Poll results: PR agencies shouldn’t take equity in their clients

PR firms shouldn’t take equity in their clients in lieu of fees. That’s the view of more than three in four who voted in last week’s poll – a sizable majority, showing the lessons learned in the downturn are still raw. The logic is clear – PR firms are already exposed to business risk from their own operations, without the double jeopardy of taking a stake in their clients’ future as well.

Taking equity, not fees, puts a strain on cashflow and reduces the firm’s ability to invest. While the lure of a large payout following a client’s liquidity event is certainly attractive, such venture investing is a specialist skill. Many start-ups fail for reasons way beyond the control of the PR firm. Meantime neither of the main costs of a PR firm, salaries and accommodation, can be paid in options.

Given agencies work at somewhere between a 10-20% margin, giving away services in the hope of a high return, can easily erode short term profits. Profits which are required to reinvest for expansion or to seize opportunities which might arise.

That said, some agencies do agree performance-based bonuses with their clients. These payoffs only become due if stretch targets are reached. In these instances, it would not present an operational risk to accept equity as the bonus element. This still provides a meaningful incentive to the team to perform, but does not jeopardize short term cashflow. I know some freelance PR pros also work on this basis. They work with several fee-paying clients in order to provide a base salary and take on a small additional client on an equity-only basis as a ‘bonus’. If that client doesn’t succeed, no real harm done bar the opportunity cost of the cash.

For clients, I still think it’s worth asking your agency if they’d accept equity but to plan for PR as a line item in the marketing budget. If the agency does accept equity, be clear about why they will accept yours in particular, and how often they do this. You want to make sure they’ll be around for the duration of the campaign – after all, it’s not just start-ups which occasionally fail.