Equity - to give or not to give?

[superleggera]

<div class="bbWrapper">School of thought #1: (Felix Dennis) - Retain equity as much as possible, ideally 100%. &quot;... equity is worth fighting for, tooth and claw. It&#039;s worth suing for.&quot;<br /> <br /> School of thought #2: (Dan Pena) - Give away generously so that you can leverage others better in terms of their effort, money and networks.<br /> <br /> Your thoughts?</div>

 

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[77startup]

<div class="bbWrapper">I&#039;m in school of thought number 2. Besides MJ I don&#039;t know any successful people who became that way solo.</div>

 

[superleggera]

<div class="bbWrapper">I&#039;m inclined to &quot;#2&quot; as well... but I&#039;ve tried working with partners in the past but it didn&#039;t work out (low commitment issues, mostly). My worst nightmare is to work late nights and build a successful company only to share half of it eventually to a partner who&#039;s asleep on the wheel.</div>

 

[Darkside]

<div class="bbWrapper"><blockquote data-attributes="" data-quote="77startup" data-source="post: 174449" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=174449" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-174449">77startup said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> I&#039;m in school of thought number 2. Besides MJ I don&#039;t know any successful people who became that way solo. </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote> <br /> <br /> <br /> Felix Dennis&#039; method of not sharing equity isn&#039;t meant for first time entrepreneurs. Felix Dennis recognizes that for people who start out with nothing, their best bet at financing their business is to give away equity, but that doesn&#039;t mean that you should give away too much; negotiate well so that you can retain as high a percentage as possible.<br /> <br /> However, Dennis is firmly against giving away equity once you already become wealthy and want to start other businesses. Why give up 25% of your company for 1 million in financing when you could easily put that million into your business yourself and retain 100% equity. See how that makes sense if it&#039;s your 2nd or 3rd business and you&#039;ve already become wealthy?<br /> <br /> Robert Herjavec makes a similar point on this episode of Shark Tank at the 6:10 mark:<br /> <br /> <br /> [video=youtube;SOSfMzwA5C0]http://www.youtube.com/watch?v=SOSfMzwA5C0&amp;feature=related[/video]</div>

 

[77startup]

<div class="bbWrapper">Good point darkside! I think it might just be a personal preference of mine. I feel a lot safer knowing there are many people with my interests as their interests.<br /> <br /> Besides part of the fun of success is making other people rich in the process. I mean what&#039;s the point of being awesome without a crew of people constantly reminding you just how awesome you are.</div>

 

[Darkside]

