Media for Equity

What is media for equity?

Media for equity (in German: Werbeleistung gegen Beteiligung) describes a form of financing in which a media company provides advertising to a young company and receives shares in that company in return. In a GmbH (German limited liability company), these are company shares (Geschäftsanteile). The advertising runs on television, on radio, on billboards or through online reach. It is often combined with an additional cash payment or a share of revenue.

An architect who charges no fee for the plans but instead receives an apartment in the finished building follows the same logic. The architect's pay then depends on what the building is later worth, and the architect has an interest in it succeeding.

The model combines a funding round with a media agreement, that is, a contract on advertising slots and advertising space. The media company monetises advertising capacity that it cannot sell in full; the young company receives reach that it could not finance from its own liquidity. The deal is regulated in the investment agreement, shareholders' agreement and a media agreement. The latter fixes volume, period and channels and determines when and how the advertising can be called off.

How media for equity works, and its variants

The parties to a media-for-equity deal agree a media volume that can be called off over a fixed period. Often only free advertising slots are available, the placement of which the media company determines. The production of the advertising materials, such as a television spot, is generally paid for in cash by the young company. Three variants are common:

• Pure advertising for shares: without any cash payment.
• Combination with a cash contribution: Part of the stake is paid in cash, for example for production and capacity expansion.
• Media for revenue share: Instead of shares, the media company receives a share of revenue, usually up to a cap or for a fixed period.

A smaller form is influencer for equity: instead of a media house, a person with a large reach on social media contributes advertising in return for shares. The same company law rules apply. For the individual, the stake can lead to taxable income even though no money changes hands.

Company law implementation for a GmbH

New company shares are created in a capital increase against a contribution, generally cash. Instead of cash, an asset can also be contributed (contribution in kind). Contributing the advertising service in this way is ruled out. Obligations to perform services are not capable of being contributed in kind; the German Stock Corporation Act says so expressly (Section 27(2) AktG), and the legal principle is applied by analogy to the GmbH.

In practice, the media company therefore usually pays the nominal amount of the new shares in cash, generally EUR 1 per share (cash contribution). In addition, it undertakes in the shareholders' agreement to make a further payment, which it provides through advertising (contractual additional payment). The share capital, that is, the liability capital entered in the commercial register, is thus raised in cash. The advertising service lies outside the statutory rules on capital raising.

Alternatively, the media company pays the full amount in cash, and the company then purchases advertising from it. The rules on disguised contributions in kind (Section 19(4) of the German Limited Liability Companies Act, GmbHG) do not apply here under the case law of the Federal Court of Justice (Bundesgerichtshof), because services are not capable of being contributed in kind. The return flow of the money remains risky. If the contribution is reserved for paying for the advertising or flows back as a prepayment, round-tripping (Section 19(5) GmbHG) may be present. The obligation to contribute then continues to exist, so the money has to be paid in again. There is no round-tripping, however, if advertising that has already been provided is paid for at market rates from freely available funds. The structure is drafted by the company's law firm.

Valuing the media service

The economically most important negotiating point is the value at which the advertising service is recorded. Media companies often calculate with list prices, but on the market advertising slots and advertising space are usually sold at discounts, and freely available slots often reach fewer people than specifically booked ones. What matters for the young company is what the same reach would actually cost if bought for cash. This valuation determines the effective price per share.

Formula: Effective price per share = market value of the entire consideration (advertising and cash contribution) ÷ number of shares issued

If the advertising is valued at list price, the media company receives as many shares as a cash investor with the list amount, but economically contributes less. The nominal pre-money valuation, the agreed value of all shares before the investor comes in, then deviates from the actual entry price. The dilution of the existing shareholders, that is, the fall in their percentage holding, exceeds the value of the consideration. Proof of performance such as broadcast logs and rules for volume not called off therefore belong in the agreement.

Balance sheet and VAT

The advertising service received is an expense of the period in which it is provided. It may not be recognised as an asset on the balance sheet (capitalised), even if it supports the building of a brand. How the counter-value is recorded in equity depends on the structure and is agreed with the tax adviser.

For VAT purposes, it must be clarified whether, and at what value, the advertising service is to be treated as a taxable supply for consideration, even if the consideration does not consist of money. The answer depends on the structure. If VAT is charged, the company generally pays it in cash and deducts it as input VAT. Until it is offset with the tax office, this ties up liquidity.

