Doug Thompson admits he was a little baffled when the owner of a trendy San Francisco office building first asked for company stock as part of the lease contract.
"I said: 'Are you kidding? You're the landlord. You're supposed to work for us,'" recalls Thompson, president of the software firm Just in Time Solutions, who was shopping around for new space last spring.
Little did Thompson know that was just the beginning of owner Greg Flynn's requests.
Flynn, who runs a real estate business specializing in San Francisco's tech-centric South of Market district, proceeded to ask the kinds of questions typically reserved for lawyers and venture capitalists. He asked to meet with the board. Then he grilled company executives about their business plan and prospects for future growth. He even talked to their competition.
In return, Flynn would offer Thompson the privilege of paying top-dollar for office space in his sunny, well-kept building. In exchange for equity in the company, Flynn, head of Flynn Land Company, would make sure that Just in Time Solutions would get the space it needed to expand, even if it meant turning away other tenants.
Overcoming his initial ambivalence, Thompson accepted the offer last fall. Space in San Francisco was scarce. And for just a small slice of equity, Thompson got offices in a building with an indoor stream running through the lobby, glass-paneled ceilings, and a cappuccino stand on the ground floor.
For his part, Flynn got a stake in what he predicts will be a very profitable software business. He also got a tenant who pays the rent.
It was, the way Flynn tells it, a very standard sort of deal. In recent months, Flynn has signed similar agreements with several Internet startup tenants. And while his request for company stock was once met with shock, the reaction has become more blasé.
"About a year ago, people were surprised, and now we get almost no surprised reactions. Almost all the tenants out there have been prepped that this is what they're going to be asked," Flynn said.
The rise of the venture landlord seems largely a consequence of supply and demand. While the amount of seed funding for Internet startups remains flush, the supply of local real estate is soberingly finite. With landlords wielding major clout in the local economy, it was only a matter of time before they too would want a slice of the dot-com wealth boom.
San Francisco's South of Market, or SOMA, district -- where Internet startups flock for hip loft-style office buildings and address status -- was a prime spot for such activities.
Nicknamed Multimedia Gulch in the mid-1990s, the neighborhood used to be dominated by warehouses and furniture showrooms. That all started to change a few years ago, when Internet companies started moving in, lured first by cheap rent and later by the desire to at the center of the action.
Property owners soon realized that even rapidly rising rents weren't discouraging Internet startups. For every spot in every hip building, landlords found themselves courted by several prospective tenants.
So for Flynn, a 35-year-old Stanford business school grad, it seemed only natural to toss out the old formula and trade dollars for square feet of office space. Instead of worrying about whether clients would pay rent on time, he started focusing more on their chances of a successful stock offering. He makes this quite clear:
"We evaluate tenants primarily on the prospects of their equity and the availability of that equity to us," he said.
Flynn has the proper Silicon Valley pedigree, which helps in the local landlord business. Besides the Stanford MBA, he runs a venture capital business, Flynn Ventures. He reads venture capital news religiously, finding out who got funding and who from, what sectors, and who's about to take their stock public.
His meeting with a tenant jumps from a complaint about the air conditioning system to a discussion of second-round venture financing. Flynn tosses out a few tips on the venture front, then cell-phones in a call to get the AC running, then hops into his Mercedes -- equipped with a computerized mapping system -- to map out a route to his next meeting.
Flynn describes his role as not too different from any other venture investor. Broadly speaking, the idea is that your landlord isn't just the guy you rent space from. For the right stock offer, the landlord can also be your friend.
That can be crucial for rapidly expanding startups, which want assurance that they'll get more office space as their businesses grow.
That was a key consideration for David Wamsley, CEO of Internet incubator Campsix, which set up shop in one of Flynn's trendier buildings a couple of months ago. When he was looking at the space, Wamsley was competing against several others, including startups and more established companies. Willingness to offer equity got him the contract.
"We see it as a cost of doing business in San Francisco," said Wamsley, noting that having hip office space makes some of the other jobs easier, like recruiting. "The bottom line is we needed the space and we got it," he said.
Although the practice of seeking stock from tenants isn't brand-new, companies say it has become pretty mainstream in recent months. More and more, landlords are framing equity requests less as an-under-the-table transaction and more as an up-front term of doing business.
It helps that Northern California entrepreneurs are pioneers in the practice of using equity to get stuff that everyone else pays for with cash. Startups have been known to help pay for everything from public relations to recruiting through stock options. Campsix liked the equity model so much that the guy who built the company's desks was given an equity position as a condition for getting the job done quickly.
Still, the trend of offering options for everything hasn't pleased everyone.
Carl Malamud, CEO of tech startup Invisible Worlds, got so frustrated with the local real estate scene he decided to leave San Francisco and move his company to the outlying, barely Bay Area suburb of Petaluma. Since the company hires most of its tech staff from outside the Bay Area, having a centralized location wasn't so important, Malamud said.
And it certainly wasn't worth giving up a stake in the company.
Dan Mihalovich of Mihalovich Partners, which specializes in finding commercial space in San Francisco, says he doesn't like to see tenants offering stock as part of their lease. Tenants are already paying obscene rent checks, he said, and that should be enough.
"We're not asking for an equity position in the building. Why should you ask for an equity position in the company?" Mihalovich said.
