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FAST CLASS: Fund Your Business for Growth

Lesson 17 of 18

Negotiating For Success

 

FAST CLASS: Fund Your Business for Growth

Lesson 17 of 18

Negotiating For Success

 

Lesson Info

Negotiating For Success

now we get into the serious stuff. Remember earlier the big fears you had about raising capital from angels or investors. Loss of control was a high point. A big concern. What if I said to you most of the initial and the most shocking and the biggest, most debilitating loss of control happens because of what founders do. They lose control because they've lost control and they've made a few decisions that don't even involve investors all by themselves. I have three top reasons or ways that you can lose control of your business or needlessly have to fork over an ever begging chunk of your business to investors who you'll turn to for rescue capital. Number one on my do not go there list is it usually starts out with just giving away. Can you imagine giving away a chunk of your business and not getting anything in return? At least with investors, you give away a chunk of your business and a check goes into your account. So how does this happen? Three buddies are at a bar. Let's go into bus...

iness together. You handle marketing, you handle sales. I build a product. We're all partners. Each will own a third, a 3rd and 3rd of the business. Okay? You form a corporation. You hand over a third of the outstanding shares to each of your two partners and the partners do nothing. Once the shares are out there, you can't get them back. Number one, who's mistake is it yours doesn't involve investors? Here's And those are the flame males. I get help get me out of this. How can I fire my partner? How can I get the stock back that I gave to that for doing nothing. This is how trauma. This is real drama. One is a spender. One isn't, one's a Doer ones. Well, maybe he might show up today. Makes sense. This is where the first pain starts and it's within your control. One partner gets a divorce and in certain states because of how you started your business without partnership agreements. Those equity shares are now owned by somebody else who is not at least at all working in the business and may make it tougher for you to build your business all within your control because you don't insist that they do something for this stock. Now granted at the time you start your business, you may say, well, it doesn't mean anything yet, but you bust your butt, you complete product development, you go out and raise investor capital and you've got ball and chain former partners that do little to nothing. That adds value to your business. This is where you lose a big chunk of your company for no reason. Big time. It happens too often. So what's the antidote? How do you minimize the risk but also maximize the upside that. Maybe you are going into business with something or somebody who can really add that firepower and is worth that stock corrective action steps first of all the business entity. If you are going into business with anybody, I want you to have a partnership agreement. If you were the lead dog, be the lead dog, I have not ever found a true partnership where there is not not one person who is truly the lead, the lead technologist or bringing the lead amount of money, The who the big driver who keeps the trains running on time, who is staying up late to make sure everything gets done. That person. If it is, you should own a majority of the outstanding shares because you're doing the work. Maybe you don't yet know if your body can do the job, but if you give shares without putting some restrictions on it or ways to earn that stock, you can't get it back. So why not? Instead of gifting stock and you can all three of you were both of you both have to earn shares granted. I like one driver, some people in this room, you're the key driver. But if there is value in bringing a partner in who also wants to build the value of the company in the same way you do, let's have them vest their shares. Maybe they earn it over four years in equal increments. But if you give those shares out and they leave a year later, can you get them back now create motivations? Maybe they earn those shares for building your website and the tool of the platform. You decide what creates that value where they earn it. If you don't, there is a possibility that they never will earn it. You're in control. Sweat equity is a phrase that we have addressed. If they are vesting shares, I would like people to spend a little bit more time. I never like tax implications for contractors or partners that relate where all of a sudden they have to pay income tax on shares that they quote earn for services and this falls under the 83 B I. R S. Elections, write this down, I don't have time to go into it today, but if you are developing agreements and you have ambitious plans for growth and are likely going to involve angel investors or VCS and again, are going to require people to earn their stake in your business. That is a way a work around a completely legal work around to minimize the tax implications of employees or contractors who earn shares over a vested period of time. Few other things issue a certain number of shares of your company shares to you and your founding partners. Don't wait to do it down the road. Do not. A very common mistake that eventually you have to unwind Is, if you authorized at the time, you incorporate your total share pool of a million shares, don't hand out a million shares to 500,000 to you and 500, of your partner because then there are no shares for investors to buy him. And you document the issuance of your shares at the board level, at the time of issuance, why you're demonstrating that you keep track of the books and records of your shares. Don't make promises or hint of promises to employees or contractors or anyone else that could come back to haunt you. Your future investors are gonna want to know and ask has anybody else been promised shares? We've all heard about what happened on facebook. Right. But if you promise, it may lead to a needless um litigation, make it black and white. Who gets shares and for what consideration, either cash or something. They're going to deliver a value to your company. You decide the terms and come up with a shareholders agreement. Work with an attorney on partnership agreements and share issuances. It will be worth it to you. In fact, it means your documents will be in really good order. That will pass the investor due diligence tests very easy with the least potential for having reduce of documents or turning off investors altogether. But the upshot of what we're talking about here is if you're partnering, what are you getting out of it? Imagine this is my number one way you lose a big chunk of your business and get nothing in return. So this means all of this relates to how you can best maintain control without losing control. So that's item number one. Can we