<div class="bbWrapper"><blockquote data-attributes="" data-quote="77startup" data-source="post: 174475" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=174475" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-174475">77startup said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> Good point darkside! I think it might just be a personal preference of mine. I feel a lot safer knowing there are many people with my interests as their interests. </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote><br /> <br /> Their interests aren&#039;t your interests. They want to make as much money as they possibly can. It doesn&#039;t matter to them if you make money. If they could manage to get 100% control of the company from you and pay you a salary to work for them or fire you, they would do it; that way when they either sell the company or go public, they get 100% of the rewards. <br /> <br /> <script class="js-extraPhrases" type="application/json"> { "lightbox_close": "Close", "lightbox_next": "Next", "lightbox_previous": "Previous", "lightbox_error": "The requested content cannot be loaded. Please try again later.", "lightbox_start_slideshow": "Start slideshow", "lightbox_stop_slideshow": "Stop slideshow", "lightbox_full_screen": "Full screen", "lightbox_thumbnails": "Thumbnails", "lightbox_download": "Download", "lightbox_share": "Share", "lightbox_zoom": "Zoom", "lightbox_new_window": "New window", "lightbox_toggle_sidebar": "Toggle sidebar" } </script> <div class="bbImageWrapper js-lbImage" title="j2.jpg" data-src="/community/proxy.php?image=http%3A%2F%2Ftctechcrunch.files.wordpress.com%2F2010%2F04%2Fj2.jpg%3Fw%3D300%26h%3D398&amp;hash=15cbb511144aa65b9504d6799f57520f" data-lb-sidebar-href="" data-lb-caption-extra-html="" data-single-image="1"> <img src="/community/proxy.php?image=http%3A%2F%2Ftctechcrunch.files.wordpress.com%2F2010%2F04%2Fj2.jpg%3Fw%3D300%26h%3D398&amp;hash=15cbb511144aa65b9504d6799f57520f" data-url="http://tctechcrunch.files.wordpress.com/2010/04/j2.jpg?w=300&amp;h=398" class="bbImage" data-zoom-target="1" style="" alt="j2.jpg" title="" width="" height="" loading="lazy" /> </div> <div class="bbImageWrapper js-lbImage" title="steve-jobs.jpg" data-src="/community/proxy.php?image=http%3A%2F%2Fwww.daemonsbooks.com%2Fwp-content%2Fuploads%2F2011%2F04%2Fsteve-jobs.jpg&amp;hash=309b04626d8f8d389ad9bc2c73e5dd63" data-lb-sidebar-href="" data-lb-caption-extra-html="" data-single-image="1"> <img src="/community/proxy.php?image=http%3A%2F%2Fwww.daemonsbooks.com%2Fwp-content%2Fuploads%2F2011%2F04%2Fsteve-jobs.jpg&amp;hash=309b04626d8f8d389ad9bc2c73e5dd63" data-url="http://www.daemonsbooks.com/wp-content/uploads/2011/04/steve-jobs.jpg" class="bbImage" data-zoom-target="1" style="" alt="steve-jobs.jpg" title="" width="" height="" loading="lazy" /> </div><br /> <br /> Look at what happened to Steve Jobs. He co-founded Apple and made it into a successful company. But, because he didn&#039;t own a majority of the shares, the board of directors fired him as CEO. He was fired from the company he created! Did they care about Steve Jobs&#039; interests? <br /> <br /> Clearly, they didn&#039;t care about him and their collective decision turned out to be one of the worst in the history of business as Apple collapsed after Steve Jobs left and now that he&#039;s back, it&#039;s the most successful technology company in the world and it&#039;s market cap is second only to Exxon.<br /> <br /> The more rounds of financing you have to do, the more percentage of your company you will lose. So, if you get to the point where you&#039;re doing series C and D rounds, you&#039;ve probably given up over 80% of your company and that&#039;s assuming you founded it by yourself; if you had co-founders then you&#039;re down to less than 10%. <br /> <br /> Let&#039;s assume for a second that you started a company and took financing. You took many rounds of financing and ended up with 5% of equity in the end. Your company went on to sell for 300 million dollars. All your friends and family think that you&#039;ve made 300 million dollars. However, you know better. The truth is that your 5% stake means that you only get 15 million out of the 300 million. <br /> <br /> That&#039;s a lot of money, but compared to how much your company sold for it&#039;s peanuts. The investors walk away with 285 million of the money and you are stuck feeling like you got ripped off. Wouldn&#039;t it be better instead to take less money from investors, own about 80% of your company and sell for 100 million instead? That way you end up with 80 million. <br /> <br /> Watch that clip that I posted from Shark Tank where Robert says that it&#039;s not about how much you sell for, but how high of a percentage you own. So, selling your company for 500 million if you only own 10% is not as good an outcome as selling your company for 100 million with you having 100% ownership. <br /> <br /> A lot of the co-founders of PayPal ended up walking away with a tiny percentage of the money the company sold for, while the investors walked away with over a billion. Who made the smarter bet? <br /> <br /> <br /> <br /> <blockquote data-attributes="" data-quote="77startup" data-source="post: 174475" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=174475" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-174475">77startup said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> Besides part of the fun of success is making other people rich in the process. I mean what&#039;s the point of being awesome without a crew of people constantly reminding you just how awesome you are. </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote> <br /> <br /> Most investors think of themselves as the reason for the success of the companies they invest in. They see the entrepreneurs as people that they can step on and use to get a big exit. Don&#039;t care about making them rich or what they think of you. <br /> <br /> Focus on your own success and reward your family and friends if you want; not heartless venture capitalists and angel investors. Take what you need from them to make your company successful but fight them tooth and nail for every single percent of your company.</div>

 

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[Likwid24]

<div class="bbWrapper"><blockquote data-attributes="" data-quote="Darkside" data-source="post: 174481" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=174481" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-174481">Darkside said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> Most investors think of themselves as the reason for the success of the companies they invest in. They see the entrepreneurs as people that they can step on and use to get a big exit. Don&#039;t care about making them rich or what they think of you. </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote><br /> <br /> It doesn&#039;t necessarily have to be an investor getting equity in your company. What about partners. If you have some one that&#039;s equally motivated to join your company and brings a lot to the table including money and skills that complement you. I know it&#039;s not easy to have partners but I&#039;d sure rather have that then give up equity in my company to an investor who just gives me money, sits back and watches. I&#039;d rather get a loan. <br /> <br /> <br /> By the way, watched that episode of Shark Tank last night. Great episode.</div>

 

[Ska2free]

<div class="bbWrapper">I&#039;m with the first school...equity is everything. It&#039;s control. I would far prefer to pay interest on a bank loan than get &quot;free&quot; money from an investor or partner that would look over my shoulder or have some say in the business. For me, selling equity is the exit strategy...I&#039;m ready to sell when it yields the highest dollar value and when I&#039;m ready to give up control. <br /> <br /> That said, maybe it varies...by personal preference and type of business. Where you need the creative and financial cooperation of a team to get started, option 2 makes more sense. And I would invest in a company for equity stake, from the other side of the table.</div>

 

[Likwid24]

<div class="bbWrapper">Ska2. I knew you would chime in on this one! LOL I know how you feel about this situation. Maybe I just need to learn my lesson.</div>

