The trend is discernible. Swapping stocks for services is becoming popular among Indian Internet companies. What are the expenses the Indian Internet companies incur? How are they being settled?

Most Net-heads are first-generation entrepreneurs who have invested their life-time savings to kickstart their Internet ventures. Internet ventures do not call for large investments in fixed assets.

But, marketing costs and overheads are large. On an average, as much as 80 per cent of the funds of an Internet venture is spent on marketing and building the brand. For, getting a visitor stick around is very difficult and competition is just a click away. Naturally, steady flow of funds is needed to keep the Internet venture going.

Just take a look at the number of banners streaking across the Western Express Highway and the Marine Drive in Mumbai. They already look like e-highways or e-marine drives with two out of every three banners belonging to one of the following three sites - Indiainfo.com, Indiainfoline.com and eindia.com. Such a feverish marketing needs oodles of money.

Marketing and promotion apart, Internet companies have to meet other expenses too. These include salaries, website maintenance and acquiring fixed assets such as personal computers and servers.

Those working for the Internet company need to be paid regularly and software professionals need to be paid for uploading and maintaining the web site regularly.

Stock swaps
Unlike manufacturing companies, Internet companies do not have lines of working capital from banks and financial institutions. Thanks to the absence of tangible assets, Internet companies are not able to attract lenders. Naturally, funding options are limited for an Internet startup.

Of course, there is venture capital. Even this support is only until the Internet company goes public. What after that?

Not just that, most Internet companies have no cash inflows. So, there is a need to conserve cash. And at the same time expenses have to be met and bills have to be settled so that the show goes on. What better way to achieve this than issuing the company stock in lieu of cash. Here is how Internet companies are doing it.

Stock options
Consider salaries first. Salary bills account for a large proportion of the total expense outgo. Almost all Internet companies have structured salaries of their employees with a mix of cash and equity. While the cash component of the salary takes care of employee expenses, stock options represent savings.

Thanks to such a salary compensation model, an Internet company is able to stem its cash outflow. Even employees find their stock options appreciate over a period of time.

Availability of stock options also acts as an employee-motivator as it creates a sense of ownership, belonging and responsibility. Thus, stock options are beneficial for both the employers and the employees.

Turn to site maintenance now. This is another area where Internet companies are using their stocks to settle bills. Most Internet companies outsource site maintenance by hiring companies which are specialists in software development.

Traditionally, these site-maintenance companies have been paid in cash. However, the trend of issuing stocks is gaining ground. This helps the Internet companies during the initial stages of operation when there is hardly any revenue from the site.

A porno and sports score site, www.Efox.net, launched by Joseph Preston, has gone to the extent of providing 500 equity shares of the company to models for every photo shoot published on the site.

Even advertisers have begun to accept non-cash payments from Internet companies. Networks such as CBS Corporation and NBC are already providing on-air advertising and promotion time to Internet companies in exchange for their equity.

For instance, CBS provided $150 million worth of promotional services on its radio and television networks for Medscape, a New York-based health and medicine company. In exchange, CBS accepted a 35 per cent stake in the new company.

Now Medscape has been given permission to use the CBS logo and the CBS trademark on its website. Not just that, CBS has acquired vertical portals such as SportsLine USA, an online sports site, and MarketWatch, an online finance site.

Both the acquisitions were through swapping airtime for equity. CBS has also lent its name to Switchboard.com, an online telephone directory and search engine, after acquiring a 35 per cent stake valued at $135 million. This acquisition was in exchange for airtime in its prime network.

Close on the heels of CBS comes NBC. NBC acquired a minority stake in iVillage, an exclusive website for women and in Talk City, an online chat community. Both the acquisitions were in exchange for commercial time on its network. Precisely speaking, iVillage got airtime calculated at 85 per cent of the gross market rate.

Mutual benefit
Such deals benefit both the networks and the web companies. While Internet companies gain access to mass audience through these networks, the latter benefits from the equity swaps by way of stock appreciation post-allotment.

Consider the case of CBS, which acquired a 50 per cent stake in MarketWatch.com during 1997. On the very first day of listing, this stake was worth $250 million. Similarly, CBS acquired a 12.5 per cent stake in SportsLine for selling airtime worth $57 million.

Currently, the market value of this stake has doubled. Other prominent share swaps: New York Times Corporation acquiring a minority stake in TheStreet.com in a deal that had a mix of ad credit and cash. Time Warner's CNN acquired a minority stake in an online company, IDG, in a similar fashion.

The Indian media is not far behind either. Business Standard, a prominent business daily, uses the services of Pugmark for site hosting and site maintenance in exchange for providing free ad space in the newspaper besides cash payments. Even some public relation outfits in India have begun offering their expertise for shares instead of cash payments.

Net companies also use their shares to grease their suppliers, customers and stakeholders for the benefit of the company. Redback Networks allotted 250 shares to its customer Flashcom Inc in its initial public offering as a token of gratitude for buying networking equipment worth several million dollars. According to newspaper reports, these shares were later sold off for a profit of $58,000.

Here are a few more examples. Customers of Healtheon Corporation were allotted 35,000 shares. Business associates of Brocade Communications System, a networking equipment manufacturer, got 10 per cent of its equity. Juniper Networks, an optical networking equipment company, offered shares to the executives of its customers such as MCI WorldCom.

Chemdex Corporation, an online broker of laboratory supplies, allotted six lakh shares to its business associates under the friends and family quota.

India may not be far. An Indian company, Wintech Computers, which is yet to come out with an initial public offering, has advertised that it is willing to allot 10,000 shares for its franchisee-owners.

What is the stand of the Securities and Exchange Board of India (Sebi) in this matter is not yet clear. However, Sebi's counterpart in the USA requires companies to disclose the quantum of shares they have set aside and the beneficiaries in its prospectus. However, established American companies such as Cisco Systems, Compaq and SBC Corporation do not allow their employees accept stocks from companies they do business with.

In India, Internet consultants such as KPMG, Arthur Andersen and Ernst & Young do not allow its partners accept preferential allotments.

However, quite often these consultancy firms receive shares from their clients in lieu of consultancy fees. "We got shares allotted in lieu of our fees in a music company called Easy Buy Music," says Munesh Khanna, country head of Arthur Andersen India.

Shares as a lure
Most Internet companies acquire other related sites for consideration other than cash. That is, the acquiring company issues its shares to the shareholders of the acquired company. This method helps the acquiring company conserve its cash resources.

Not just that, shares are also issued for luring traffic to the site. Lucky winners are picked up every day by drawing lots among registered users.

This helps the Internet company get more registered users, increase stickiness of visitors and reduce advertisement expenses. In India, one site has prominently advertised that one visitor every day selected by draw of lots will get 100 shares of the company.