18 TPE Part IV - Chapter 10-converted

Starting a business is like having a baby. You need to invest time, effort, and nurture it to make it successful. Giving away equity to partners can be risky, as it may lead to conflicts and differences in vision. Hiring employees and treating them well is a better option. VIPs, who seem valuable initially, often don't deliver. Ideas alone don't make money, but effort does. VCs and angels invest in businesses for profit, not as partners. They may take control if they don't like how things are going. It's better to consider seeking their investment once your business is already making millions in revenue. A fool and his equity are soon parted, me. So you have a brand new business that is not worth anything yet, right? Your company is far from generating revenue. You don't have a single client, let alone a phone system to receive calls. It's just a baby. So why not give your best friend some equity now? After all, it ain't worth nothing. If you have or plan to have a child, would you give a portion of your parental rights to your friend, your neighbor, or the doctor at the local hospital? I hope you're thinking, no freaking way. It's your kid, for God's sake. Your kid. Jeez. A child requires a tremendous amount of your time to feed, nurture, and train, and keep healthy so he'll stop puking on you. But watching your kid grow is more than worth it. Guess what, Chasey? Your business is your baby. While it doesn't look like much now, you'll be putting a tremendous amount of time, tears, and sweat into it. As with a baby, you will need to feed and nurture your business, keep it healthy, and teach it not to vomit on you. As your newborn business grows, it will slowly but surely turn into a strong, healthy young adult. It would be a shame for you to do all that grueling work only to be sharing the parental rights when the business starts hitting its stride. So don't do it. Don't give your baby away. Most partnerships fail. Some end in a bitter, emotional corporate divorce. Some end with stunted progress, and a few others end with a handshake and a smile. I can already hear your argument. If I'm the parent, wouldn't it be better to have a spouse to help me care for the baby? Wouldn't it be better to have someone to help change the diapers? I would say yes if you were really going to have a child. In that case, a good, solid partnership is critical, but you are starting a company, not having a real baby, so don't get married to equity partners. Growing a business and parenting have many similarities, but one of the biggest differentiators is that your business can hire many spouses to help you feed and grow the corporate baby. There are many ways to bring in extraordinary people and compensate them without sacrificing equity. Treating people well, as you would want to be treated, enables you to create situations where both you and the other guardians building the company are compensated in a way that does not include equity. Partners without equity. I don't care how close you are to the other person, how well you know her, or even if she's your twin. People are different. Differences are a good thing when it comes to building a company, but small differences can be big issues when multiple leaders are at the top. Different perceptions of risk. Launching a business is risky, no question. It requires serious head preparation, an enabling belief system, and a crystal clear vision. Danger lurks if you and your partners go in with different beliefs about the risks involved. Contrary beliefs are limiting and damaging. For example, one partner may be so skittish she calls it quits too early, and the other may be so bullheaded he becomes a dead man walking. Too much of a good thing. Variety is good when it comes to building a team, but you can't win with only quarterbacks. When you add the variable of another leader, the vision can be slightly different. The beliefs may vary, and the focus may go askew. As long as the company's progress is consistent with the collective partner's desires, things are good. But when things go off track, watch out. Egos can take over ethics, pissiness can kill passion, and selfishness can destroy success. Different Immutable Laws A lot of people go into business with someone they know simply because they know them and the path ahead seems less scary with a partner. Good acquaintanceship doesn't make for good partnership. For your business to succeed, you and your partner must share the same immutable laws and have complementary talents and strengths. Different Levels of Energy We all have varying levels of energy and opinions about our own energy level in comparison to those of others. One partner who happily works through the night may consider the other lazy for leaving work at dinner time. The partner leaving at 5 p.m. after all her work is done may consider her night owl partner inefficient and distracted. What may seem like a balance in the beginning may lead to serious conflict later on. Conflicting Vision A markedly different vision very often divides partners. Going in, everyone says he wants to have a multi-million dollar company, but as time passes complacency can kick in. The vision of a large company may be offset by the work demands of a growing business. When varying visions stop sharing a common past, problems arise and things can get nasty. As you build your company, your biggest investment will be your time and I can guarantee that no one in your business is going to invest as much time in your business as you, nor will anyone have the same impact as you. Your company may not look like much now, but it doesn't matter where you are now. All that