 

[HenkHolland]

<div class="bbWrapper">In another thread the thread starter makes the observation that there are many people on the forum who post for example about having a great idea, but not knowing what to do. Such people may benefit enormously from teaming up with a partner, who does know what to do.<br /> I&#039;ve always learned that it is much better to own for example 50% of a business that takes off than to own 100% of an idea that will never evolve into a viable business.<br /> <br /> There is a self-made Dutch (almost) billionaire, who reached that net worth within, I think, a period of less than 10years, who lives by the motto &quot;if you can divide (read &#039;share&#039;) you can multiply&quot;. He never gave up the control in a business, but always shared equity in a generous way with the key players in each of his businesses. In some cases he even owned less than a majority of the shares, but secured his control by having priority shares.</div>

 

[Ska2free]

<div class="bbWrapper"><img src="/community/styles/default/xenforo/smilies/tiphat.gif" class="smilie" loading="lazy" alt=":tiphat:" title="Tip Hat :tiphat:" data-shortname=":tiphat:" /><br /> Yeah, likwid...I tried to resist, I tend to be a broken record on the subject! But take it with a grain of salt, as I do have a partner in my business after all.</div>

 

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[John C.]

<div class="bbWrapper">When I read the question, &quot;to give or not to give&quot; my immediate response is never to give. I do believe in sharing the equity but it always must be earned. <br /> <br /> There is a danger in sharing equity too soon and too generously. I believe it is very smart to have an equity sharing program but it must vest over time and there needs to be some way to tie the equity to the value provided by the person receiving the equity.<br /> <br /> I have seen far too many people start a business and decide from the start how the equity should be divided. No one can accurately forecast how a developing business will unfold. Allocating the equity before you have some idea of the value contribution and the commitment of the various people involved is an invitation to future problems. <br /> <br /> Be very careful about promising X percent of the business in the future. Again, I have seen many business people live to regret their promises of future equity. It is okay to have a plan and a formula for future equity but get a seasoned professional to help you design it.<br /> <br /> Your equity structure could severely limit your ability to 1) raise capital 2) sell all or part of the business 3) bring on new and better qualified talent. It can also cause employee problems if there is an imbalance between what some employees contribute to the success and what they receive in equity.<br /> <br /> Always keep asking this question: What am I trying to accomplish by sharing the equity?</div>

 

[HenkHolland]

<div class="bbWrapper">John C., I agree with you that sharing equity with employees can be a pain in the ... <br /> I have experienced this myself.<br /> My views on giving equity is not related to giving equity to employees. <br /> As to problems such as limiting your ability to sell all or part of the business, those can be prevented by proper stipulations in the bylaws of the company and by issuing different types of shares with different voting rights for crucial issues like the sale of the company.</div>

 

[Darkside]

<div class="bbWrapper"><blockquote data-attributes="" data-quote="HenkHolland" data-source="post: 174498" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=174498" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-174498">HenkHolland said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> In another thread the thread starter makes the observation that there are many people on the forum who post for example about having a great idea, but not knowing what to do. Such people may benefit enormously from teaming up with a partner, who does know what to do.<br /> I&#039;ve always learned that it is much better to own for example 50% of a business that takes off than to own 100% of an idea that will never evolve into a viable business.<br /> <br /> There is a self-made Dutch (almost) billionaire, who reached that net worth within, I think, a period of less than 10years, who lives by the motto &quot;if you can divide (read &#039;share&#039;) you can multiply&quot;. He never gave up the control in a business, but always shared equity in a generous way with the key players in each of his businesses. In some cases he even owned less than a majority of the shares, but secured his control by having priority shares. </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote> <br /> <br /> I don&#039;t have any problem with sharing equity if it&#039;s with a partner who brings real value. After all, what would Steve Jobs have been originally without Wozniak who created the apple computers; they were the perfect team; Steve marketed the computers brilliantly and Wozniak built them. There are many other examples of co-founders building great companies as well; Larry and Sergey, Bill Gates and Paul Allen, etc.<br /> <br /> However, be careful that you don&#039;t just give it away to anyone before testing them out to see if they possess the skills you need and that they&#039;re willing to go the distance with you. Many partners have taken equity and left; they don&#039;t do anything but still receive the money. This happened to the youtube guys; there were originally 3 founders who split up the equity equally. <br /> <br /> One of them left early on when the company was struggling and after they sold to Google, he demanded 1/3rd of the money the founders received. They had to go to court to fight it out and I don&#039;t know what the outcome was but it just goes to show that you should be very careful when giving out equity. Usually it&#039;s a good idea to make sure that the equity vests over time as John C. had suggested.<br /> <br /> This insures that if someone leaves before their shares have vested, they don&#039;t get any equity. So, in a sense, you&#039;re making sure that they&#039;ve contributed enough to the company before they are rewarded with shares.</div>