do this? Yes, we insist on value. We give away nothing for free. Even if it is to the best buddies, if you give it away for free and your best buddy doesn't do anything, don't complain about it. Who set up the situation. You know better if you're worried about insulting your friend or whatever, then maybe you're not ready to be the boss and make the tough decisions. You're running a business. If you're involving friends, keep your friends, but maybe they are not. If you can't make a black and white decision or have to worm your way or afraid of making a decision and you're the lead entrepreneur and involving a friend. If you're unable to make the tough call, don't involve the front, it will lead to too many compromises that will cost you more shares. I guarantee it. Number two, hiring, we touched on this a little bit before. If it takes an extra million dollars to complete product development because your employees don't get their jobs done on time and within budget, what do you have to do? You have to go out and raise more money to get that job done. Whose fault is it? You your employees or the investors so higher from a point of precision, don't compromise here. When the big chunks of cash are involved, you have to give away the biggest, biggest percentages of your company at the start up and early stage level. If you want to be loosey goosey on hiring, doing it later when you're profitable, not here when mistakes, beginners, mistakes which may not be yours, but your employees mistakes cost cash within your control, but you have to be ready to say no, yes, I will not hire you or by the way, you're now fired, you're not producing. I walk into too many venture backed businesses that do not do employee reviews. They might do it after 90 days of hiring in start on purpose. I have a very specific way for startup entrepreneurs to review employees. That's actually fun and empowering. I don't encourage it. You review once a year, how about once a quarter change happens. The best way to keep everybody focused on what you want them to do is to create very specific things that you want delivered. That's the way to keep your company on time on budget, no budget surprises because you can't afford it because then you have to spend more of your time raising more money and I know that's not your favorite thing and to do in a work day, your people can cost you money, hire the people who have been there, done that experience. If you want to launch your product on china, hire people who have already launched products in china, I don't care when you're hiring and I used to think when I was younger, it mattered more. I've learned through experience that somebody may have the will and the want and the desire to do a good job, but if they don't have these skills or experience to do a good job, they may not be able to, I may want to be a top professional golfer in the United States, I don't have the skills or the experience to be a top professional golfer in them, no matter how much I want it and want to do that, I can't so don't fall into the trap of somebody convincing you that they can. The only way you can tell if they can is if they've done it before. So if someone says I want to run a marathon, yes. Have you ever run a marathon before? If they shake their head? Yes. Okay, good. That's the way to hire with precision. Been there, done that they have the skills and the experience and they've already done that. Don't compromise. It will cost you hiring too fast. Could mean you end up having to spend more of your time to get more cash, shocking. Some other attributes I'd like to talk about of who tend to be great employees in startup companies, I love employees that are the Uber organizers. Sometimes there's that person who just brings order to the work day processes in startups, you might need somebody who thinks ahead about customer service, where thinks ahead about product systems, those are good people. So if you're interviewing people, people who create systems and love that and don't seem like they're a disorderly mess, they may bring that added value, putting in systems that will make it easier as you grow to feed off of the order they create. That's an extra check mark I give to people in hiring a personal preference is I like to hire people provided they have been there, done that experience, who are competitive. I love to hire people who love sports, granted. I really love sports. But what does somebody who participates in sports bring to the table in general? They have won games and lost games, but they come back with a fight to win harder. You are competing for customers, You are competing for cash against other entrepreneurial companies from VCS and Angels. Why not surround yourself with people who love to set goals and beat them and exceed them? That kind of mentality. Is that extra something that might help you complete a project on time and maybe be in less budget? That kind of person can be motivated. Let's see if we can beat this. Yeah. And that kind of person is accustomed to making mistakes, but recovering, that kind of person has probably worked with a coach before and is willing to be coachable to perform better. This one is a perfect personal preference. I get a lot of flak on this. But if I only can hire four or 5 people and I want the best. Plus I want something more. I like those orderly people who do that systems creation, things that I don't like to do and I want people fighting for customers with the same vigorous intent that I have. I also like people who have worked in a startup or small company before. It is a culture change to go from a 30,000 employee company into a five person company. A marketing exact who handles a budget to launch a product is very with a massive budget. Lots of people that they can delegate action steps to is a very, very different scenario than launching a new product in the marketplace with not a big ad budget. Pr budget and all the people and characters who have helped them succeed in the past. Can they adapt to this kind of world? It's a big change. And just because they've been it and done that in a big entity may mean it is a very different skill set in a small company without the same resources, don't confuse, been there, done that up here when you're down here, this is the kind of thinking that creates smarter hiring and getting more out of your employees and of course don't hire the winners and if a winner is in your room, get them out because entrepreneurial companies change all the time. If they don't adapt to change or hate change, complain about change and you know who I'm talking about, why are they changing this? Didn't they just say last month that we're doing this? But suppose you have to adapt to a new customer reality, who can adapt, Who can change, who's not going to whine about change. So in your interviews, ask them the biggest change they had to adapt to. How do they handle it? Were they a leader or a complainer? And if you end up having made a mistake and you have