Remember that entrepreneurs are also investors and that cBuilding a company is a team sport
“We are very excited about it, but we are also trying to think about the future”said one of the two co-founders I was meeting with. “If we get out of the business, say, for $1 billion, giving up an additional 2.5% stake would basically mean giving you $25 million. “That just seems crazy to us.”
Those were the concerns of a couple of founders I was talking to, who were trying to decide whether they should bring in a third person to help them develop their product. Originally, they had planned to find someone with the technical skills necessary to build their platform, but it so happened that they met a candidate who was a little different than they expected, and he was interested in a much larger role.
The founders liked the guy. They felt he could be a great fit for their team at an early stage, but he wanted more than just a typical employee package. He was asking for a 15% stake in his startup, a company with no revenue, no funding, and virtually nothing. And the founders were struggling to decide whether they should negotiate to reduce their request to something more modest, like 12.5%.
I couldn’t help but laugh. It was one of those situations where inexperienced entrepreneurs were focusing on the wrong problem, and that’s the quickest way to lose everything.
The Danger of Stock Hoarding Let’s clear up the obvious flaw in your logic:
Owning 100% of a failed company is worth exactly zero dollars.
And yet, despite what seems like simple math to me, I’m always talking to founders who are so obsessed with their stake in the companies they’re building, that they’re willing to suffocate their startups to death before giving them a chance. opportunity to grow. In this case, the founders had become convinced that the conversation was about an “extra” 2.5% and whether it made sense to give it up. In doing so, they were overlooking the real issue: Is this guy capable of providing enough value to make his company worth anything in the first place?
Unfortunately, many founders hoard shares because they are too attached to the fantasy that they are going to “make it big” on their own. They think they will be able to keep the entire property while achieving tremendous success, but the truth is that no one does it alone. In fact, the opposite is true. Entrepreneurs who understand how to leverage their action group as a tool to access resources are the ones who ultimately succeed. They understand that their actions are not for them to get rich. Instead, stocks are the primary asset they can use to accomplish important things like attracting talent, incentivizing loyalty, and accessing capital. This type of “actions as a resource” mentality is what helps them build stronger teams and better companies.
In contrast, when entrepreneurs worry about holding onto shares only for how much they might be worth at some unknown point in the distant and improbable future, they are demonstrating that they have the wrong mindset. It’s a mindset where the purpose of their work is to make a lot of money for themselves, rather than creating significant value.
The entrepreneurs I was talking to were a great example. They were getting distracted by the potential dollar value they would be delivering if their company reached unicorn status, while completely ignoring that the only way to get there is by building the right team.
The real question to ask “Let’s go back a little”I told the founders. “They’re worried about giving someone they barely know $25 million, and yes, that’s a lot of money. But let’s be real: Have any of you stopped to ask if this guy has what it takes to make his company worth a billion dollars?”
They exchanged glances before one of them responded: “Well, we think he can contribute a lot.”
“That’s a start.”I responded. “But let me put it this way: If you’re already fixated on a couple of percentage points, you’re acting like you’re holding on to a billion-dollar company right now. Is your company worth a billion dollars right now?”
They both shook their heads sheepishly, admitting that it wasn’t worth it.
“Is it close to being a billion-dollar company?” I asked rhetorically, knowing, of course, that it wasn’t. “So instead of thinking about how rich they will be if they win the jackpot, shouldn’t they be thinking about whether this guy can help them build something valuable in the first place?”
The founders nodded, and I could see I had their attention. “Stocks are just another tool in your box”I explained. “If they are going to build something big, they are going to need to attract the right people, and that is going to cost them. Either they pay in cash, which I imagine they don’t have, or they pay with shares. And if you want to attract someone who is willing to fight on your side, who is as committed as you are, that means giving up a significant piece of the pie.”
“But what if we end up giving more than it’s worth?”asked one of the co-founders.
I shrugged. “That is the risk they run. But think about it this way: if you trust him enough to consider him almost a co-founder, then you have to believe he’s going to provide enough value to make it worthwhile. If you do your job well, you’ll both benefit, and that 15% will seem like a smart move. If you don’t, they will have bigger problems than the stocks they gave up.”
The entrepreneurs were quiet for a moment, considering my point. Finally, one of them spoke. “So how do we know if it’s the right person?”
“Good question”said. “Ask yourselves: Does it provide skills that you don’t have? Does it provide connections or knowledge that they lack? Do you feel like you will put in the effort necessary to make this work? And, most importantly, do you think he is going to treat this company as if it were his own?”
They seemed confused, and I realized that they hadn’t fully thought through what it means to hire someone. “Look”said, “Stocks are valuable, but only if they have something worth owning. Hoarding shares does them no good if it means they fight alone. If you think this guy can help you achieve your goals, don’t let a few percentage points hold you back. I assure you, if this guy eventually helps you build a billion-dollar company, by the time that happens, your relationship with him will have evolved so much that you will be happy to reward him with that large amount of money.”
One of the founders sat back, sighing. “I guess when you put it like that, it seems a little stupid to worry about that 2.5%.”
“It’s not stupid,” I responded, “It’s normal. They are trying to protect what they have built so far. But remember, what you have now is just the beginning. If you want to build something that lasts, you’re going to have to leave behind the idea that you can do everything alone. Building a company is a team sport. They will not achieve this by monopolizing their shares; They will achieve this by leveraging actions to attract the people who can help them make it real. Ultimately, the more they invest in their team, the better their chances of success.”
