There are so many myths holding us back from making significant chunks of money – the sort of money that can carry you from $30k in debt to $7 million in the bank in just 7 years – that I feel that it is my solemn duty to break as many of them as possible …
But, why do these myths exist?
I think for two reasons:
1. They may work for the lower required annual compound growth rates i.e. smaller Numbers / later Dates that most personal finance bloggers and authors have personally experienced,
2. People propagate ideas put forward by one author until they become The Truth.
In other words, some of these ‘common wisdom’ personal finance – and, business – truisms are simply aimed at an audience who doesn’t need to get rich(er) quick(er) … and, following those ‘rules’ will ensure that they get exactly what they aim for: 40 years of hard work, followed by a ‘frugal retirement’ 😉
So it is for the myth of business control:
People start their business with the idea that they either have 100% ownership – or, perhaps a 50/50 founding partner – from Day 1 and fervently believe that they will retain this mythical ‘control’ over their business (hence their life) as long at they hold on to at least 51% of their business …
… and, if they should need some outside investment – in their minds, at least – it’s critical that they give away less than 50% of the equity in their company.
Steve voices this point of view very clearly:
You give up 51 % control and who is to say you will make any money at all?? the new controlling owners could eventually throw you to the street.I’ve seen that happen a few times.
Personally, if there is no other options than to go for outside investors to move forward, your better off not giving up any more than 20 to 30% control ever.
First let me break a little myth in this blog … the ‘myth’ that I think that it’s a good idea to hand over a chunk of your company to an investor … nothing could be further from the truth:
I believe (and, have stated) – that you need to have a VERY good reason to give ANY equity away (for reasons that I explained in Decision Point # 1 in this post).
But, once you have crossed that line – and, have exhausted Friends/Family/Fools who may invest token amounts for token equity (i.e. that 20% – 30% that Steve talks about) – you will find that control goes with the money NO MATTER WHAT THE NOMINAL % MAY BE that you agree to hand over (and, THE INVESTOR will decide that %, not you!) …
… if you don’t like the deal, then you will have to make do without the money.
The tool that your investor will rely on is the Shareholders Agreement, where they will make sure that critical decisions (eg hiring/firing; purchases over – say – $10k; new capital raisings; etc.), at a bare minimum, will require unanimous approval of the board … naturally, the outside shareholders will expect to have a seat on that board.
So, at a minimum, a smart minority shareholder will effectively hold the power of veto over your business … and, the Shareholder’s Agreement allows plenty of scope to even provide them with effective control over the business, regardless of their shareholding (be it 20% or 80%).
BUT, and I stress this, as I said to Steve:
There are no hard and fast rules: feel free to find the ‘fool’ who will invest a significant amount without the ability to put you on the street if you don’t perform 😉
Great post Adrian
If I could add a thought:
Money has a different value in a business depending on the stress the business is in.
If you are in desperate need of money then it will have a much higher value than if you don’t need it.
So the simple rule is to make sure you have a buffer so that the value of money doesn’t rise above what it is really worth.
Many inventors and entrepreneurs have found themselves short of cash and have no choice but to accept a small amount of money for a large percentage of their business.
As you rightly point to in the post, this is a fact of life so don’t let yourself get pushed into a corner where the money controls you and you have to take a deal to survive
@ Andee – I agree; an ounce of prevention is worth a pound of cure … we started this series of posts on the assumption that the owner NEEDS the outside investment … I always managed (somehow) without outside investment.
However, there are circumstances where this ‘loss of control’ come into play even without a capital injection per se.
For example, a strategic joint venture: I did two of these to grow my company into New Zealand, then the USA. In neither case did either party contribute any cash yet, for strategic reasons, the deals were done and control was shared … albeit unevenly, for the reasons I described in this post 😉
Regardless, your message is clear: control your cash before it (or the person who provides it) controls you!
Ok, giving up some equity to make some money, giving up some control, not a bad idea. But lets say that you figured out a number that will allow you to pay yourself, and want to reach that destination so that you have some live left to live your purpose. Be it surfing the Aussie coast or travelling or whatever. To get there obviously requires the “right vehicle”, one that offers compound returns, something that is expandable and leveraged. These things, no problem, the problme for me is getting something to offer equity in, some idea or start-up business. I could maybe make creative X-mas cards, or X-man cards, or sell cars, or something? but what? What am I going to be, the next person up in front of the dragons den / shark tank offering 49.8% of my new and improved pot brownie recipe? What is the next step, or rather, what is the right direction? Maybe it’s not day trading gold futures (tried that). Maybe its’ not pot brownies (havnen’t tried that, but if you have any let me know), maybe it’s not Christmas cards. What is it? How do you find something that makes enough sense to even bother?
“There are no hard and fast rules: feel free to find the ‘fool’ who will invest a significant amount without the ability to put you on the street if you don’t perform”
but this is just the point . I don’t like giving up control ,cause I co-owned a business with a family member ,and when I could see that things needed to be changed, My hands were tied (as he owned controlling shares) and a business where we did well but needed to have more cash flow to pull us through the lean winters, he wouldn’t do what was needed.
If I am going to go to the trouble and expense of starting a business, I want to know I have my hands on the controls so things won’t go under.I won’t be afraid to do whats needed to make that business grow to its fullest potential.
@ Ill Liquidity – Yep, you get it … but, as you are finding out, understanding doesn’t necessarily = results. BUT, you do now have the ability to discern which opportunities are worth your time, and which aren’t … purely on the basis of whether they will help you achieve your Life’s Purpose.
Of course, you still need to eat, so maybe you have to do what Steve suggests: find a job/business that puts food on the table today and don’t “be afraid to do what’s needed to make that business grow to its fullest potential” 🙂
Ill Liquidity,to answer your questions above. You need to look at what you know well, are you a painter? a poet? . Do you have skills in directing movies? What is it you know and do well. Can this become a business? Or is there a business already out there that you know a lot about, that you can buy and run? These are things you have to answer, cause this may be the answer to your question of what do you sell, or what do you do to reach your number/date.
If you have no marketable skills, I suggest getting some , then find a mentor to help you market those newly acquired skills.This will be your starting point.