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Should you start a business on your own; or with co-founders? In this video I will discuss this question with special emphasis on 50-50 shareholding and end off with an example of my own experience. I hope you find it useful.
If you are fortunate enough to have access to finance and are confident that you have the skills and knowledge to start your own business, it may be better to go it alone rather than invite business partners to join you as giving away ownership at the start of a business may prove to be the most expensive business decision you will ever make; especially if the business becomes successful. You will be giving away years of future profits for a service or a skill you could have either outsourced, contracted in or employed directly.
In considering this decision, it is wise to weigh up the options - would it be more beneficial to raise finance from cofounders by giving away ownership (also known as equity) or raise the money on my own from a lending financial institution? Should I pay experts to help me with the business or rather give away ownership to try to save costs?
Many entrepreneurs may lack the confidence nor have the appetite for risk to go on their own. The process could feel very daunting and it may feel preferable and safer to share the workload, the stress and the risk while trying to have more fun and hopefully make more profits. Some of this is true to some extent as a study by SmallBizTrends found that having two or more co-founders increases the chances of success since they raise 30% more funding on average and have 3 times more clients when compared to sole owners.
When negotiating co-ownership it is vital to have a good understanding of the real value each partner will bring to the business and then apportion the percentage ownership accordingly. As a general rule, if a partner is not planning to work in the business but will be a silent investor, it is wise to restrict their ownership to not more than 25% of the total. If, however, they are not agreeable to these terms and you are pressed to give away a larger percentage, it is essential to include a buy back clause which allows you to buy back some of the equity at an agreed amount once the loan is repaid. These should be acceptable terms to an investor as it is in their interest for you to remain motivated and engaged rather than exploited as you will be the driving force in the business and responsible for its success.
50-50 partnership or equal shareholding does sound like a good idea as it seems fair, especially when starting a business and in many cases it works very well. However, over time some partners work more than others or bring in more sales which may lead to resentment, disagreements and eventually deadlocks; all to the detriment of the business. Many business advisors are not in favour of the 50-50 ownership due to the potential of a deadlock and prefer the main partner to have either more shareholding or a resolution giving them the casting vote. There are many tragic stories of failed businesses and friendship lost due to the 50-50 deadlock.
Lets assume you have agreed on the ownership percentages, I would recommend you then sign a Shareholders agreement to manage dispute resolutions and protect all shareholders rights which should include how to manage any future additional funding, share valuations in the event of death or divorce, divided pay out policy etc. I will leave a link in the description
Over the past 35 years I have been involved many businesses, four of which have had 50-50 shareholding. All of them had moderate success, but in the end, I sold my shares in three of the businesses and bought out my partner in the fourth. One of the businesses was a diamond diving operation in Namibia’s Skeleton Coast which was relatively successful. For various reasons, I ended up doing more of the diving than my partner, but we resolved this by agreeing to increase my salary, however in the end I sold my shares, and I am happy to say that we remain friends until today.
26 авг 2024
