Tag Archives: starting a business

Don’t Give Away Ownership As If it Were Just Credit. Please.

Family Business, Starting a Business, , , ,

Please, entrepreneurs, this is important. Please don’t give away ownership in your startup, ever, except to partners who offer permanent help and value to the business, and will be there forever. That’s team members working the business, investors, or strategic partners with long-term commitments you can’t live without. Separate ownership, which is critical, and should never be given away easily; from credit and kind words, which are easy to give away.  

I’ve seen this so many times. People give percentages away to their lawyers, their graphic artists, their friends, and their relatives, but for no good reason. Then what happens is if the business makes it a year or two into actual business, suddenly those once-naive founders realize they are doing business with partners, who own part of their company, who don’t work, don’t care, criticize, and drag the decision-making processes. Pay the fees. Don’t save starting costs by giving the business away. 

Giving a piece of your new business isn’t liking buying a round of drinks at a table, but sometimes people treat that as if it were. But the truth is that you only have 100 percentage points to give away. The best ownership structure is 100 percent you. If however you need resources, key people and investment, then you need those percentage points to trade them for absolutely critical long-term relationships, or money. Not to make your cousin happy. Not to save on attorney fees. 

I recently dealt with an entrepreneur who was grateful for a ton of help, including written content, received from a good friend. He was trying to figure out how much of the company to give that friend as a reward. But the friend wasn’t going to be involved in the future, had taken another job, and wasn’t even asking. 

Don’t give her a piece of your business, I said. Pay her fairly. And if you can’t afford to pay her now, write up a bonus or a percent of sales that you’ll give later if you make the sales. Everybody wins. And you own your whole company. You don’t give away a piece of it in gratitude for somebody who won’t be a permanent part of it. He took my advice and gave her money now and a promise of money later, but not ownership. Both sides of that were delighted with that arrangement. 

What brings this to mind is this question I received over the weekend in my ask-me form on my timberry.com website: 

I’m 19. I have been avidly working through ideas for an amazing product. I’ve gone through lots and I eventually stumbled upon one that my mom loves so much that she wants to be a part of my business. Great news, but my issue now is that I’m willing to list my mom as a founder and now she wants me to add my stepfather as a founder as well. I feel like people are fishing for credit and titles that they have not yet earned. I’m not willing to appease anyone for the sake of it. How can I build a successful business alongside my family? 

Kid, you’ve got this one right and your mom and stepdad have it wrong. Read the post here. Family or not, ownership in your business is about actual contributions to your business. You say you’re “willing to list” your mom as a founder. But this isn’t like the acknowledgements at the beginning of a book; this is ownership in the business. List, sure; stocks and shares, no. 

Titles and credits are nice but ownership should be reserved for people who are going to actively contribute either money or long-term help. List them as advisors and give them credit on your website but give them ownership in proportion to the work, contribution, or money. This is business.  

(Image: bigstockphoto.com)

4 Questions To Ask Before Starting A Business

Entrepreneurship, Starting a Business,

(This post is taken from my most recent column in the Eugene Register-Guard’s Blue Chip magazine)

Suppose you’ve been wanting to start a business; or maybe you’ve lost a job and you’re thinking that starting a new business might be easier than finding a new job (it’s not that unrealistic, by the way; it does happen sometimes). Is now a good time? Or is now such a horrible time that you should avoid it at all cost? I’d like to suggest some questions that might help you decide.

I’ve done these lists before, but these are tough times, so I want to start with the hard reality of it:

1. Do you have a choice?

This very down year is already showing signs of a surge in the so-called “pushed” entrepreneur. You’re out of a job like millions of others, you look for a new job, but you don’t find one. In frustration, you start your own business. It happens a lot.

And, if that’s the case, plan carefully, go slowly, and communicate well with your loved ones. Don’t risk relationships for business. Spouses, partners, and significant others need to know that what happens next isn’t you chasing dreams. It’s hard reality.

