Equity Should Be Earned In, Not Handed Over

An established software firm approached a compliance venture I advise. They were preparing for a public listing and wanted a strategic stake in exchange for opening their client base to us — a large book of introductions into a sector we'd been trying to reach for months.

On the surface this is a good trade. They have distribution we can't buy. We have a product they can't build. The obvious move is to price the access in equity and shake hands.

We didn't, and the reason is the part worth keeping.

Introductions are not customers

Upfront equity for distribution prices a promise at the value of its best-case outcome. The promise is "we will introduce you to our clients." The outcome you actually want is "those clients become paying customers." Those two things are separated by everything that is hard about selling: whether the introduction is warm or perfunctory, whether the person introduced is a buyer or a bystander, whether the partner's own account team has any reason to care once the paperwork is signed.

If you grant the stake upfront, you have converted all of that uncertainty into their favour and none of it into yours. And you've done it permanently — equity doesn't come back when the introductions turn out to be a mailing list.

There's a second problem that's easy to miss when you're excited about the access. A stake granted at signature is also a governance change at signature. You now have a shareholder with information rights and an opinion, on the basis of work that has not yet happened. For a company that is itself preparing for a listing, that's not a small thing on either side.

The structure we used instead

Earn-in: equity is released periodically, measured against delivered paying customers.

Not introductions made. Not meetings booked. Customers who have paid. Each tranche vests against a count over a window, so the partner's reward tracks the thing we actually wanted rather than the activity that was supposed to produce it.

The properties that make this better are not subtle once you list them:

• It converts a valuation argument into a measurement question. We no longer have to agree what the access is worth in the abstract — a negotiation nobody wins, because neither side has a comparable. We only have to agree how to count a delivered customer.
• It keeps the partner engaged past signature. Upfront equity pays for effort that hasn't happened; earn-in keeps paying for it as it happens. The incentive doesn't expire the day the agreement is executed.
• It's the safer instrument on both sides legally. A performance-linked release is much easier to defend — to a board, to a regulator, to an auditor looking at a pre-listing cap table — than a stake granted for an undocumented promise.
• It makes failure survivable. If the distribution doesn't convert, the arrangement quietly doesn't vest. There's no unwinding, no buyback, no awkward conversation about a shareholder who contributed nothing.

The sequencing mattered more than the instrument

The structure I'd actually generalise isn't earn-in by itself. It's the order:

Commercial first. Integration second. Equity third, gated on traction.

A plain commercial agreement — an NDA and a memorandum of understanding — costs almost nothing and tells you within a quarter whether this partnership is real. Then technical integration, which is where you find out whether the two products actually fit or whether everyone was being polite. Only then equity, priced against what the first two stages produced.

Every step in that sequence is cheap to reverse until the last one. Most partnership conversations run it backwards, because equity is the exciting part and the exciting part is what gets discussed in the first meeting. Talking about the stake first also flatters both parties, which is exactly why it happens.

The useful reframe: equity is the last instrument you reach for in a partnership, not the first. It's the only one you can't take back, so it should be the only one you use when there's nothing left to find out.

Where this is wrong

Earn-in has a real failure mode and I'd rather write it down than discover it later.

If the bar is too high, the partner never starts. A structure that only pays out at scale gives a partner no reason to do the unglamorous early work — the first five introductions, made properly, to the right people. Somebody senior on their side has to be able to point at a near-term tranche and justify the effort internally. An earn-in with its first gate a year out is functionally the same as no deal, except that you've spent the goodwill.

And you have to define the metric before anyone signs, not after. "Delivered paying customer" sounds unambiguous until the first disputed case: a pilot that converted six months after the introduction, a client who came through a different route but knew the partner, a contract signed and then cancelled. Every one of those is an argument you will have with someone you're now in business with. The measurement definition is the actual negotiation. The equity percentage is the easy part.

The honest counter-argument for upfront equity: it buys genuine commitment in a way that a conditional promise does not, and there are partners — particularly ones with real optionality — who will simply decline a structure that asks them to perform before they own anything. If the access is scarce enough and the partner has alternatives, upfront may be the price of being in the deal at all. That's a defensible call. It just shouldn't be the default one, and it wasn't ours.