The Working of Contracts
The Tale of Two Contracts.
One of the biggest reasons why creators, founders, anyone get stalled or even their businesses dying is because of bad contracts. This is why I think this is the most important piece I can write for any creator that’s interested in learning about startup-style company building and definitely if they want to fundraise.
Startups and creators share one thing in common: they’re betting on the future. And when you’re building something new, the most powerful tool for alignment is equity—or, in some cases, revenue. But the way you structure this alignment matters. How you divide control, ownership, and payout can make or break a partnership.
To start, there are three types of general contracts to think about as a creator (this can be applicable to getting signed by a management or getting venture capital investment.
Tale of Two Contracts
There are two major kinds contracts for Creators:
1. Equity-Based Contracts
In an equity-based model, collaborators don’t get paid upfront or through revenue shares. Instead, they receive a percentage of the company’s equity—typically in the form of non-voting/common stock.
When to Use It
- You’re building something with high growth potential that will need outside investment.
- Collaborators are focused on creating long-term value rather than immediate returns.
The Upside
- Long-Term Alignment: Equity aligns collaborators with the creator’s vision. If the company grows, everyone benefits.
- Scalability: Equity doesn’t strain cash flow, which means more resources can be reinvested into growth.
The Downside
- Delayed Payouts: Equity-only models work best when there’s a clear path to a liquidity event (e.g., sale, IPO). Otherwise, collaborators may grow impatient.
- Risk of Misalignment: Without revenue incentives, collaborators might not focus on short-term opportunities.
Who Benefits
Creators focused on building high-value, scalable businesses (e.g., startups, media empires) thrive under this model. Collaborators who are willing to play the long game prefer equity over immediate payouts.
An Example for Equity-Based Contracts
You bring in a manager or operator to help you scale your holding company. Instead of revenue-sharing, they get X% of non-voting shares, vesting over four years. This gives them a stake in the business without giving them control.
The beauty of equity-only models is their simplicity. There’s no need to calculate revenue splits or worry about cash flow—it’s all about creating long-term value. But they also require patience. Equity-only models work when there’s a clear path to a liquidity event (e.g., a sale, IPO, or buyout). Without that, collaborators may grow impatient or feel undervalued.
2. Revenue-Based Contracts
In a revenue-based contract, a manager or collaborator earns a percentage of the revenue generated by the creator’s work. Think of it like a royalty: you take a piece of the pie as it’s baked.
When to Use It
- You’re working with collaborators who add value through execution (e.g., securing sponsorships, running operations).
- You want a straightforward way to align incentives without diluting ownership.
The Upside
- Simplicity: No cap tables, no equity dilution, and minimal long-term complexity.
- Immediate Rewards: The manager or collaborator gets paid as revenue comes in, which aligns their focus with generating income today.
The Downside
- No Long-Term Skin in the Game: If there’s no equity involved, the collaborator may lose interest once the immediate revenue dries up.
- Risk of Misalignment: Revenue-based models prioritize cash flow, which might not align with the creator’s long-term vision (e.g., reinvesting profits for growth).
3. The Middle: Equity + Revenue-Based Contracts
This is the middle ground. Collaborators earn both a share of revenue (for their operational contributions) and equity (to reward long-term value creation). Think of it as getting paid today and owning a slice of tomorrow.
When to Use It
- You’re building a holding company around a creator’s business.
- The manager is playing a dual role: helping with short-term monetization while laying the groundwork for scalable growth.
The Upside
- Dual Alignment: The revenue share incentivizes immediate results, while equity keeps everyone focused on the bigger picture.
- Balanced Risk and Reward: Collaborators share in both the ups and downs of the business.
The Downside
- Complexity: You’re mixing two systems (revenue and equity), which requires clear contracts and careful management.
- Dilution: Introducing equity means everyone gets diluted as the pie grows.
An Example of The Middle
Let’s say you’re a creator launching a holding company to house all your projects:
- A podcast that generates ad revenue.
- A merch line that grows into an e-commerce brand.
- A licensing deal with your name on it.
Your manager helps you set this up, and in exchange, they receive:
- X% of revenue from deals they directly oversee (short-term incentive).
- X% of equity in the holding company, with vesting over four years (long-term incentive).
This model can align everyone. The revenue share keeps the manager motivated today, while equity ensures they’re thinking about scaling the business tomorrow.
How to Choose
There’s no universal answer to which model is best. It depends on the creator’s goals, the type of business they’re building, and the collaborators involved.
Here’s a simple framework:
- If You Want Short-Term Monetization → Choose Revenue-Based.
- If You Want Balanced Incentives → Choose Equity + Revenue-Based.
- If You Want Long-Term Alignment → Choose Equity-Based.
The Magic of Alignment
The best agreements are designed for alignment. Revenue-sharing works when you need quick wins. Equity works when you’re building something that will take years to realize its value. And equity + revenue is for the rare cases where you want both.
Creators are startups in disguise. The right structure can turn a creator’s potential into a business that lasts. But just like startups, the wrong structure can create misalignment that slows everything down.
The key is clarity. When everyone knows the rules—who gets paid, how, and when—they can focus on what really matters: creating something valuable. I’ll write more about this in another section.
As always, if you have any particular questions, feel feel to reach out to em@pre-founder.com.
← Previous