Think Twice About Taking a Smaller Piece Of A Bigger Pie

If youaEURXre an entrepreneur currently considering selling or merging your company into a larger entity, youaEURXve invariably heard the phrase, aEURoeItaEURXs better to have a smaller piece of a much bigger pie.aEURX This has become just another tired business adage that people assume must be true because it has survived so long.

But sometimes having a smaller piece of a bigger pie is not a better meal.

Diluting your stake in your company in order to grow can backfire dramatically if you donaEURXt consider all of the variables.

The Control Issue

Before we even get into the economics of the deal, letaEURXs first talk about what really matters aEUR" the ability to control your own destiny.

When you owned the majority share of your company, you may not have had the brightest future, but it was your future to determine. Now youaEURXre talking about putting your future in someone elseaEURXs hands indefinitely. Selling your company is like joining the mob aEUR" once youaEURXre in, youaEURXre not getting back out.

Having a smaller piece of the bigger pie depends on the assumption that whoever youaEURXre giving control to will be more successful at creating a profitable outcome for the company. ItaEURXs not just the acquiring CEO, either. ItaEURXs every person in the new organization, from the finance department to the marketing team.

Essentially, youaEURXre entrusting an entire organization to collectively make better decisions for your own business than you as an individual can. Are you ready to make that commitment?

The Exponential Outcome Issue

Now on to the economics. Surely youaEURXve figured out that owning 10% of a $15 million company is worth more than 100% of a $1 million company. What weaEURXre really talking about is the probability of a bigger outcome later on, not the dollar value today.

Obviously the smaller your stake in the company, the bigger the outcome needs to be in order to break even. This is especially important when taking on a round of investment. Every time you give equity away to investors, you will need a substantially larger sale in order to receive the same return.

To this point someone will invariably talk about how having a 20% stake in YouTube, selling at $1.6 billion, was not a bad deal, and it wasnaEURXt. But how many companies experience the same kind of success that YouTube did? Very few.

ItaEURXs far more likely that youaEURXll sell your company for $10 million with 100% ownership than that you will sell your company for $100 million with 10% ownership. ThataEURXs because the bigger the pie, the fewer the people that can eat it.

The Faster Growth Issue

The other side of the economic issue is the question of when to take your slice of the pie. LetaEURXs assume your company is worth $10 million, which is exactly what you are doing in sales this year. You merge into a company worth $100 million and take a 10% stake in that company. In order for your 10% to double in value, the new company needs to grow to $200 million in sales.

Yet in order for your company to double in size at its present value of $10 million, you only need to do $20 million in sales. The question then becomes aEUR" is it more likely that youaEURXll be able to add $10 million in sales or that the new company will add $100 million in sales?

The difference in infrastructure, business development, and capital requirements of creating $10 million worth of growth versus $100 million worth of growth is enormous. Or said differently, it takes exponentially more effort to double the size of a big company than a small one.

Taking that smaller slice could actually substantially inhibit your value if you take it too early. If youaEURXre already growing so quickly, and your future is so bright, would it be worth it to hold out longer to get a bigger slice of the bigger pie?

The Pie ThataEURXs aEURoeJust RightaEURX

So if all of these questions make you want to bail on the idea of taking a smaller stake, what would possibly make you think itaEURXs the right idea?

A lot of it comes down to timing. If youaEURXre at a point where you just canaEURXt handle the daily grind of managing a company, turning it over to someone else may be worthwhile, despite lost value. Or if you truly believe that youaEURXve tapped out the hyper growth opportunities then it would make sense to latch on to a faster moving train.

In a nutshell, the timing is just right when the big questions weaEURXre asking here donaEURXt seem so important. If you think that the management in this new company is just right, the likelihood of a sale is around the corner, and your individual gains could never outpace what this new venture could yield, by all means go for it.