When starting a business it is important to have the right business partners on board; in any walk of life it is essential that you are supported by a good team that can encourage and help you, but with Start Ups it’s even more so.
Whilst investing in start-ups and having investment discussions, I see a lot of common mistakes, but one appears to be more apparent than most when there is more than one person at the helm of the company. When starting out, a lot of entrepreneurs feel they need a team around them and they rush into ‘signing up’ co-founders or giving away equity stakes to people who they feel have an immediate benefit but do not consider the value of their long term benefit. As such, they start off well and all in good mood, but very soon as the business scales, frustration creeps in because the value they thought would be present actually is not. However, by that time it’s all too late – equity stakes have been given away and trying to backtrack is near impossible.
As an investor, I want to know that each person who has a shareholding is bringing both short term and long term value to a business. Where that long term value is not present, it makes it a harder decision to invest in that business.
So the first thing I would recommend to any entrepreneur looking to bring on sweat equity or partners that they will be making a shareholder is to think about both the short term and long term responsibilities of each stakeholder. That not only means giving everyone a set of clear responsibilities and objectives from the outset; but also basing their share on performance. Don’t give away 10% of your business immediately – ratchet the shareholding based on targets being achieved.
It’s also important to play to the strengths of team members and to utilize their expertise. As well as this, it is important that all members of the team are equally investing in making the business a success and that all partners are willing to put the same time and effort towards reaching your common goals. This needs to be established when the company is starting up. It is important to remember that a team is comprised of people or varying strengths and personalities. Team personalities and strengths should complement each other especially in the start- up phase as there are going to be many hurdles and difficulties you will have to overcome together.
It is important to avoid these common shareholder pitfalls when giving away stakes in your business – not only for your own sake but also because it will affect how investable your business is. If you are starting up your business with family and friends be aware that without clear goals and performance measurement, your personal and professional life may overlap and you could end up compromising one or the other when having to make tough decisions.
Further, you may be tempted to give away shares in your company in exchange of legal or financial advice. In my experience, it is best to pay for such help as when you need it as it is questionable as to how much value these professions will add over the course of your whole business.
A successful shareholding team should work together to build a strong business with the right mix of strengths, personalities and skills. One person striving for their business alone can only achieve 100% effort whereas with a team of four ideally you should have 400% effort going into the same business. When this partnership goes wrong it can take a lot more effort and time to resolve – not only causing a lot of frustration in the process but also affecting business performance.
If you have already done the deal and the business is not moving in a positive direction, be ready to openly discuss and renegotiate terms before it is too late. If you do not, you may end up alienating some shareholders who may feel that their effort and the reward for their effort is being diluted amongst people not bringing the same value to the company. That’s a simple recipe for disaster. Have the strength to openly discuss and resolve these differences.
Having a team you can rely on is one of the most important things to consider when going into business; with this in mind pick your partners carefully.