Entrepreneur Myths (36 page)

(Q1
) What is the personal burn rate for each partner? If one partner is living the high life, burning his savings or earnings like there’s no tomorrow, this partner might not have a high risk tolerance because they don’t know how to be frugal during the lean phases of the startup. If their burn rate is high because they continue going to fancy restaurants and buying new cars or homes while you’re out trying to raise capital, they might run out of funds and give up before the capital raising is completed.

(Q2)
Has the partner been in a startup previously? Is this their first time ever? I find most newbie partners to have low risk tolerance because they’re not used to the turbulent environment of being part of a startup.

(Q3)
If the company is undercapitalized and can’t pay partner’s salaries until the money is raised, how much savings has the partner set aside before they joined the startup?

(Q4)
Have you spoken to the partner’s spouse to see what their risk tolerance is for their spouse joining an undercapitalized startup?

Communicating about the risk levels of each partner is critical in any venture. There are other factors to consider, such as the length of time each partner has endured risk. And how will each partner’s duration of risk exposure be compensated in terms of ownership? I’ve been in situations where my partners put no money into the venture but assumed, because they quit their jobs, that they shared an equivalent level of risk. Your partner quitting their job does not mean they share the same risk as you — if you’re the one putting in all the money.

What if you’ve been at it for more than 12 months and now you need a partner to come on board? Do you give them equal equity even though you’ve been at it longer? I wouldn’t think so, but you do what you have to do. However, it could cause problems down the road if the original partner feels he was taken advantage of by agreeing to equal equity when the new partner had not shared equal risk. Shit like this happens.

I’ve seen in situations where one partner kept their full-time job and still expected the same equity, although they weren't sharing the same level of risk. You see, they were going to make up for it when the company got funded. Yeah, right. That never fucking works.

I’ve seen entrepreneurs working 20-7, while another partner, who had quit the business, still expected the same fucking share of the profits — even though that partner hadn’t been involved in daily operations for over a year except to call in for an update. I’m not kidding. I’ve seen this happen more than once.

I’ve seen partners who contributed no money to the venture and had zero risk in the venture, but because they developed the prototype of the product they simply wanted to wait on the sidelines while others spent time and money on raising capital. They had no tolerance for risk and still kept their other jobs. You don’t want to go into business with this type of partner because they end up acting like fucking crybabies. I see this scenario frequently in the high-tech arena. Here’s the classic story:

Software programmer develops a prototype of the software product and, because they’re a fucking dumbass about running a business, agrees to form a partnership with the “evil business suits” to raise the money, sell the product, finance the product and market the product. The programmer assumes no risk, sits in his developer ivory tower expecting everyone else to do all the easy work such as raising capital, while he does the difficult “magic” of developing the product. He believes that if he builds a better mousetrap, everyone will kiss his ass. He also expects to own the majority of the venture because, you see, he’s the one that developed the product and the evil business suits are just the necessary drones he needs to become filthy, fucking rich. A company under these circumstances rarely makes it.

Because this type of business partner has low risk tolerance, no patience, and no understanding of the process of raising capital, marketing or selling, you
will
run into problems if the venture doesn't raise capital quickly. The programmer will take their little toy and go home.

My advice: Find a partner who will come onboard willing to share the same risk as you, because they see the venture as their baby too and have the attitude of “We win together or we go down the toilet together.” These partners are rare. If you find business partners like this, you’re lucky. Make sure you continue to foster that partnership.

Brain Candy: questions to consider and ponder

(Q1)
Do you and your partners have the same risk level? If not, what the hell are you going to do about it?

(Q2)
How do you determine the risk tolerance of each partner? Are there any key variables I missed?

(Q3)
How do you address part-time partners until the capital is raised? Do you treat them equally from an equity perspective because of their abilities vs. their sweat equity time in the business?

(Q4)
If your partner has a family, have you figured out the risk tolerance of the spouse?

Entrepreneur
Myth 52
| Equal partners do equal work

My first exposure to this myth happened in college. Unfortunately, I've run across it more than once and you’d think I would learn my lesson and never forget it. The problem is that determining equal work at the partner level can be complicated.

