Dot-Com Start-Up Equity Increasingly Popular Currency

One increasingly popular variety of dot-com incubator has another name: advertising agency.

It all began when dot-com start-ups, short on cash but long on potential, started asking Web development firms to build their Web sites in exchange for a piece of the emerging company. These interactive agencies, often just hatchlings themselves, were willing to take the risks involved with an early-stage investment and they got a piece of the action.

Now, as would-be Internet millionaires scramble to get into the dot-com gold rush, equity in online start-ups has practically become legal tender, with traditional advertising agencies of all stripes honoring the currency.

The latest frontier is that of media buying and planning, where Western Trading, an affiliate of Western Initiative Media Worldwide and part of the Interpublic Group of Companies, has gone so far as to set up a special program, called eAdvantage to service dot-com clients.

Western Trading is following the lead of media companies like CBS and NBCi, which have both traded promotion on their media properties in exchange for stakes in start-ups.

“We are partnering only with leading companies in e-commerce categories, and we are prepared to show our confidence in these firms by accepting swaps for equity,” says Robert Ingram, chairman and chief executive officer of Western Trading.

One of the first companies working with the media buying firm is MortgageIt.com, an online mortgage site that spun-off from IPI Financial Services. The company’s CEO, Doug Naidus, touts the opportunity for start-ups to get special attention from ad agencies, which are motivated by the desire to boost the value of their investment.

“It’s a matter of availing yourself of an inventory that wouldn’t normally be accessible to us,” says Naidus. “One of the challenges of the Internet companies face now is the supply of quality media.”

Through the program, MortgageIt.com also gets access to another Interpublic Group agency, Hill Holliday. The start-up is paying for this service, but even traditional agencies are trading ad services for equity these days, although not everyone is speaking openly about it.

The San Francisco office of Young & Rubicam, as well as the newly-formed Y&R 2.1, have been known to take on clients through these kinds of deals. Stein Rogan and Partners, who works with the GO Network, Mail.com, FasTV.com, and cars.com, has taken equity in exchange for services from one of its clients, and it’s in the process of negotiating two similar deals.

It’s risky to do such deals, because the agency is taking a chance that the investment will pay off. It has a stake, and therefore incentive to do a great job, but there’s also a chance that events beyond the agency’s control will cause the start-up to tank. Meanwhile, the agency is tying up resources that could be used to bring in cash business.

Still, in an environment in which even staid accountants and consultants like Grant Thornton are restructuring, partly to enable them to accept equity for consulting, who can blame traditional ad companies from wanting to get into the game?