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Don’t Give Away Shareholding Too Easily

Unfortunately, you can’t always retain full ownership of your company. If it comes to selling shares, here are some potential hazards to watch out for.

Tim Berry

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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:

  1. 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.
  2. You can’t get the critical essential knowledge and experience you need without creating a team. In addition, you can’t get a few, select others to join you without giving them ownership. This situation is quite common, but it’s also about as safe and steady as a minefield. Go very carefully and expect a lot of problems.
  3. You can’t start your business without outside money. This is very common. If this is the case, create a good business plan and consider start-up costs, initial cash flow and critical break-even points carefully. If you need outside investment, you’re stuck with that reality. Outside investment almost always means you don’t really own your company. There are exceptions, like very small investments, but those instances are rare.

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:

  • 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.

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.

Tim Berry is the founder of Palo Alto Software, a co-founder of Borland International, and a recognised expert in business planning. He makes several notable appearances in Fire in the Valley, Swaine and Freiberger's classic history of the PC industry, and is the originator of plan-as-you-go business planning. He has an MBA from Stanford and degrees with honours from the University of Oregon and the University of Notre Dame.

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Partnerships

The Whats And The Whys Of Creating A Successful Business Partnership

Partnerships can break businesses. They can also make them fly. How can you ensure your partnerships serve all parties and safeguard the company’s vision?

Grant Field

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One of the first businesses I started was a high-school DJ-ing business with my brother. We were going to ride the party wave to untold success. Because I had known my brother all my life, I just assumed that we would be on the same page in terms of the future of our little business, and I didn’t bother to check whether we had the same long-term vision.

When the money started coming in, he wanted to invest the earnings, while I wanted to plough them back into the business. Each of us had a distinct idea about an end goal. I wanted us to be a leading DJ company on the South African event scene. He wanted to preserve the capital. Both of these were noble pursuits, but we neglected to ensure that we were on the same page when we first started out.

The “why” really does matter

Right there is the first lesson that anyone should learn when considering a partnership – you need to agree on the “why”. Simon Sinek wrote that great book, “Start With Why”, which encourages people to begin by finding their purpose. In a business partnership, if your whys aren’t the same, if you don’t have the same fundamental reasons to do what you’re doing, your business isn’t going to fly.

As we all know, business can get tough – all efforts must push towards the same end-point to enhance your chances of success.

What?

If you’ve ticked the “why” box, the next thing to consider is the “what?” What are you and your partner each bringing to the table? When the skills sets are very different, it can be hard to understand value… which can result in resentment on both sides.

For example, if you are an engineer who has built an amazing platform, but you’re just not a people person, you could establish a partnership with a business development expert with loads of connections. From one angle, it might appear that your new partner spends each night having expensive dinners, until he lands the contract that provides your platform with national exposure and gives your business the first step into true operation.

There’s no way to put an actual value to the contribution that you’ve each made, but the business would be nothing without both of your efforts.

Once you’ve defined what your business needs, it’s a process of accepting that even if a different skills set cannot match the blood, sweat, and tears that you have invested in the business, it can still contribute exceptional value to your bottom line.

Partnerships in practice

Even established businesses can investigate partnerships in order to evolve. At Fedgroup, we’ve engaged in in three active partnerships to allow us to innovate in new, future-critical spaces.

Our Impact Farming venture was perfected as a product from a tech and accounting perspective, but would never have made it to market without the deep expertise of our partner Suraj Lallchand in the sustainable agriculture and agritech world.

We have also partnered with the machine learning and AI guru, Marco Cerutti and his company DragonFlower, clearly recognising that this technology is critical to Fedgroup’s sustainability, and further recognising that we simply didn’t have the skills to make fruitful contributions in this space.

Another example is our Internet of Things partner, Techsitter. Michael Stofberg, the head of Techsitter, has allowed us to enter this market with a deep skills set and vast knowledge that we would never have gained in-house in time to meet demand.

A leap of faith

The funny thing about all of this is that my brother and I are still the same people we were in high school, and both of us are using our particular approaches to the benefit of the companies we run. I still want to use my profits to reinvest in the business and grow, whereas his successful property portfolio investment company, Fieldspace, ensures capital preservation and growth.

In all the partnerships I’ve mentioned, there was a meeting of minds. There was a common why, and a complementary what, but in the end when you’ve ticked all the boxes, any partnership is a leap of faith, and sometimes you just have to take it.

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Success Fuelled By Partnership

Property Point, the Department of Small Business Development (DSBD) along with the Small Enterprise Development Agency (SEDA) have joined forces to drive market access to a legion of high potential small black-owned businesses.

Property Point

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When SEDA invited Property Point to apply for funding through their incubation fund structure, the pilot project became a game-changing partnership. The aim of the project is to provide incubation funding of R6-7million annually over three years. The Enterprise Incubation Programme (EIP) under the Department of Small Business Development awarded Property Point funding of R5 million for a 12-month programme to incubate 15 businesses.

“The goal of the collaboration was to drive market access to a cohort of high potential small black businesses,” says Desigan Chetty, Head of Operations at Property. “Point Property Point’s demand led-approach to ESD suited DSBD’s objectives to ensure that businesses are able to access markets after going through a capacity building programme.

“Property Point’s objective is to establish a strategic relationship with government to assist in contributing to the sustainability of small businesses, reducing dependency and ensuring that businesses are enabled to competitively access market opportunities,” he explains.

