often follow the same formula as cash fees. Search agencies have traditionally taken a third of the newly placed executive's first year's salary, but now that fee is combined with a third of the executive's first year's stock options. Stock deals can be complicated, however, and vary widely. Some require no vesting or "lock-up" period, so recipients can cash in the minute a company hits the public market. Some deals involve options and some warrants. Both represent the right to buy stock at a given price in the future. Warrants, however, tend to be subject to fewer tax and accounting rules and can be issued on a more ad hoc basis than options.

In real estate, where the equity-as-currency phenomenon is stirring up this fairly traditional industry, landlords are agreeing to take warrants in lieu of security deposits. A wildly competitive real estate market can give the landlords more discretion over tenants and how they can structure deals.

"Rents are going up on a biweekly basis in my area," said Ted Caulkins, an associate director of leasing services in San Francisco for Cushman Wakefield, the international real estate brokerage firm. "A landlord usually has three to six offers, and it becomes a beauty contest. That's where the stock element gets very attractive."

Within the high-technology sector and other companies that are likely to go public, roughly half the deals Mr. Caulkins negotiates involve warrants or options.

Even in New York, where large, institutional landlords reign supreme, stock-for-space swaps are occurring in smaller niches. Rudin Management, which owns highly visible commercial properties like 55 Broad Street and 110 Wall Street in the financial district of Manhattan, has done four such deals. When Rudin Management negotiated with xBind, a networking-technology company, "we liked their business model," said William Rudin, the president. With Homedelivery.com, which accepts orders for local merchants through its Web site, Rudin Management saw other possible collaborations. "We own a lot of residential apartments in Manhattan, and Homedelivery.com's services can add value for our customers."

When New York landlords and dot-coms start talking synergy, times have changed. Or have they?

"My grandfather's philosophy was to buy stock in a company that moved into his building," Mr. Rudin said. "It's a slight variation of the theme."

But buying stock in companies beyond your balance sheet is not the same as taking stock for pay. At Cushman Wakefield, Thomas Falus, the president of the New York operations, does not favor the equity high-wire act.

"We're investing vast amounts of money in earnings to grow our business in China and South America," Mr. Falus said. "We can't afford not to be profitable in mature markets like New York." For him, playing the equity game with square footage is no better than playing the horses without knowing a thing about thoroughbreds.

Mr. Caulkins agreed that companies needed to do their homework. "These deals put the landlord in the position of a V.C.," he said.

Scott Jamar sang the same refrain: "I use the same criteria in negotiating with clients that a V.C. would use." A marketing consultant with 20 years' experience in high-tech businesses, Mr. Jamar has taken noncash payment to the next level by incorporating it into his business model. "It's become a core component of my strategy, to build a portfolio of equity in companies. Right now I have stock, or agreements to take stock, in four companies. I imagine over the next 12 to 18 months, I'll probably hold equity in 10 to 15 companies."

Because he works with early-stage start-up companies, Mr. Jamar asks for a minimum of their scarce cash and most of his compensation in options. But this risky ride suits him well, he said. "The new Jaguar convertible is going to have to wait for a while, but I don't feel like I'm selling myself short."

At this end of the spectrum -- where e-commerce companies are even cutting in one-man-show consultants who would otherwise be billing at $150 an hour -- the territory is relatively untested. "This is a brave new world for most independent contractors and their clients," said Michael Dortch, who has been following the high-technology industry as an independent research analyst for most of the last 25 years. "Think about it just on a logistical basis: companies tend to work with a lot of contractors; for each equity arrangement you've got to go before your board and write up a specific contract; no one has the time to manage that much overhead."

Still, that momentum is building. "Somewhere down the road," Mr. Dortch predicted, "forward thinking start-ups might build into their business plans classes of equity specifically for independent contractors."

So, does all this swapping portend a world in which every office temp and smoothie delivery person builds a portfolio of investments in the start-ups they serve?

Not exactly. While the equity flows between businesses and their contractors in ever larger quantities, plenty of young companies are clutching to their ownership, declaring their equity too valuable to hand off to outsiders.

Michael Hudes, the president of Organic Online, a Web company that builds sites and provides marketing services and that went public in February, held firm when potential landlords proposed that Mr. Hudes pay in equity.

"If we gave equity to any number of partners who approached us, we'd have missed out on giving ownership to the people who matter most, our employees."

Todd Sotkeiwicz, the chief operating officer of Bigwords.com, an e-commerce retailer targeting the college market, is also careful.

"A short-term relationship I would never pay for with equity," he said. "It's got to be really long term and really strategic."

In addition, after an initial offering, most companies become stingy. "When you get capitalized," said Isabel Maxwell, the president of CommTouch Software, a provider of e-mail services, "you're looking at mergers and acquisitions. You buy what you need. I doubt you'll find well-capped companies who would give away stock to small contractors."

But as long as word keeps spreading that dot-com options are today's top dollar, contractors will clamor for them. Take the building contractor who badgered a San Francisco executive for warrants. "It was a total knucklehead request," the executive said. "Ten thousand shares, he kept on insisting, 10,000 shares. But he had no idea of the exercise price or how many shares we had outstanding!"

Martha Baer is a senior contributing editor of Wired magazine.