Should a Cash-Poor Entrepreneur Give Up Control to Keep Her Start-Up Alive?
boss.blogs.nytimes.com
boss.blogs.nytimes.com
If you give up control the new guy in charge will always be able to get rid of you. You are basically signing up for an employee type of deal, but with a fundamentally broken employment relationship. The real owner will know that you'll be resentful rather than grateful and will try to get rid of you as soon as practical. If your deal on paper is too costly for them they'll find a way to restructure / dilute you in some way to avoid paying out anything substantial.
People get desperate, I understand that. But it should be better to just walk away. The real solution though is to plan things through and not get yourself in the situation of "needing" to raise cash or go bust. There are tons of ways to avoid getting stuck is this situation.
You've characterized Arthur Shorin as a 'huckster' which in many places would be considered insulting. This guy spent 27 years at his Grandfather's company and grew its revenues by 5x [1]. That is some pretty serious credibility in the candy business. Not 'huckster'.
Then you talk about by giving up 75% you lose control. Which is true, but 100% of 0 is 0. But lets imagine that there is a chance that Arthur can grow the value of this particular company with his knowledge of the candy business and his credibility. If your company is valued at $1M and you own 100%, you give up 75% and with the help of that investor it becomes worth $5M. Your 25% stake is now worth $1.25M.
Contrast that with going broke. Having your net worth gro 25% is much better than having it shrink 100%.
Then the last lament, which I have heard many many times, is this "The real solution though is to plan things through and not get yourself in the situation of "needing" to raise cash or go bust. There are tons of ways to avoid getting stuck is this situation."
I think of it as the parallel universe theory of wishfulness, because we know that every decision creates two parallel universes, one where you made the right decision and one where you didn't. The "right" answer is not to be in this damn universe but to somehow step across dimensions into that really awesome one. Sadly people get lost looking across at that other universe.
It is the opposite of ridiculous here is to take the offer, not dwelling on all of the 'could have been' things, and resolve to learn everything you can about the candy business from this living legend. They have to take your meetings because they are in it to win, not lose their investment. Our entrepreneur is just hitting 30, spend 5 years learning the candy business (its not taught in business school) and then, start yet another candy business. Her 25% stake in this one is much more likely to be worth a decent chunk of change, she will know the people in the industry, and she'll have gone through all of the stages of getting a candy business from where she got it too before, into the big leagues. It will be much easier for her to succeed, and in that new business she will know exactly how much work it is to get into distribution and exactly how to negotiate with contract manufacturers, and exactly how to find the market and increase awareness. Perhaps we'll add her name next to Wrigley's or M&M Mars.
Yes and I stand by every word of it
You've characterized Arthur Shorin as a 'huckster' which in many places would be considered insulting. This guy spent 27 years at his Grandfather's company and grew its revenues by 5x [1]. That is some pretty serious credibility in the candy business. Not 'huckster'.
In my book anyone who asks for 75% of your business is a huckster. I do not care about his credibility in the family business, the only thing I see here is some guy wants to pick up this lady's assets for nothing. If you read "Burn Rate" you'll see this type of vulture investor documented pretty well. They prey on desperate people who do not know any better. When making this kind of offer they are clearly not treating you with respect.
http://en.wikipedia.org/wiki/Burn_Rate
Contrast that with going broke. Having your net worth gro 25% is much better than having it shrink 100%.
Contrast that with cutting down your burn and finding other resources to fund your production run. That's what the word "resourceful" means. There is always an alternative to giving up or buying into empty promises.
Then the last lament, which I have heard many many times, is this "The real solution though is to plan things through and not get yourself in the situation of "needing" to raise cash or go bust. There are tons of ways to avoid getting stuck is this situation"
That's how successful businesses are run, including Arthur Shorin's. He did not become successful by turning over control to the first guy who asked. But of course if you have unrealistic business plan that requires a lighting to strike and you have no Plan B, the most likely scenario is a shutdown or this type of vulture deal.
This would appear to be a combination of Sunk Cost and Gambler's fallacies. The time and money is gone, the only question is whether this guy can make anything more than she has out of the company. Like I state elsewhere, the $250K he's offering for the stake amounts to only ~$60K per year of time she's already put into it, with nothing substantive but possibilities (without any indication of probability) for the future.
Said another way, this could just be a cheap setup for his friends to nibble away at her remaining ownership now that he's got his. Once they all have her down to nothing, well...it's happened before.
Hopefully, she is able to negotiable a more favourable deal for herself and have better control on the startup she created. The original deal as stated in the NYTimes articles is pretty crappy.
If she maintains control, then sure - that might work, depending on how large amounts of sale she can gain from this move. But 25% doesn't smell like control to me.
It's easy to justify early on, convincing yourself the company wouldn't be able to get off the ground otherwise.
It's easy to justify even later, when you think about how the company wouldn't be where it is today without that cash infusion.
Unfortunately, it doesn't matter if you don't have majority control. It doesn't matter if the company is doing $10mm/year if it got there based on a strategy (driven by the investor) that drives you up a wall. As an entrepreneur, what makes you crazy isn't a lack of funds, it's a lack of control.
Conversely, if you and the investor share a similar vision, it's a legitimate partnership that could work well. You sacrificed a lot more equity, but your company is only worth what someone is willing to pay for it.