- You are a team as you start. There are
already two, three, four or even five of you. It's unusual to start with teams
of more than three, but it does happen, although it's hard to make things work
with several owners.
- Don't give shares of your company to your friend who came up with the idea over drinks, while you were camping, after class or during lunch at work. Ideas have no value. If you build the company, it's yours. Don't apologise. Companies need their ownership as a strong foundation; they can't spread it around to people who had ideas. If they wanted to have a company, they should have done it, not just talked about it.
- Don't give shares to people who have helped you. If they really helped you, reciprocate and help them in return. Buy from them. Recommend them. Invite them to lunch or dinner. Don't let professionals do professional services for you without specifying their billing rates ahead of time, and then pay your bills.
Partnerships
Don't Give Away Shareholding Too Easily
Unfortunately, you can't always retain full ownership of your company. If that's the case, here are some potential hazards to watch out for.
By Tim Berry
The best way to own a company is to own it fully. You started it, you own it, and you run it. You don't have to decide anything by majority rules. You bring in others only for good reasons – and reluctantly. There are a few good reasons to expand ownership:
Don't
Give Away Your Business
If your case doesn't fall into one of those three scenarios, you probably don't want to share your company. Don't let myth, manipulations or relationships get in the way of this cold truth. Let me make some specific recommendations based on frequently asked questions:
If you have done either of these things, you're in dangerous territory. You should know that companies with more than one founder who aren't crystal clear from the very beginning about who owns what and how much are almost certain to end up with ugly and divisive fights over ownership. You must never assume that your partners and team members understand that you own the majority because you did something or paid a certain amount. That's deadly.
Write it down, early on, before there's real money involved, while you're still talking. The idea is worth nothing; the money involved is worth a lot; and the work involved – so-called "sweat equity" – ought to be converted into money immediately. If you work for free to start a company, make sure your team members agree on how much your work is worth, by hour, day, week or month, and when it's going to be paid. Or, if it's to be converted to ownership, determine at what rate and when and according to what document. These things not only have to be talked about; they have to be written down and signed.
Unfortunately, there's no formula for determining how much each founder of a small business owns. There's some mix of work, money, know-how, experience, equipment already owned and, maybe, the idea. You have to agree on what's fair or you're doomed.
In these cases, most companies end up managing this as shares, like shares of stock. When founding the legal entity, the lawyer formalises how many total shares there will be and how many shares each founder owns. There's a lot of legal weight to that, so pay attention.
If you need serious outside investment, then all bets are off. Buckle your seat belts and get advisors you trust who have done it before. Expect to see a lot of shares going in a lot of different directions. When you need to go back and get more investment, everybody's ownership gets diluted. Founders of companies that go public often end up having surprisingly small shares in the final company.
If you aren't in any of the first three categories I mentioned, use your savings or borrow the money.
Published 25 October 2009 | Editorial Disclaimer
© Entrepreneur Media SA (Pty) Ltd / Smart Business Solution (Pty) Ltd. All rights reserved.
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