In my first column, I noted that in my law practice representing business owners and my experience running businesses, it seems that entrepreneurs tend to lament, or feel sorrow or regret for, the following:
- Focus. Pursuing new ideas to the detriment of the core business.
- Work/Life. Missing out on real life while pursuing business passion.
- Employees. Inability to find great help and keep them.
- Partners. Challenges in finding or maintaining good business partners.
- Money. Inability to find necessary financing for growth or survival.
- Burnout. When one morning you just can’t do it anymore.
- Boredom. When there’s not much more to build.
Founding Partners. When you start a business with someone else at your side, it is difficult to determine how to divide the pie, how decisions will be made, what happens if one of you leaves, and so on. Be sure that you really need the other person, because if things go as you hope, and the other person is replaceable, you will provide a very significant windfall for the privilege. Here's one hint: if you have difficult issues going in, that's probably a sign of trouble ahead.
Investor Partners. Assuming you want and can find investors (more on this in the next column), they tend to be either friends and family, angel investors, venture capital or private equity firms, or, if you are a public company, so called PIPE (private investment in public equity) investors, which tend to be hedge funds.
Friends and family and PIPE investors tend to be the least interested in having a say in how the company is run. But they also usually do not offer meaningful assistance and guidance, which is more common with angels, venture capital, and private equity investors. Of course, with guidance comes involvement. One client lamented his frustration at his investor partner by telling me, "I already have a Mom. I don't need another." Another said, "It wasn't until it was too late that I realized they could throw me out of my own company." Others appreciate the value that these investors add. Be sure you understand what you are getting into when you bring these sorts of investors in.
Rainmaking Partners. Rainmaker partners are unique in that their main job is to produce revenue for the company. It is a tricky decision as to whether to grant someone like this ownership in the business. Yes, it will incentivize them, but it will also give them more of a say in things. Sometimes, however, that is what it takes to keep someone. Just make sure you can always outvote them, though realize that some legal rights attach to being a shareholder.
Another choice: so-called "phantom stock." Here you have a contract with the rainmaker promising financial rewards, as if they were a shareholder, if an event such as a sale of the company or going public occurs. But they don't own stock--they don't co-own the company--and if they leave the company, they generally lose the phantom stock.
A client of mine granted stock options in his private company. The option could be exercised only upon a liquidity event (such as a sale). Plus, real money had to be paid (or credited) in order to exercise the option, solving a major tax problem relating to granting stock as compensation. Additionally, the option granted no shareholder rights, and was terminable if the holder left the company. It also vested over the time they were there. When the company was ultimately sold for $14 million, four option holders each took home close to $1 million. Two of them told me they would have long ago left the company, except that they were waiting for this payoff. Ah hah--it works!
Worker Bee Partners. And what of the lowly worker bees? Won’t they happily slave away for a good salary and an occasional pat on the back? Actually, most entrepreneurs improperly downplay the importance of the folks who implement things, assuming incorrectly they are basically fungible and that rainmaking is more important. As we discussed in the last column, getting and keeping good people is not easy.
In fact, no one appreciates "a piece of the business" more than that worker bee. I sometimes offer valued service attorneys in my firm a percentage of the business, in addition to their regular salary. And it is easier to negotiate terms, as they are likely to be thrilled just to be offered ownership. I’ve seen offers phantom stock, stock options, or stock with no voting rights, and they are all tend to be terminable if they leave.
Whenever you take in a partner, remember that you must run the business cleanly, without creating the “piggy bank” that entrepreneurial companies sometimes become for the founder. Because while you will always be the founder of the company you started, once you take on someone as any of these four types of partners, you are no longer truly its sole owner.
Next time: the challenge of obtaining necessary financing to keep your business going.
David N. Feldman, founding partner of Feldman Weinstein & Smith, is the author of Reverse Mergers and blogs at Reverse Merger & SPAC Blog. He can be reached at dfeldman@fwsllp.com.
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