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Case Study

sorry, guys. Just a few more questions. I know this is boring.” “Next time we’ll have to bring the vodka,” Brooks joked. “Anyone who spends so much time on our taxes should at least get to taste the product.”

“Actually, I’m hoping this will be our last meeting, since the filing deadline is next week,” said Laura, the accountant. “But the flavors do sound good. OK, so what’s the equity split between you two?”

Brooks was silent. Laura looked up. “Even,” Tyler said. “Right, Brooks?” “I hadn’t really thought about that,”

Brooks said cautiously. He had, of course. He just hadn’t discussed it with Tyler.

“What’s the issue? We’re equal partners. We’ve been running this together from the start.”

“Well, not exactly the start,” Brooks said. After all, Brooks was the one who’d

spent five years working on beverage deals in the investment banking division

at Morgan Stanley and had recognized the growth opportunities in the premium liquor market. He was the one who’d taken a year off to tend bar here in Los Angeles and test ideas. He was the one who’d decided on a line of sustainably produced herb-infused vodkas—Erbe. And he was the one who had put up all his savings—$250,000—to get started.

Yes, of course, Tyler had been there from the beginning to bounce ideas around with. That’s what the two cousins had always done growing up. Yes, Tyler had quit a pretty sweet private equity job to help Brooks only a month into the new venture, and had then persuaded their uncle Charlie to invest. And yes, he’d worked his ass off ever since. But was that worth a half stake in the company? Brooks wasn’t sure.

“Well, it was damn close to the start,” Tyler said, looking ticked off. Quickly, though, he collected himself. “Look, this

How Much Is Sweat Equity Worth?

A vodka entrepreneur considers the value of his cousin’s contribution to the company. by Christopher Marquis and Joshua D. Margolis

The Experts

Courtney Reum, founder of VeeV spirits

Jon Olinto, cofounder of b.good

hBr’s fictionalized case studies present dilemmas faced by leaders in real

companies and offer solutions from experts. this one is based on the hBs Case study “VeeV on the rocks?” (product no. 410006-pDF-enG), by Joshua D. margolis, Christopher marquis, and laura Winig. It is available at hbr.org.

Christopher Marquis is an associate professor at harvard Business school. Joshua D. Margolis is the James Dinan and elizabeth miller professor of Business administration at hBs.

December 2012 harvard Business review 121

hBr.orGEXPERIENCE

isn’t something we should bother Laura with.” He turned to the accountant and mustered his trademark grin. “Laura, let the two of us talk and get back to you.”

“No problem,” she said. “We can finish the rest later.”

“What the hell was that?” Tyler practi- cally shouted as soon as they’d left her office.

“Sorry, man,” Brooks said. “We should have talked about it before. Obviously, I know you deserve a bigger stake than you have on paper now.”

“Yes, bigger than nothing would be good.”

“But the investors already have 10% plus the upside we’ve promised them, and I don’t know that I’m ready to cut my stake to 45%.”

“So you don’t think helping you write the business plan, bringing Uncle Charlie on board, finding the perfect sustainable distillery, fixing the formula, and coming up with our entire branding and marketing strategy is worth 45%?”

“I don’t know what it’s worth. I’ve never done this before.”

“Was I supposed to negotiate it with you up front? With my cousin? This is ridiculous.”

“Look, I’m not trying to take anything away from you. I know you’ve earned a big piece of this company. Just let me think about what’s fair.”

“I know what’s fair. I can’t believe you don’t.”

They were stopped on the sidewalk, so Brooks tried to change the subject. “You heading back to the office?”

“No, I’m going to Malibu. I have to make sure everything is all set for the party tonight.”

“OK, I’ll see you there. I have another meeting with the lawyers about the TTB.” Brooks had spent six months getting approval from the Alcohol and Tobacco Tax and Trade Bureau to produce and sell Erbe, but he was still negotiating over what could be included on the company’s website. The entire process had been a bureaucratic nightmare. “And look,” he

added, “don’t be angry about this. We’ll sort it out.”

“We’d better. If I’m working for less than half this company, I should stop working so hard.”