the complainer get rid of the complainer because the whole nature of entrepreneurship and setting yourself up and getting VC money, it's all about taking you here to hear that is massive change, Change is your reality and what the definition of success is in a venture backed business. And if you hire people who just don't acclimated well to change, you've created a ball and change something that will slow you and your company and your company's mojo down. These are my preferences, you'll add your own as well. But know that if people are slugs, it will cost you if you hire the wrong consultants, you didn't get any value for your cash. You have to stay on it and insist on performance. If you don't don't complain when you need to raise capital before you ever expected to. All of this is in your control, totally within your control. I'm gonna show this slide again because until you were cash flow break even and if you don't have cash to invest in your business, you are dependent on investors or lenders. The longer it takes you to reach cash flow break even in profitability, the more you will have to turn to investors. That's when it gets easy. This is when you must be precision based, more precision. Less precision. You have less margin for error in the beginning. Less decisions that should be made by the seat of your pants because that's how you'll get skinned up. This slide says it all of what you have to lead your company to greatness. Third problem, waiting too long to raise capital. You are great shoppers for cash. If you approach your company at the 11th hour to Angel investment clubs to lenders to VCS and you pro procrastinate. Yeah. You're not gonna raise cash on the best deals terms possible. We're going to be addressing deal terms shortly. But you're negotiating power. If you're on a static cache in a month, it's not that high. Who was in control of the decision to wait and procrastinate, who has been controlling the decision to assume their first investors will automatically be in a position to write a check on demand. This happens way, way too often. So even at the V. C level, let's say you take the 1st 500,000 in from VCS and you are so wrapped up in the performance of your company that you forget about the cash. Oh my gosh, we're almost out of cash. You phoned the investors who's in control, not you, not. You, you'd be amazed at how many companies that have raised first rounds of capital from angels and VCS think, oh, I can do this again. But suppose the stock market pulls back. Angels tend to go dormant right now is a great time to pursue angels because their public company investments have done really, really well. If a calamity happens in the economic marketplace, it causes some angels to retreat, VCS have to keep doing their job, Don't wait until you were out of cash. The 11th hour means you blew it. You may raise cash. But remember VCS are going to take a good six months, by the time all the investor documents are done and the deal terms are done, It takes time and you're not the only one on their plate. You are assuming you come first, They may have 10 different companies that they're involved in. You're not first, it is up to you to start raising cash before you need cash. So if you have just raised $1 million dollars to complete product development, that's where that team comes into play, that you must rely on to do their jobs while you start raising more cash. We had a great comment, how much, what percentage of my time should I spend raising cash, but if you are not a cash flow break even it should be at the top of your list. I love it. Where each week you try and come up with some new potential investors to just start wetting their appetite, getting to know them. Suppose you have to fly to new york, meet some more early stage investors, start networking. It is never off your list if you are not cash flow positive or even profitable because then you have the luxury of choosing the deal and maybe turning to debt sources to boost your company's cash flow. Those are the big three reasons why entrepreneurs lose control of the business because they've lost big chunks of equity and they didn't need to. Now somebody, some naysayers could say, oh, she comes from the venture finance world and it's true, I do, But I do see those 11th hour pitches and you're desperate, you're not presenting your best foot forward. You worry about g am I going to have to start laying off employees? Um, I see that pain, but I also know from an institutional perspective we can't speed up just because of you. And I would say to clarify in the last eight years, I've moved more to spending more of my time just doing this kind of stuff to warn you say, don't go there because this is what will happen. So I don't want you to think I'm telling you this. And the reason why investors are not number 12 and three on this beware liss. And the reason why I've just handed over and lost a big chunk of my company. This is where it happens most, and especially at the seed and early stage level. So if you want to keep the biggest percentage equity stake in your business, Don't do 1, 2 and three. And then by doing and taking a different route, you're gonna have better employees who are going to perform better. You're going to reach your goals faster. Your business is going to be worth more. You won't be raising money from being behind, you're gonna be ahead of the game. And guess work. You will have set the stage from getting the highest possible valuation for your business whenever you need equity capital. So by doing this better, you will put yourself in a position to get even a better deal because you were great shoppers for cash makes it is this too easy. This is what you have to remind yourself. The most important is probably one and three. The big chunks go out where you have to say to yourself, Okay, So and so has 10 of my company and they've never earned it. You have to just okay, mentally, get on with it, then learn from it. Don't do it again, suck it up. Waiting to the 11th hour is the next one.

Class Description

Ready to master the principles of business funding without frustration? Join financial expert Susan Schreter for a deep dive into debt and equity.

Susan covers everything you need to know to fund a business from inception onward. You’ll learn about how to safely borrow start-up funds from friends and family, and how to research and apply for loans, including micro-loans and SBA loans. You’ll also learn about a wide variety of funding types and the requirements or restrictions attached to each of them. From angel investments to venture capital to crowdsourcing, Susan demystifies potentially confusing funding concepts, giving you the skills you need to confidently grow your business.

Whether you’re just setting out as an entrepreneur or a long-time business owner, this course will help you ensure your business's long-term financial health and profitability of your business.

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