As the brainchild of a start-up, it’s in your best interest to be one step ahead around decision making power and the effect new partnerships or investors could have on yours. If you don’t understand the legal authority given to each role player joining your business, your power can easily be diluted. This is overlooked by most start-ups, in favour of making tangible progress on product and sales.
In this article I will unpack how decisions are made in a company, who decides how to bring the business idea to life and what steps you should take to get there – all whilst maintaining your power as founder.
Company control – making sure you stay part of the process
Essentially, there are three groups with decision making power in a company. Each group has both special rights, and absolute limitations. Being completely clear on the rights and limitations of each group is perhaps a condition of your success, or even survival in your own company.
Group 1: Shareholders
The first shareholders are the founders of the business. They make a contribution to the business, usually in the form of cash or capital, effort, time or other valuable resources. Their reward is that they get a return on capital, as their shares grow in value and they receive dividends from the profits of the business. They have the right to appoint the custodians of the company: the directors.
Shareholders are consulted and have the final decision making rights on major decisions, influencing the value of the company. However, shareholders have no right to take part in the business of the company. They have no role in the operations, finance or other day to day business of the company. If this comes as a surprise to you, it’s probably because you are (like I was eight years ago) both shareholder, director and employee of the company. Read on.
Group 2: Directors
These are the custodians appointed by the shareholders. Carl Bates from Sirdar (a leading consultancy, focusing on company governance) once put it something like this: The shareholders provide the cash and set their expectations for a return on capital. Then they appoint directors and charge those directors with the task of building the road map, or “strategy”, for achieving that return on capital.
After building the strategy, the directors develop the practical steps that will result in its achievement. Then they monitor the company, which involves “fine tuning” monthly, quarterly and annual deliverables.
This is a big picture, conceptual role – directors don’t roll up their sleeves and descend onto the office floor, coding software, manufacturing car parts, or whatever the activity of the company is. They have the mandate of keeping a broader view. To see the wood for the trees, so to speak. Having a group of people who are not subjectively involved in the day to day work of a business is incredibly valuable. This is a reason why mentors or independent directors are so valuable.
Group 3: Employees
These are the sales people, the manufacturing or production people, the finance team, the HR, the digital marketing team – the people that take the practical day-to-day steps of creating a company (the same company that was funded by shareholders, conceived by directors and is now being set up and run by employees?)
Take note – this is where it becomes interesting and highly relevant for the archetypal client of our law firm: when starting up, the start-up client is all three of the above. She has the skills and capital, she develops the idea, she builds the product, leases the premises, hires the accountant and buys the milk and coffee every day. Sound familiar?
Although it would be great to have all three perspectives of the founder’s roles, this is usually not really necessary to kick things off. At the beginning stage of a business, it’s about making progress on the product, validating the business model, and finding the customers.
However, fast forward a few months and things will change radically as the founder brings on partners and investors. When this happens, additional people are involved in the decision making – and when THAT happens, who actually has the decision making power?
Who is really on top?
Looking at these three stakeholders, you will appreciate a bizarre inverse reality. The most “junior” members of the category probably think of themselves as most valuable, yet they have the least power over the bigger picture.
Employees are the face of the company, but they have no say at all when it comes to the biggest decisions of strategy, funding or even the sale of the company.
Directors are charged with building the strategy and making the essential decisions around the implementation (i.e. signing off all contracts, employing new staff etc.), yet they are appointed and can be dismissed by shareholders.
Shareholders have no employment role and have a limited say in the overall strategy – except if it will affect the overall value of their shares. That said, they are the only ones that can authorise major decisions such as taking on more funding, selling the business, merging the business, etc.
The danger then? Finding yourself in a situation where you feel that you are building up the business as an employee, but your power as shareholder and director have been diluted by other partners. This is why your shareholders’ agreement and MOI (memorandum of incorporation) is so critical – it clearly sets out these rights with no room for confusion. In essence, this is where a start-up lawyer plays a key role and can directly contribute to the value of your stake in the business.
Keep an eye out for my next article on funding your business and bringing on new shareholders. Here we’ll take an even deeper dive into how to best navigate your way around organisational growth and restructuring, without losing your power and voice.
Put On Your Wellies: It’s Time To Wade Into Risk
Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…
You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.
Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.
It is also unrealistic to assume that it isn’t worth taking this risk.
There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…
Step 01: Do your research
No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.
Step 02: Understand the costs
Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.
A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.
Step 03: Know when to walk away
As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.
You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.
Mind The Gap
The entrepreneur’s guide to finding the gaps and building the right solutions.
Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.
Here are five…
It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.
2. Look for pain
Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.
Be the Panado that fixes these pains.
This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.
4. Luck needs courage
You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.
Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.
5. Pay attention
This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.
5 Things To Know About Your “Toddler” Business
As you navigate this new toddler phase of your business, here are five things to bear in mind.
Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.
Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”
As you navigate this new toddler phase of your business, here are five things to bear in mind:
1. This too shall pass
Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.
2. Appreciate what this phase brings
The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.
3. Establish boundaries
Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.
4. Take a break
Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.
5. Give it space to make mistakes
While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.
During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.
While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.