matters is your prosperity plan, your destiny. How big do you envision your business becoming? When it achieves these goals, do you want to share the rewards with other equity partners even if they didn't work as hard as you or weren't as smart or didn't bring value to your business? If you give or sell equity to someone, you have to be absolutely convinced it will grow the company. In many cases, you keep half the company but end up doing triple the work. Triple? Yep. You'll do three times the work, partly because you have to spend time fixing problems and differences with other partners. At the early stages of starting your business, it's tempting to undervalue yourself and your company, particularly if it brings in people who show great initial value and expertise. But do you want them to be driving the train alongside you or riding in preferred seating? Watch out for VIPs, very inordinately paid specialists. Don't give away equity or lots of money to bring in VIPs. VIPs are perceived to be of tremendous value because they have big names or high credibility to your company or have key contacts or bring some other value to the table. More often than not, however, they don't deliver. It's simple. VIPs don't deliver because they don't have to. They receive the reward, money and equity, before doing anything. Think about it. Would you have started a business if you were already receiving the money, success, and the effect of what you wanted to achieve? Probably not. Know that for your business, you are the VIP. It's your blood, sweat, and tears, damn it. And for that, you should be rewarded, not some freeloading VIP. Ideas are worth the time spent on them. New business ideas are easy to think up and even easier to dream about. The next big thing is only a couple beers, a few friends, and 35 minutes away. And it's right there at the bar where the equity distribution is discussed. One third, all the way around, man. We're going to be rich. Another round of Milwaukee's Best, on me! If you are the schmo who then puts the majority of effort into getting the idea off the ground, you've just given away the farm. Ideas don't make money. Effort does. Some ideas require tremendous amounts of effort and time. Think cool invention, working prototype, patent, or salivating customer base. Add monumental effort and work hard, and your business may be worth something. Gauge the value of your idea on the effort, not on the idea alone. Angels and VCs suck, kinda. Let me preface this by telling you that I'm a little bitter here. I have dealt with VCs and angels, and I did not have a pretty experience. Not all angels, high net worth individuals who invest in businesses, are bad. And not all VCs, venture capitalists, suck. They did bring us Google, Starbucks, and other super successes, after all. But let's get real here. VCs and angels are putting money in your business as an investment. They fully want and expect to get a significant return, and fast. They're not philanthropists. They're in the business of making money. I'm not saying these are bad people, or even that there is no value in working with them. You just need to have absolute clarity about what their objective is. Have you ever bought stock in a public company? Maybe on the New York Stock Exchange or NASDAQ? What mattered to you most? That the stock went up, and quick, right? Your goal was to sell quickly for big gains, right? Did you care about the cohesiveness of the management team or employee morale? Were you concerned about the personal fiscal health of the top decision makers? Did you wonder if the president had enough time to make it to the family reunion that weekend? Hell no! The stuff probably never, ever even crossed your mind. Your goal was to invest, make good money, and get out. That is the behavior of 98% of the VCs and angels out there. While there are a few differences between VCs and angels, and a stock investment, one is significant. When you buy stock, there are thousands and thousands of other investors in there with you. Effectively, you spread your risk with others. You all want the company to succeed, but if it fails, you go down together. Angels and VCs invest with two or three others, not thousands. Hence, their risk is magnified. They are investing in a startup company, risky, and they are going it alone, or nearly alone, very risky. With this level of risk, VCs and angels have a serious interest in the success of the company. So they don't just give you money, sit back and watch. They often take control too. So, if you go the VC angel route, know that you are an investment, not a partner. And if they don't like how things are going, they will take control and not give it back. There is an appropriate time to consider seeking out VCs and angels though. And this is typically once you are already bringing in millions in revenue. At a certain point, your growth can be rapidly boosted through an injection of money. That's when you should consider this type of investor. I suggest that you approach angels after you are in the millions, and VCs when you are in the tens of millions. And at that point, you may be very happy with how things are going, and may even consider being your own angel. The right way to balance equity and partnering. Are you still convinced that you can't go it alone, that you will be more successful with the right partner? You may be right. It worked for Sergey Brin and Larry Page. Here are the right ways to choose a partner for your business. Rather than go in 50-50, let the partner who is performing at the highest level have the majority of the company. Performance-based equity distribution motivates both partners to work hard and