Small Business Contrarian

STOP: Don't Give Up Equity

When you're starting a business you want to attract the best people. At the early stages you may have a big giant dream but you're probably not thinking five or ten years down the road.

When I first started in business my dad advised me to never give up equity. If you want to incentives for people, you can do it in other ways. (Incentives are important.) But unless your intention is to go public one day equity can become a headache.

Early in my career when I had no money it was tempting to say to someone, "Ill pay you half of what you need but I'll give you X% of the business." I can site dozens of people who I considering doing this with at the early stages of my business. I was in love with most of them and their ability. Most I hired anyway, without equity, and today three decades later only a couple are still working for me. People move on, people don't work out, sometimes people are bad news.

If I had given equity to these people I would have had to buy them out before they left. Many who promised to be superstars were not. Unless that equity had been performance based it would have been a disaster. Not only would I have to pay an attorney to unwind their equity, I'd have to pay to have the stock managed. Not a burden a small company needs.

Most of the people I would have given equity to at one time would not be people I want to have as share holders today. There are exceptions. I've been fortunate to have some brilliant people. But everyone moves on at some point and unless there is a liquidation event (sale or going public) you end up paying them back for their shares at current company value. Sometimes it happens when you can't afford to put out the cash even if your value is higher.

I've watch friends do it and regret it. One friend gave up 49% to someone who turned out to be a deadbeat. He went away but they never solved the stock issue. Years later when my friends company was valuable the guy showed up, took 49% of his business value and the cash out essentially killed his business because he could not afford to put out the cash, which he needed to run his business. He lost the lawsuit, had to put out the cash, which he borrowed against his company, and he had high legal fees. Ultimately it destroyed him and his business all because of his initial good intentions. They were great friends at the time but he gave equity to a guy who never pulled his weight. Big mistake.

Equity is great for companies with a fast path to going public, great for venture funded businesses, but in a small business environment where you intend to build, grow and operate the business its not the best idea.

STOP: Don't Take on Partners

Looking back at my early business ventures it was often me and a couple people sitting around, coming up with ideas and then saying "would'nt it be fun to go into business together?" Sounds fun working every day with your friends.

The problem is that friends are great as friends but they often make horrible business partners. Though there are many exceptions to this rule there is a high rate of failure among friends who become partners.

My best friend and I decided to create a business together. We were 50/50 partners and we started building the business. I did the sales and marketing and he was the product guy, though I also did some of the product work, which was consulting. Our business was booming. But there were issues. I would have clients call me and complain about him. He would have clients call him and complain about me. I  was not selling fast enough. I wanted to go in one direction and he wanted to go another. Those little issues turned into big issues. One day he came in and said, "I'm moving across the country." Clearly it would not work if we were not together so I had to go or we would not be together. He had made up his mind. The business ended and so did the friedship. Though it recovered a decade later, it was never the close friendship we each had.

The romance of working with friends daily is simply stupid. It rarely works well. An idea between two friends is often not good reason. A better way to approch it is to say, "lets not end our friendship by becoming partners. Either you start it or I'll start it, but lets not do it together. It won't end well."

I'm sure I'll hear from all the successful partnerships who prove me wrong. There are great exceptions. But if you must do a partnership than one of you (preferably you) needs controlling interest so decisions can be made. Joint decisions often result in bad decisions. Sometimes you will have vision you need to persue and you can be blocked by your partner.

I've been tempted over the years. Some people I almost partnered with went on to giant success. Others giant failure. Its hard to know. But if you can put the friendship aside ask yourself if you would hire this person for the role they are playing, and would it be worth 50% of your earnings? Usually not.

If you want to take on a partner, before doing it, suggest you and your spouses go on a trip around the world together and see how well you agree on where to visit, where to eat, what to spend your time on. Do it for a month and you'll quickly find out that maybe its not such a great idea to go into business together. In reality, you spend more time with your partner in business than your spouse. You have to agree on every decision together, whether to put the money back into the company or take it out (lots of battles over money), and the right strategic decisions.

My advice. Hang with your friends but don't make them your business partners.

 

STOP: Borrowing Money Is a No Win Trap

Business owners need money. Its no secret that cashflow and captial is the key to being able to get the things you need to run or grow your business.

Every small business I started was founded on an idea and then a sale. I'd sell the idea, see if there was interest, get a sale and then build the product. I never misrepresented that I had it, I always said, will you buy it and be my first customer. Someone always did. Though I did not know what I was doing at the time, I was funding my business through my own sales.

When I meet with Entrepreneurs for coaching the first thing I hear them say is that they need money. Why? I ask? They always tell me about the need for more people, more programmers, more equipment, more of something. Then I ask, "Would you go out of business if you don't get the money?" The answer is usually yes, then when I probe and ask if they could struggle a little longer and find a way to make it work, they usually say they could do it.

