It should have been a cause for celebration. Last spring, Dave Graham, founder of software consulting firm Arizona Bay, learned that a major client, Jumpstart Automotive Media, had been acquired for more than $80 million. Jumpstart was one of Graham's first clients; it signed on shortly after he founded Arizona Bay, in 2000. Jumpstart wasn't much at the time, just four employees working from home offices. But with the help of Graham's company, which specializes in creating tech systems for start-ups, Jumpstart grew to more than $50 million in revenue--enough to make it an attractive acquisition for media conglomerate Hachette Filipacchi.
Graham was happy for his client. But he wished he had been able to share in some of the upside. Arizona Bay, after all, had built the IT infrastructure and Web applications that Jumpstart needed to hit it big. The two companies had worked together closely for years. "They went on to do great things," says Graham. "And we're still their outsourced IT department." Determined not to miss another opportunity, Graham has begun waiving fees and instead taking equity in clients he thinks have a good shot at success. Like a venture capitalist reviewing business plans, he now weighs the potential of every company Arizona Bay works with. "There's a huge opportunity cost in not taking equity," he says.
It's easy to see where Graham is coming from. In the past few years, hundreds of small companies have been snatched up by private equity firms willing to agree to ever-rising valuations. Even with the turmoil in the capital markets in the second half of 2007, it was another record year for merger and acquisition activity. One of the ways vendors and partners--whose behind-the-scenes assistance often is crucial to a start-up's success--can get a piece of the action is to exchange services for equity.