“He’s a Natural” The party that night was packed. Mercedes was launching its new hybrid model, and Erbe was the exclusive liquor sponsor. It was a perfect “green luxury” pairing, as Tyler had promised. Brooks had to hand it to the guy. The cocktails—a basil gimlet and a thyme lemonade, both served on the rocks with fresh herb accents—were delicious; the crowd was hip; and Erbe bottles were prominently displayed.

“I like the lemonade better than the gimlet,” said Erica, Brooks’s girlfriend. She was a studio publicist and always had an opinion.

Brooks surveyed the room and saw Michael, a former SKYY executive who had agreed to serve as a consultant to Erbe, heading his way.

“Brooks, good to see you,” Michael said. “Just had a great conversation with Renee, one of Mercedes’s PRs in New York. She loves what we’ve done here. Loves it. Wants us to do Miami, too. And she’s got other clients right in our wheelhouse: Loro Piana, Element Hotels, Stella McCartney. I thought this would be an uphill climb with all the new flavored vodkas on the market—it’s getting pretty saturated—but the green-and-premium angle is giving us an edge, buddy, a real edge.”

Brooks hadn’t been thinking about marketing when he’d insisted on using an environment-friendly distillery and get- ting a carbon-neutral certification for Erbe. He actually believed in promoting sustain- able industry practices. But being able to align the company with other high-end, socially conscious luxury brands—and their customers—was a nice benefit.

“This feels just like when we launched SKYY,” Michael continued. “There’s energy, there’s buzz. Tyler’s a real pro. You’d think he’d been in marketing his whole life.”

“I know,” Erica chimed in. “He’s made it eco without being eco. It’s very Stella.”

“He can certainly throw a party,” Brooks said, thinking of the ridiculously detailed TTB forms and investor financing agree- ments he’d been working on at the office all day.

“And the discoloration thing?” Michael asked.

A few months back, Brooks had gotten a series of annoyed calls from the manag- ers of the L.A. clubs and restaurants where they’d first introduced Erbe. The vodka in those original bottles had started to develop a very faint yellow tint. The taste was the same, but obviously that didn’t matter; people like their vodka clear. So Brooks had immediately dispatched Tyler to hand-deliver replacement bottles and apologize to the customers. Then he’d called Bruno, his distiller in Nevada. They’d initially gone through nearly 200 formulas before settling on the right three for their basil, thyme, and rosemary flavors. But Bruno hadn’t been able to ex- plain the discoloration—even after a week of investigation.

Finally, Tyler had suggested they call in a consultant, and he’d flown to the distillery with her. Within 24 hours they’d identified a stabilizing agent as the culprit and replaced it with another one. The first production run of the new formula was now 75 days old, about when the previ- ous run had started to turn yellow. So far, every bottle was still perfect.

“Looks like it’s sorted,” Brooks said. “Great—then I think we can start plan-

ning the national rollout,” Michael said. “And possibly international by this time next year. Where is Tyler, by the way? I want him to meet Renee.”

“He’s over there,” Erica said, pointing to a bar across the room. Tyler was behind it, his jacket off, juicing limes. “Is he bartending?”

“Seems so,” Michael said. “That woman he’s talking to? That’s Renee.”

“Honestly,” Erica said, smiling up at Brooks, “the kid’s a natural.”

He did his best to smile back.

EXPERIENCE

122  Harvard Business Review December 2012

“It’s Your Decision” Brooks had just come into the office when his iPhone rang.

“Uncle Charlie,” he said. “Brooks. Did I catch you at home?” “No. I was up at five for a surf, but the

waves weren’t great, so I’m at my desk.” “I always did my best work before seven.

Are you alone?” “Yes.” “How did the Mercedes thing go?” “Really well.” “Good. Tyler called yesterday and

seemed confident about it.” “He always does.” “He also asked me for some advice.” Brooks took a deep breath. “About

what—women?” Charlie chuckled. “About equity.”

“Was he asking his uncle or his inves- tor?” Brooks said, his voice rising. “Be- cause if it was the latter, he’s totally out of line.”

“That’s what I told him. But then I also told him a story I think you should hear, too.”

Charlie had a lot of stories. He was the youngest of five brothers—Brooks’s dad was the oldest, Tyler’s the middle—and

the only one who hadn’t become a doctor. Instead Charlie had left L.A. for Hong Kong at 18, worked a series of odd jobs around

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