Suitability and consequences for later rounds

The model suits above all companies that address end customers with a broad target group and whose conversion of reach into revenue has been reliably measured, for example in online retail or consumer apps. Product, customer service and logistics must be able to carry the demand from a large campaign. For software companies that sell to businesses, the model is rarely suitable, because their target groups are small and sales run through personal outreach.

Later investors ask about the media company's effective entry price and whether growth and customer acquisition also hold up without free reach. Metrics such as the LTV/CAC ratio, which sets the value of a customer over the entire customer relationship against the cost of acquiring that customer, must therefore be calculated using market prices for the media service. If the valuation was inflated by list prices, the risk rises that the next round ends as a down round, that is, at a lower price per share. Exclusivity rights of the media company can also make cooperation with other media houses harder.

Worked example: media for equity at list value and at market value

A company with 100,000 company shares agrees a stake at a pre-money valuation of EUR 12 million, that is, EUR 120 per share. The media company provides consideration with a list value of EUR 3.0 million, the cash contribution at the nominal amount in cash and the rest as advertising. At market prices, this consideration is worth EUR 1.2 million.

• Shares when valued at list value: EUR 3.0 million / EUR 120 = 25,000; stake 25,000 / 125,000 = 20.0%
• Effective price per share at market value: EUR 1.2 million / 25,000 = EUR 48
• Effective pre-money valuation: EUR 48 × 100,000 = EUR 4.8 million instead of EUR 12 million
• Shares when valued at market value: EUR 1.2 million / EUR 120 = 10,000; stake 10,000 / 110,000 = 9.1%
• Capital raising for 25,000 shares: cash contribution at the nominal amount of EUR 1 per share = EUR 25,000, the rest as a contractual additional payment through advertising
• Advertising: EUR 3.0 million minus EUR 25,000 = EUR 2,975,000 at list value, EUR 1.2 million minus EUR 25,000 = EUR 1,175,000 at market value
• Cost per new customer with 12,500 new customers from the campaign: EUR 2,975,000 / 12,500 = EUR 238 at list value, EUR 1,175,000 / 12,500 = EUR 94 at market value

The existing shareholders keep 80.0% of the company in one case and 90.9% in the other. The difference of around 10.9 percentage points is the actual subject of negotiation.

Distinctions: media for equity, barter deal and strategic investor

• Barter deal: performance in return for performance between two companies, without a stake in the capital.
• Corporate venture capital: investments by a corporate group in cash, usually out of strategic interest. Here, by contrast, the consideration consists predominantly of advertising.
• Strategic investor: invests for market access, technology or a later acquisition. The media company is mainly concerned with monetising free advertising capacity.
• Revenue-based financing: money in return for a share of revenue. Media for revenue share replaces the money with advertising.

Common mistakes

• List price adopted as value. The stake is calculated on the basis of a media value that would never be paid on the market.
• Conversion not tested. Without prior small-scale campaigns, it is unclear whether reach produces revenue at all.
• Volume not called off left unregulated. The shares have been transferred, but part of the advertising is never provided.
• Ancillary costs forgotten. Production of the advertising materials and pre-financed VAT burden liquidity.

Frequently asked questions

Can advertising be contributed as a contribution in kind?

No. Advertising is a service, and services are not capable of being contributed in kind. Practice therefore works with a cash contribution at the nominal amount and a contractual additional payment.

How many shares does the media company receive?

As many as the agreed value of the consideration yields at the price per share of the round. What matters is therefore whether the advertising is valued at list prices or at market prices. In the worked example, it is 25,000 shares (20.0%) at list value and 10,000 shares (9.1%) at market value.

Who decides when the advertising runs?

The media agreement regulates this. Often the media company decides on placement within its free capacity, while the young company negotiates blackout periods and minimum reach.

Is the model suitable for software for business customers (B2B)?

Rarely. Broad advertising mostly reaches people outside the target group, and business customers usually decide after personal outreach.

How do later investors view a media company among the shareholders?

Mostly neutrally, if entry price and rights are in line with the market. Critical points are inflated media values, far-reaching exclusivity and growth that rests solely on free reach.

The Roemer Capital view

If a client receives an offer to obtain advertising in return for shares, we calculate the effective price per share on the basis of achievable media prices and set it against the valuation of the current round. At the same time, we show the effect on the cap table, the overview of the shareholders and their shares, and on the economics per customer (unit economics) after the agreement ends.

For software companies with business customers, we rarely consider the model suitable. The client's law firm and tax adviser determine the structure and tax treatment; we supply the economic valuation.