creatively for the success of the company and rewards the partner that excels. Determine specific metrics and critical goals for the company's growth. These may include sales volume, billable hours worked, purchase savings, customer feedback, and products and services developed. Have at least three performance variables, but no more than five. Then, every quarter for the next two and a half years, review the achievements and split 10% of the equity. At the end of these 10 quarters, the entire 100% of the company equity will be assigned, and the partners will be fairly rewarded for their contribution to the overall success. It's a big deal to be small. Partner or not, funded or not, you will start small. This is a very, very big deal, and you can use it to grow big. Would you call Walmart an intimate experience? Not at all. It is sterile to say the least, and in my opinion, a little creepy. It seems like it ships in the same weird-looking, funky-smelling, sweatpants-wearing customers from store to store, but the prices are cheap. So I still go often and get out quickly. The megastores and megabusinesses have an important place in the business world, but they don't have the only place. It is a big deal being a small business. The world needs you. Actually, the world starves for you. The number-crunching megastore machine can't match the intimacy or nimbleness of a small business, nor its ability to make every single client feel important. This is your advantage in being small, and you need to exploit it big time. Not much to lose. Think about it. You have very little to lose. This is quite possibly your biggest advantage. If an idea has potential, you'll go for it because you have nothing to protect. The underdog. Everyone loves to root for the underdog. Take college football. The nation went crazy over Appalachian State's win over Michigan, except for Michigan fans, during the first week of the 2007-2008 season because the Appalachian State Mountaineers were big-time underdogs. The game was professionally commented on more than any other game in history. Leverage the fact that you're an underdog. People just can't help but root for you, and word gets out quickly when you pull out the win. Speed. You can move faster and more nimbly than the big guys. All the red tape, backstabbing, political games, and bureaucracy that occur at big corporations don't happen within a small company, especially when it's just you. You can make a decision in seconds that will take them days or weeks. You can be in, out, and invoiced before they even return a call. Use speed to your advantage. It matters. If you have 10 clients and you lose one, that's 10% of your business. If a megastore loses one, it doesn't care. It cares about the overall trend. As a nascent startup, you not only want to do what it takes to find and keep good clients, you have to do what it takes. Every client is a big deal, and you must make sure he feels like a big deal when he's doing business with you. If you can pull that off, clients will always choose you over the big guys. Intimacy. Building on the it matters concept, when you are small, you have the ability to know your clients very well. Some of them even become personal friends, and others will become key customers. All of your clients should be treated like best friends. Get to know them beyond business. What do they care about? What are they interested in? What do they need? Deep down inside, we all want to walk, just like Norm from Cheers, into a bar where everyone not only knows our name, they stop, look over, and welcome us in. That level of personal attention will keep them coming back. Break the rules. The big boys have been around the block so many times that they adhere to rules they no longer need. Some established industries get stuck in the mode of doing things a certain way just because they've always done it that way. A small, nimble competitor like you can identify the industry rules, take what you need, and then break the rest wide open. Throw out the way it has always been. Tim Ferriss, the author of The 4-Hour Workweek, won the Chinese National Kickboxing Championship by breaking the rules. Well, not really breaking the rules. He actually broke the expectations. He broke the tradition. On a dare, Tim decided to compete in the kickboxing championship. With only four weeks to prepare for the event, Tim was clearly at a disadvantage against competitors who had been in the league for years. He was facing opponents who had committed their lives to the sport. They were born to win. They were the big guys. Tim was the small guy and didn't have a chance, at least not without breaking, or in Tim's case, exploiting the rules. Rather than take on the impossible task of achieving the performance and experience levels of the masters, Tim hit the books. He studied the known and not-so-known rules of the league. It was here that he discovered the rule that would bring him victory. If he was able to throw a competitor out of the competition ring three times during a match, the competitor would be disqualified and the victory would go to Tim. This rule played exactly into Tim's talent, his natural strength in throwing things. This time, he just needed to throw people. The day of the championship, the masters bowed, boxed, and kicked people. Tim bowed, dodged, and threw people. Tim won. Tim Ferris is a toilet paper entrepreneur. Take action now. No more exercises, no more pondering, no more psyching yourself up. Your last task is to take one giant leap off the cliff and launch your business, if you haven't done so already. Show us what you're made of. Join the few, the proud, the toilet paper entrepreneurs.