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One of your key roles as an entrepreneur is to create value. However, maintaining and saving this value is just as important. It makes no sense to create value in your business if you let it falter.
So how can you avoid giving away your business unnecessarily? You must overcome the following four obstacles:
1. Naivety with the co-founders
When starting a business, most co-founders try to operate in a spirit of compromise and fairness. There is rarely a rationale for the first day equity splits. However, acquisition agreements between the co-founders can help limit the impairment.
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The acquisition protects the business and the remaining shareholders in the event that a co-founder retires early to pursue other opportunities. The arrangement means that each co-founder must to win over time and will have to give up equity if they leave before the end of the vesting period.
Action step: Make sure you have a contract or a legal document defining the terms of the acquisition and get the best acquisition “calendar” that suits you and your business by taking legal advice.
2. Soothing employees
It is extremely unpredictable to allocate stock options to employees, unless you can rationalize the value they bring. This recognition of equity should be reserved for experienced employees, and options may still be available for those who create value in the business later. Option acquisition is also something you will want to formalize.
Action step: With your management team, make a list of key employees who make a real contribution to your business, regardless of the length of their mandate. Also identify other key roles that you need to fulfill. Develop an option package strategy that seeks to recruit, retain and motivate key employees to help grow the business. You can consider taking inspiration from the social media sharing start-up Buffer, which has an innovative way to determine capital allocations. The important thing is to do what is right for your business.
3. Want to keep investors soft
Fundraising from investors is a two-way process. It is important that you realize that, just as investors assess whether or not you should support yourself, you should also ask yourself if this is the right deal for you.
The worst thing you can do is make a deal fair because it gives you a temporary cash flow without looking at what you are giving. Inevitably, it will end in tears. Likewise, accepting a deal because you don’t want to trade harder and upset the investor is a bad game. They’re looking for what works for them and you have to do the same.
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Action step: At the start of any fundraising process, write down your main goals for the funding cycle. This could include the type of investor sought, the experience they should bring, and the maximum capital you are willing to donate. Be absolutely honest with yourself. During the process, keep reviewing this to make sure you don’t get carried away with the excitement of making a deal.
4. Agitation for a pay day
Many entrepreneurs build their businesses with exit in mind. This is the moment for which you have worked hard and which, hopefully, ends with a valuable bargain as a reward. But how can you make sure you don’t leave unnecessary value on the table during these crucial negotiations? The best exit process is where the supplier has control. This requires a lot of planning and preparation, and most of all patience.
Action step: It is essential to ensure that you have a solid and competent advisor. It’s their job to figure out what’s important to you right out and try to deliver it. They should advise you to choose the right time to start a process. You will need to work with them to identify the right buyers to market your business and to make sure that you are comfortable with the strategy of the sales process. Proper preparation will put you in control of the negotiations.
Safeguarding the value of your business is extremely important and possible. In fact, it is relatively easy to think about your business properly and put the right structures in place. However, this requires navigating certain roadblocks. If you want to make sure that you don’t unnecessarily add value, think about structure and fairness with your co-founder and your employees, keep your goal in mind when talking to investors and be patient when it this is an exit. You will leave with a maximum value.
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