Equity in-kind

Calvin Coolidge’s observation from 1925 still rings very true: many Americans do chiefly consider owning a business as their preference for earning a livelihood.  It comes with many risks, but self-employment is the ideal because it blends personal passion, autonomy, and the potential to achieve financial security.  Brooklyn Coop’s perspective on entrepreneurship is through the lens of lending to small businesses for either start-up or expansion. We have been SBA-approved lenders since 2006, providing loans that average around $20,000. This gives you an idea of the small scale of businesses we serve.

When talking about funding for start-up businesses, the media highlight Initial Public Offerings on the stock market, venture capitalists and unicorns, but very few new businesses are in a position to seek these options. Closer to home, the Power Up competition awards funding to a handful of start-ups each year. More commonly, initial funding comes from credit card debt or personal savings. Yet even these resources will run out in a year or even less, meanwhile it can take a couple of years before a business earns real revenue. How do such businesses  keep going in the tough early stages?

In my observation, there is a universal source of start-up funding that is rarely discussed in research or the media, but accounts for a tremendous amount of value especially as a business is starting to get on its feet: in-kind equity. The family member who watches your children while you work; a niece who runs the cash register on the days she doesn’t have after-school activities; your high school buddy who lends you his truck so you can pick up some second-hand equipment from way out in Jersey –> all of this is support for your small business in the form of donated services.

Because you don’t have to pay these suppliers back, their contributions become part of your business’ equity. If you were OCD about your balance sheet, you would include these as line items on the Equity side by estimating a market value for them. Borrowing a truck instead of having to rent?  Probably $300.  A cashier for a 4 hour shift, 3 days a week?  Easily $250 a week.  Reliable childcare?  Literally priceless, or upwards of $50,000 annually.  I call this “in-kind equity” because the contributions come in the form of tangible items instead of cash funding.

The value of in-kind equity is entirely invisible, yet imagine having to start a business without these resources. So many entrepreneurs can’t dedicate time to lift up their businesses because precious hours out of their day are taken up with childcare or minding the cash register. Those are hours they can’t focus on bookkeeping, building an online presence, or improving their product to meet changing market needs. For cash-starved business-owners, in-kind equity is often their only source of seed capital.

This is not only true of low-income entrepreneurs. Mackenzie Scott worked side by side with Jeff Bezos to found Amazon. Her contributions were recognized with stock equity when the business became a publicly-owned corporation. Note that I am not talking about family-owned businesses like the New York Times — if family members are decision-makers, then they are owners.  However, if they contribute labor without expecting either a monetary return or a role in making decisions, they are donors rather than owners.

I think about in-kind equity when listening to funders or policy-makers talk about the needs of small businesses. Often they focus on lifting up the business-owner through technical assistance and/or access to capital. Rarely do they discuss the types of support that  lucky business-owners have from their equity partners, like the buddy with a pick-up truck. As a community lender, we do see and understand the value of these connections. In the best circumstance, we allow the business-owner to “monetize” such social capital when the donor is willing and able to serve as a co-signer. I remember a loan from 20 years ago to a bodega in Williamsburg. The owners had no credit history and little income. However, 5 members of this extended family were working in the bodega and committed to its success.  All 5 signed the promissory note for $100,000; the loan paid perfectly and the family’s subsequent business loans at Brooklyn Coop are evidence of the value of both community lending and of in-kind equity.