As a kid, I grew up on a farm where you learn the principles of hard work. In my Serbian family upbringing, being lazy is not accepted, so I assumed everyone worked hard. It’s quite the opposite in real life. In regard to startups, I finally got it through my thick head, through multiple experiences, that equal partners do
not
do equal work.

When I was in college, I formed a specialty and corporate image advertising company with two other student entrepreneurs. Our plan was simple: conquer the corporate image advertising sector and become huge players — despite the fact that none of us had a background in advertising. I was studying mechanical engineering, the second partner was studying real estate and the third partner was in corporate finance. How we all decided to start a specialty advertising company is beyond my comprehension, even today.

Of course we didn’t know what the fuck we were doing, but at least we thought we did. I guess that counts for something. I quickly learned that not all partners, despite being equal, did the same amount of work. One of the guys on the team was there more for personal image than to do work. He wanted to be able to tell girls he was a fucking entrepreneur. His daddy was rich so he really had no need for money. While he was bragging about our venture to the girls, the other partner and I were working it. College age or not, we ousted the lazy son-of-a-bitch. He was shocked because, you see, he thought he was doing so much “strategizing” that he almost became a fucking legend — in his own mind.

One-third of the partnership became one-half of the partnership, and this math was better for the two partners who did an equal amount of work. From this experience I learned, the hard way, two things: (1) When the going gets tough, the tough get going and the weak leave; and (2) Equal partners do not do equal work.

This myth is not merely due to lack of experience or maturity. Here’s another example. Years ago I worked for a software company which was experiencing phenomenal hypergrowth. One of the founders was a programming wizard and genius, while the other was a marketing guru. This software company was hot. They were selling software by the truckload and the products were flying off the retail shelves. The odd thing was that I didn’t even realize there were actually five equal partners on this company’s management team. I was only aware of the two top guys working it hard every day. I found out months later that while two of them did most of the work, the other three were basically enjoying their fancy new cars. One of those fuckers showed up only twice in the first six months of my working there. I couldn’t believe it. So you see, even grown adults can make the same fucking mistake of not working equally in “equal” partnerships.

What do you think happened with these five founders?

The two working partners sold the company for a substantial amount of money within a year or so while I was there. Four of the founders left and one remained. Yes, it was one of the two hard-working partners that made sure the company was acquired. My guess is that he brought the acquiring company to the table so he could get rid of all the
equal
partners. And yes, he ended up as CEO of the company for many years after.

What do you think happened to the second hardworking partner? After enjoying his Aston Martin for a while, he decided to compete when his non-compete ran out. He came out with a big-bang software application, but he just didn’t have enough juice to compete head on against the same company he helped create.

Shit like that happens all the time. The venture you create doesn’t allow you to easily play again in the same market after your non-compete expires. The reason is simple: you built a monster the first time out. Ironically, the original software company had become successful because they had flanked a large competitor on price. But a few years later they got their ass kicked by another company that emerged from nowhere to become a billion dollar player and dominate the market. My advice is to start up a venture in a related or non-related sector.

Over the years, unfortunately, I made the same mistake a few more times. It is difficult to predict whether your partner will work as hard as you do. Defining “equal” is no easy task either, but it doesn’t matter in terms of definition. Perception is what matters. If your partner perceives that you are not doing the same amount of work as they are, you have a problem.

If there’s anything you can learn from my mistakes, it’s that equal partners do not do equal work. The best thing to do is not have equal partners. There are also situations where partners with more equity do less work than you do. Now this is a formula for disaster, and I dare not tell the stories I’ve seen in Silicon Valley in regard to those situations.

I realize entrepreneurs want some magic founder or partnership formula in terms of equality of shares. Here it is — there is none. It all depends on the dynamic of each particular situation.

Brain Candy: questions to consider and ponder

(Q1)
Do you have equal partners in your business? Are they putting in an equal amount of work in your opinion? What does equal work mean to you?

(Q2)
Do your partners do more work than you? Be fucking honest with yourself.

(Q3)
What do you do when equal partners don’t carry the load? Do you get rid of lazy partners? Do you give them a warning to shape up?

(Q4)
Do you correlate performance with the number of hours your partners put into the business? Or is it based on performance metrics?