We have trained small business owners to think their business will be more successful if they can borrow money. Who has push this concept? People who lend money. Why? Because they end up making money on you or owning a piece of your business.

Sadly, most businesses that THINK they need money don't need it at all, or don't need as much. And when you get that money you end up being careless with it. I know, I've done it and so has every small business owner that borrows money. When you have money in the bank it changes your mind-set, you feel able to spend on things you would otherwise not buy.

What you really need as a business is income. When you borrow you have money to pay back. Though we all have this vision of how well things will go, a high percentage of business loans fail because things never happen as fast or as perfectly as we imagine them. We read about superstar success and imagne we're the next hot business start-up but sometimes we're not.

There is nothing that puts a damper on you faster than debt. It changes your mindset when you have the cash, and it makes you live in regret once you've spent it and that debt is hanging over your head.

Oh, and the worst part is that debt has strings. Usually its a personal guarantee. Suddenly your spouse is angry when you loose the house and your life is in disarray.

At a young age my dad gave me some sage business advice, which at the time I thought was foolish. But, he was right. NEVER EVER sign a personal guarantee. Never. No matter how much you are druling over the possible money you will get. I never have, ever. And in those anxious times when business is bad and I need money or a credit line and I decide to break my own rule and try to borrow, the personal guarantee always stops me. I have operated my business for decades without a loan or a personal guarantee. (Note: I did borrow some money from my dad one time when I got into a bind, and it backfired bigtime. More on that at another time.)

The strings that come with debt go beyond the personal guarantee. Loans can come with all kinds of strings in order to assure they get their money back, which can be as honorous as the bank taking control of your business, a seat on your board, even the ability to oust you and put someone competent in place. Be very careful what you sign. But even though those strings often don't exist, there is a banking relationship that can go south and a banker or family member or investor filing a suit against you or forcing you to do things you believe are best for your busienss.

I personally can't sleep knowing I have debt. I don't want to own anyone anything. Once time I started a venture funded business and raised millions. Suddenly I was answering to a board of directors and my business ended up being pushed in an entirely different direction than the original vision. Turns out my vision was invented later by someone else who made it hugely successful and the direction I was pushed in failed. Oh, and when I first raised the money I had 70% of the business and after additional rounds of funding I ended up with 2%. It killed my motivation, I became an employee and lost control.

The bottom line is that SALES=INCOME. INCOME is what you need to fund your business, not debt. Most people borrow before they have many sales or before they are good at selling. Most failures come because the business could not SELL the product. So its black and white to me. Sell something.

I have to admit that my business growth was slow. But, most of my business life I've lived without debt, without investors breathing down my neck, without having to look family members and friends in the eye about having lost their money (though there were some) and no one was directing me to do what they thought was best.

My philosophy? When you need cash, make a sale. It works. One time I wanted to hire this great sales guy because I was doing all the sales. At the time the cost to get his was $90,000, which I could not afford. So, I determined how much money I would need monthly to get him and how long it would take till he was paying for himself. I determined that I needed 180,000 in sales to pay for him.... 50% of it to pay for the product I'd be selling, 50% to pay for him. I then broke that out into a monthly figure. So I went out, worked like crazy and drumed by new business agreements totalling $15,000 a month. I assumed that he would start paying for himself after about 8 months but if I was wrong I had the cash. Then I hired him. It took about 11 months before he was paying for himself.

This is a simple process. Figure out what you need and make a sale, but make sure you cover the cost of what you're selling in the figure you need. I used this process my entire career and built my team one sale at a time. Everytime I needed a team member or a piece of equipment, I went out and made a sale.

At the end of the day my business is thriving. I have no debt. I have no strings. I have no one telling me what to do (other than customers, which I welcome.) Had I given up equity I'd be regretting it.

As a business owner the most important skill set must master is income generation. Making a sale. Now if your business requires debt to get into then this system might not work for you, though if you think about it, it can work for many businesses.

Ask yourself. Do I really need what I think I need? Can I get by without it? Can I make a sale to pay for it?

When operating your business you need to master SALES and CASH FLOW. You also need to think LONG TERM. Thinking short term you may think a little debt is ok because you know in your heart you will crush it. But if you fail you have strings and a debt to pay off, which makes your life more difficult. And its not right to walk away. If you think long term, not try to be in a hurry you'll end up owning 100% of your business, and you will have done things your way.

Borrowing money is important for some businesses but most businesses I consult really don't need it, they just have convinced themselves they need it. But, its a no win trap. Though my way is a contrarian way there are thousands of very wealthy people who mastered this technique. Your banker is your ability to sell. Stop borrowing and go sell your way to success.