2. Will people buy what I want to sell?

It might seem obvious, but just because you want to do it doesn’t mean anybody else wants to pay you for it. Business isn’t really about doing what you love — unless, that is, people will pay you to do it, so you can meet costs and make a living. People pursue hobbies, sometimes, thinking that because they love it other people will pay for it.

Being original helps, but it’s no guarantee. Sometimes, when you see there’s no competition, what’s really happening is there is no business, because there aren’t enough customers.

Being completely unoriginal doesn’t necessarily hurt. Very few businesses actually start with a great new idea. Take restaurants, graphic artists, car repairs, or management consulting, just to name a few: there are lots of them around, they already exist, but you can still make it if you do a good job, give your customers value, and keep showing up.

This question leads to a lot of very important business planning issues, like target marketing, and business strategy, and the month-by-month sales forecast. But first, take a step back, and give yourself an honest answer. Will people buy it? Then fill in the details.

3. How much will it cost?

You can’t get around this one, you have to be able to make reasonable estimates on what it’s going to cost you to get started, and then, after you’re started, what it’s going to cost you to stay in business.

The math isn’t hard by itself. Your starting costs are essentially two simple lists: a list of expenses and a list of required assets. Expenses are checks you write before starting for tax-deductible items like fixing the place up, establishing the legal entity, designing a website and so on. Assets are checks you write for things you have to own to do business: chairs, tables, cars, and trucks. And yes, there is a trick question hidden there among the assets — how much money do you have to have stashed away to cover your spending during the early lean period of the business, before sales catches up.

So that last question, the one about the cash you’ll need, means more simple math and reasonable estimates. Here again, you might not like it (to be honest, I do; but that’s just me), but the math is simple. Make a list of 12 months and write out your cash coming in, month by month, and the cash flowing out, month by month. And then add up how much cash you need to cover the difference.

As you do this, working out your numbers, you’re going to discover that the only answer that works for you is your own answer. If you’re lucky, you’ll have a lot of good input from people around you who have had some experience. Guides are nice. But no business is exactly like yours, and you don’t have to search the world to find the right numbers. You’ll never find them. You have to estimate for yourself. Your estimate will depend on who you are, what you want your business to be, your strategy, your specific angle, and so on.

Take, for example, the restaurant business. You can be the high-end restaurant that offers gourmet meals to a select few, or the soup cart on the corner by the university. It all depends on you and the choices you make.

4. Do you have a plan?

What happens next depends on your answers to the sales and spending question above. It’s about filtering the opportunities from the ideas. Ideas are a dime a dozen, worth nothing, common. Opportunities are when you have an idea that will work, plus the resources to get it going.

If the numbers don’t seem to work, that’s discouraging. Can you scale down the idea to match your resources, and still have a go at it? Don’t kid yourself on one important point: some businesses scale easily to a reachable level. You focus on a part of it, and watch the spending, and, maybe, take it slowly. Other businesses don’t work in parts or pieces.

If the numbers would work, but only on a scale larger than your resources, don’t just start the business regardless. Find out how and where to look for investors. Do it right, or not at all. Finding investors is a tough path to take, but lots of good businesses go through it. And the good news is that if you need investors and none are willing, then you’ve dodged a bullet. That wasn’t a business you would have wanted to start.

And if the numbers do seem to work, and you think you do have an opportunity, then you’re well on the way to having your business plan.

Flesh out your understanding of the market, particularly who is and who isn’t in your market, and why they buy from you  — what they get out of it, not just what they buy, but the benefits. Just to give you an example, people who buy drills don’t want drills; they want holes. Think about how your new business will spread, what people will say about it, and to whom — that’s marketing. You can also think of marketing as getting people to know, like, and trust you.

Don’t worry about whether the plan exists as a document printed out somewhere. You’ll want that if you need outside investment or a bank loan. Keep it on your computer. But do make sure you have a plan, and, as soon as you actually get started, make sure you review that plan every month. Your plan will be wrong — they all are — but it will become the first draft of the revised plan that will be better.