Access to markets, job creation, and sustainable small business growth

The major objective was to access markets, ensure job creation and sustainable growth of small businesses. Each business was taken through a diagnostic assessment and a bespoke business development map was produced.

Related: Public Private Partnerships Can Work For Entrepreneurs

“One-on-one mentorship was a successful tool to align the objectives of the owners as well as the businesses,” adds Desigan. “In addition, the focus was on profiling the businesses, enabling them to access markets through a solid sales pipeline process, acquiring machinery to increase operational capacity and also accessing technical certifications which are often a barrier to opportunities.”

The power of partnership

The biggest success story would be that Property Point has managed to exceed all expectations of DSBD, according to Khutjo Langa, Property Point’s Monitoring and Evaluation Manager.

“The impact targets were achieved in the first quarter and we have been pushing the boundaries to increase the ROI of the funding. We have added one more business to the initial set target of 15 businesses because we saw a need and a perfect fit for that business to benefit from this partnership.”

Khutjo believes that there is certainly a need for collaborations of this nature, “especially now that we have seen the results that can be achieved if things are done correctly. South Africa needs both private and public to work together to solve the ills of our country. These kinds of collaborations allow easy flow of resources and accountability, thus ensuring that everyone does what is expected of them.”

Working with the DSBD

The small businesses that are part of the DSBD intake will form part of the Property Point alumni network and we will still maintain contact through our monthly Entrepreneurship To The Point networking engagements.

Related: 4 Black-Owned Businesses Participating in This Enterprise Development Programme That Are Growing – Fast

“The DSBD team was supportive and provided oversight to ensure that programme objectives were met,” says Desigan. “The Director General, Edith Vries, attended the launch of the programme and engaged with each of the 16 businesses on the programme individually.”

“We have learned a lot from this engagement,” says Khutjo. “We were stretched but proved that our ten years of existence and proven track record qualifies us to be able to take on such projects and succeed.”

Bradley Kodi, Programme Manager at Property Point agrees. “The experience has been amazing thus far, by no means easy, but a beneficial relationship of interchangeable learning between both organisations,” says Bradley. “I strongly believe this public-private partnership can be considered a success – our impact speaks for itself.”

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Partnerships

Alan Knott-Craig Answers: How To Find Partners And Navigate The Partnership Territory

Most businesses are built on some form of partnership, from co-founders to investment deals. Here’s how to find partners and navigate partnership territory.

Alan Knott-Craig

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How do you find the right partners? — Johnny

The best way to find partners is to make it easy for them to find you. Speak at conferences, write a blog, write books, do media interviews, make it easy for people to notice you. With some luck someone will approach you and voila, you’ll have a potential partner. The real challenge is knowing whether they are the right partner.

The only way you will find the right partner is if you are totally honest about yourself. The only way you can be totally honest about yourself is to know yourself.

To know yourself, you need to take risks. Lots of risks. Fall in love, start businesses, travel, meet new people, do public speeches. Keep taking risks. Sometimes you’ll win, most times you’ll fail.

It’s in failure that you’ll find out how you respond to setbacks, what is important to you, what type of people you gel with. One of the biggest risks you’ll take is choosing a business partner. If you make a mistake, it’s painful, but you then know more about yourself and will find it easier to find the right partner next time. Take risks.

Related: Alan Knott-Craig Answers: How To Build A Debt-Free Business

How do I discipline a senior executive in my business? We’ve been partners for over two years, he’s helped me enormously, but he recently crossed a line with one of our staff members and I’m not sure how to handle the situation. — Busi

Start with having a disciplinary code and disciplinary process that describes the steps to be taken in the event of an employee contravening the code.

You then need to call in your partner, have a witness present, and get his side of the story. If the issue can be explained away, problem solved.

If not, you have to follow your disciplinary process to the T. If anything, you must be overly strict. You must over-react.

You have to show the rest of your staff that no one is above the law. If you don’t, don’t be surprised if your staff become demoralised and disrespect you and your disciplinary code.

Related: Alan Knott-Craig Answers Your Questions On Money And Partners

I’m a CEO of a small business. We’ve recently had some HR issues. What’s the right response to gender or racial discrimination in the office?  — Vusiswa

No company in South Africa can tolerate gender or racial discrimination. Immediately start a disciplinary process, act firmly and publicly. Make an example of the situation. Draw a line far away from anything that could be construed as offensive, and make sure your entire team knows where that line is.

The first offenders should be used as public examples. Tough luck for them, but the best way to save others from doing the wrong thing is to over-punish the first offender.

I’m losing the confidence of my investors. What do I do? — Belinda

There are a couple of reasons for losing investor confidence:

  1. They think you’re incompetent. Only you know whether that is true. If true, there is no escaping this truth. Your only option is to find someone else to run your business. That action will rebuild investor confidence.
  2. They think you’re a liar. If you’re a liar, you will eventually be caught out. Investors will forgive incompetence, but they’ll never forgive fraud.
  3. You are not delivering on the promises you made. This doesn’t necessarily mean you are incompetent. It means you over-promised. The solution is simple: Stop over-promising. If you think you’ll do 20% sales growth, promise 10%. Get into the habit of giving yourself a margin of error. If you keep your promises, your investors will back you.

 


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