Royalty or Equity? Structuring a Designer Partnership

A royalty arrangement pays the designer a percentage of revenue from the products they design, which has the advantage of being simple to understand and directly tied to their ongoing contribution rather than the brand's overall valuation. It's a good fit when the designer's involvement is meaningful but bounded, a specific collection or product line, rather than a stake in the whole business's direction.

The downside is that a royalty gives the designer no upside from the brand's overall growth beyond their own product line, which can feel thin if the brand becomes much more valuable than either side expected.

Equity makes sense when the designer is genuinely a co-founder in substance, involved in brand direction, not just individual product design, and you want their incentives aligned with the brand's overall trajectory rather than a single product category. This requires the full mechanics: a 409A valuation if you've incorporated as a C-corp, a vesting schedule, and a signed grant agreement, the same as any other equity-holding co-founder.

The tradeoff is real dilution and a more complex relationship to unwind if the partnership doesn't work out, compared with simply ending a royalty arrangement, which is a meaningful practical difference worth weighing honestly before committing to either path.

Some brands use both: a royalty on the specific product lines a designer actively works on, plus a smaller equity stake reflecting their broader contribution to brand identity and direction. This can be the right answer when a designer's role is substantial but you're not ready to treat them as a full co-founder, though it requires clear documentation of which revenue is royalty-bearing and which stake is equity, so nobody's confused about what they're actually owed.

Write the boundary between the two clearly, since ambiguity here is a common source of disputes as a brand grows.

Don't confuse a designer partnership with your relationship to a private label or contract manufacturer, which is a straightforward vendor relationship, not an equity or royalty arrangement, even when that manufacturer plays a significant role in product quality and development. Keeping this distinction clear avoids a manufacturer later claiming an ownership interest they were never actually granted, based on an informal conversation that was never documented as an equity offer.

Any equity or royalty commitment should be explicit and in writing, never implied by the closeness of a working relationship.

For a smaller, independent brand granting its first real equity stake to a designer or co-founder, compare Pulley's and Carta's current setup effort, 409A pricing and turnaround times; neither requires a fundraising history. If the brand has taken outside growth capital or drawn interest from a strategic acquirer, often a larger apparel group looking to add the brand to its portfolio, Carta's format is the one that buyer's team is more likely to already trust.

Either way, get the royalty-versus-equity decision right first. The software choice matters far less than whether the underlying structure actually fits the relationship.

A royalty or equity percentage that felt generous when a designer joined a small, unproven brand can look mismatched once that brand is doing meaningfully more revenue than anyone expected at the outset, and pretending the original terms are permanently fixed can quietly damage the relationship. Build a scheduled check-in, perhaps every two years, where both sides can raise whether the original terms still reflect the actual scope of the designer's ongoing contribution.

This doesn't mean renegotiating constantly or on demand, but a brand that never revisits an early-stage deal risks losing a key partner who feels, fairly or not, that they're still being compensated as if the brand never grew past its first collection. A scheduled conversation, agreed to up front by both sides at the start of the relationship, keeps this from ever becoming an uncomfortable ambush partway through a partnership that's otherwise working well.

Use these checks to decide between a royalty and equity:

• Choose a royalty when the designer's involvement is meaningful but bounded, such as one collection, and you want pay tied directly to sales of what they design.
• Choose equity when the designer is a co-founder in substance, shaping overall brand direction, and you want incentives aligned with the whole brand.
• Consider a blend of a product-line royalty plus a smaller equity stake when the role is substantial but short of full co-founder.
• Treat a private label or contract manufacturer as a vendor, not as a royalty or equity partner, even when it shapes product quality.
• Schedule a check-in to revisit the terms once the brand outgrows the deal that felt generous at the start.