Entrepreneurs, Here’s How to Retain Equity in Your Company
As an entrepreneur, you’ve got goals for yourself and for your business. Among your personal goals is no doubt retaining as much equity as possible in the company you’ve dedicated yourself to building. Let’s face it though, capital builds businesses and you probably need to raise capital to fuel and scale yours. Unfortunately, raising funds and preserving equity are often mutually exclusive objectives. So what do you do?
The best piece of advice I can offer entrepreneurs who want to retain their equity is to bring a couple of senior operators onboard. I’m talking about the kind of experienced professionals who’ve already been to a few rodeos.
Let me explain what I mean.
Imagine for a minute that you’re a first-time entrepreneur with a hot product in an even hotter market. Your business is exploding and you have no trouble raising the capital you need to fuel even more growth. Great news, right? The problem is that even with all of this going for you, you’re going to make mistakes. Lots of them, in fact.
That’s not a jab at you or any other first-time entrepreneur. It’s just the reality since, like most people, you haven’t ever built and sold a company before and are probably flying by the seat of your pants. Mistakes are to be expected and are completely normal! What matters most, however, isn’t what mistakes you make, but rather how you react to them. And that’s where having the right team around you comes into play.
Great investors know this and that’s why repeat executive teams often get the highest valuations. The dirty secret of business is that, like in battle, once the first shots are fired most plans often go out the window. Investors are really betting on your ability to pivot your plan when things get tough. They’re looking for a more experienced team that can help you do that while de-risking the investment in the process. Almost all successful businesses had to tack the boat a few times to get it right; more experienced executive teams simply do this faster and better.
So, how can you be more likely get to the right place faster and retain more equity?
The best thing you can do to help your company is to insert the talented DNA of a couple of seasoned operators into your management team. Partnering with folks who have the experience of scaling and exiting a business that you lack will be invaluable because it will allow you to make fewer mistakes over the long haul. That means your business will have a greater chance of generating more revenue and getting a higher valuation when the time comes to raise capital. That’s exactly what you need if you want to raise funds and retain as great a stake in your business as possible.
Of course this is easier said than done for two reasons. First, it takes guts and a lack of ego to hire someone who is more experienced and seemingly more senior than you are as founder. But think of it this way: You’re hiring someone who’s better than you at a certain role to make you and the other investors more money. Second, it’s hard to find these people to join your business. Sometimes they worry the founders will never really accept them and that they’ll find them as a threat, or they’ll want to run the company, which is another issue altogether. I find that being upfront and candid and building a strong, high-trust relationship really helps this process.
How to Find the Right Operators to Augment Your Business
Hiring great talent isn’t exactly a new or novel idea. But when it comes to finding the right operators to join your management team, you’re looking for a particular set of characteristics that extend beyond mere talent.
Specifically, you’re looking for folks who’ve been in the trenches and have the battle scars to prove it. They should have been part of the leadership teams that took other companies from zero to sixty, scaling them from nothing into something.
The best place to find these folks is by looking for companies that have just been acquired or gone public and whose management teams are turning over as a result. In a perfect scenario, you’d be targeting people who were there to help start the company, stuck with it through all the trials and tribulations of scaling and selling the business, and are now looking for their next gig.
Importantly, I don’t recommend targeting folks from large companies who have never built a business no matter how impressive their credentials may be. After all, if they don’t have the experience you lack, what’s the point in hiring them?
For example, imagine you want a to hire a VP of sales. That’s a very tough hire that most companies mess up a few times. The best place to start is with someone who built a territory from scratch with an unknown brand. If they just had a great exit they will be pumped to do it again. Even better, if they are a true A–player they will bring other A-players with them. An A-player VP of sales may bring in four to five top-performing sales reps with them and that’s wroth a lot! Again, these moves help to ensure your revenue and make it less likely you will dilute faster in the future.
But What About My Board and Advisors?
You may think the board members and advisors you already have are good enough to offset your blind spots. Maybe they are, but not necessarily. The fact is that most board members and advisors aren’t there in the trenches with you day to day fighting the battle and they often don’t have their skin in the game the same way you do.
But you can change that in two ways. First, always make sure that your board members and advisors have been entrepreneurs themselves at some point in their career (if they aren’t, they should at least be deep subject matter experts). Unless they’ve personally known the pressure of trying to make payroll, chances are that they won’t fully appreciate the world you’re living in. The second thing you can do is give them a vested interest in the company by having them put their own money into the business or giving them shares for their participation. Suddenly ensuring the success of the business will take on new urgency for them.
Similarly, ask yourself if you are valuing your advisors enough, and if they truly care about your business if you haven’t given them any equity. I see plenty of the headshots on new business plans that have a bunch of fantastic “advisors,” but where it’s not clear that they are motivated to participate other than the fact that they are maybe just doing the new entrepreneur a favor. Remember, they are likely to be very busy people who have their own goals. Tying them in with warrants and maybe an investment could be very effective at focusing their attention.
Lastly, you likely don’t need six advisors to start. I see many startups with too many cooks in the kitchen. It’s hard to build the business and make good use of so many advisors. I suggest that you limit yourself to just a few advisors who fit the above profile to start — you can always add more as you grow.
Remember, whether you’re a new entrepreneur or an experienced one, it’s ok to make mistakes. In fact, sometimes it can even be good to do so. What matters most is that you’ve got the right team around you to help you navigate whatever comes your way. Doing so will not only make your life easier, it will also allow you to generate more revenue and keep a bigger piece of the business you’ve worked so hard to build.