Quickest synopsis I can produce: I started an Internet marketing company 2 years ago. Originally did websites and social media, eventually went to just social media with success. I have 3 people working with me at this point (2 salesman on strictly commission, 1 partner with a small stake) and we've went from 6 to 11 contracted social clients in the past 90 days -- in other words, some signs of growth (not to mention the quality and size/budget of our clients is improving too). All though we still are a smaller operation as we are on track for only about 30k in sales for this year at conservative projections. We have no capital so we're very restricted financially which makes faster growth tougher. Recently I was approached by one someone (a client I did work for actually) who owns a large flower shop and flower distribution business and is also tied in with a local television station in my city. He told me he is impressed with me and what we have going and he wants to team up. He is willing to finance an office (we've been working out of my home office which certainly can't last forever) and add a few more employees in various areas. He wants to be hands on to grow the business, not so much just an outside investor. He also wants to begin offering video production in addition to the Internet marketing services as part of this company. He wants to basically hit the reset button and rebrand from the beginning but now offering a larger array of marketing services. He wants to split the company 60/40. 60 to him. This is my dilemma. I'm very excited to partner with someone who's more experienced than me and also well connected in the area which will bode well, but am I discounting what I've built? I do feel we could continue being successful without him, but I also feel the financial backing is appealing in that it's extremely difficult to set yourself up for large amounts of growth with limited capital so it would be nice. Lastly, I'm giving up the controlling stake. My dream has always been to be at the forefront of my own company, but with this arrangement I essentially fall to second in command. Am I on an ego trip to be questioning if I'm okay with that? I keep going back to the saying, it's better to have 1% of something huge than 100% of something small.... My gut tells me I can't pass up partnering with this business man and this opportunity, but I don't want to get taken advantage of either... Any and all help is extremely appreciated. Thank you so much in advance!
A few points (and as someone who has sold a digital agency, I have some experience here)
1) "This is the biggest decision of my life"...
No it isn't. Not even close. I mean no disrespect but, agencies are easy to start back up. You build a team, build a client base, maybe take investors, scale it, sell it. Sit on your hands for the non-compete period, then start another one. Don;t sweat this too much, you aren't facing a decision that you can't work your way out of in a year or two.
So my tip number one: relax!
2) This investor is taking you for a ride
Giving yourself a minority ownership in an early-stage company or startup is a very, very bad idea. You need to feel like you have a "big win" ahead of you. A CEO shouldn't own a minority stake in the company she or he founded until you're doing $Millions in revenue
3) This guy is bringing very little to the table
He has no background in your area. If he's bringin money, sure. On £30k run rate you aren't hugely investible but hey, a £20k injection of cash at 20% equity might work for you. But seriously, right now you have a very early stage business and it's too early to see how his flower shop expertise would help.
4) It's really, really early for you
Taking investments into agencies is usually a bad idea until you have some solid revenue. £30k is very admirable and you should be proud to be more successful than a LOT of small business owners. But honestly, just keep selling and hustling.
Hire SLOW and fire fast. Move your sales reps to a basic and give them quotas. Use contractors to scale out delivery without taking on as much risk.
It sounds like you have the beginnings of a great agency. but from the information you've provided and from remembering my very early days where I transition from freelancer to agency, an investor right now would be a bad move for you.
Happy to jump on a call to discuss my specific experiences and how I scaled out my team and client base and then moved everything to SWEET retainers so we could sell the biz.
I've built and sold two businesses for £1M+ each. In both cases I took on outside investors.
Some things to think about:
Do you need an investor? What would you actually do with the money he’s investing? You mention an office and adding video production, but are those things you really need to have / do? What is really constraining your growth right now? Would having an office and more money actually generate more sales? You mention that you already have two commission-only salespeople, so they only cost you money if they bring in sales, so you wouldn’t need more money to get sales through that route.
If you proposed partner is into flower wholesale and distribution, they may not really be able to add that much useful expertise to your social media marketing agency.
I’d look at it this way: what’s the worst thing that would happen if you did or did not take up this offer? If you did take it up, worst case is that you lose your business and can’t do anything about it (things don’t go well, partner stops funding, business goes bust); if you turn it down, you are at least still in control of your own destiny.
I think you nailed it with the 1% vs. 100% comment.
It really depends on what you want to do and where you want you business to end up.
It sounds like you would like to grow the business and have additional capital to do so. Just because he offered 60/40 with him in charge does not mean that is what it has to be. I would see how negotiable he is on that point and what his concerns are with you being in control.
I suspect that it has to do with how his dollars will be spent, which is understandable.
Just spit-balling here but maybe you could counter with something along these lines. Make a 51/49 split with you in control, but setup a "release schedule" in which he would have to approve specific investments before he gives you the cash.
There are a variety of other things you could do, this is just one idea. This way he had more control over what happens to the money and is not just giving you a "blank check", but you maintain control over the company.
This scenario requires you to establish a good financial reporting and forecasting process/system. But this is something you absolutely must do no matter how you proceed.
I hope you have not yet made your decision yet, however, I believe partnering up with this individual in 60/40 split will be a mistake. Here are my reason why:
1) This business is yours. You started it and you have grown it to what it is. He is an outside investor, who, not only wants to change the vision of the company, but he also wants controlling interest. The likely outcome is that you two will butt heads on decisions and directions of the company, but you will be powerless because he owns the majority share. He can also have you removed.
2) Being a first time entrepreneur can be tough. Ofter you're doing things you have no idea will work, and its easy to feel like you could be making the next huge mistake that will destroy your business. My guess is that you feel this person can help remove that uncertainty because he is experienced and has connections. However, the odds are that he also does not know what he is doing when it comes to the specifics of your business. He is just going to come in with preconceived notions based on his past experiences and successes. Odds are he can be just as wrong as you can be. You have to trust your gut. Only you know what is best for your business.
3) If you give up the majority of your company in the very first funding round you put yourself at risk of not being able to raise additional capital in the future. If you do raise capital later, you will have to give up even more of your minority share. Venture Deals by Brad Feld and Jason Mendelson is a great book to learn about raising any kind of venture capital and the typical pitfalls.
I can list a few other reasons why this is a bad idea, and I'm happy to jump on a call with you ,should you want to discuss this further.
My advice is you should continue to build your business (slow and steady) until you are in a much better position to raise capital on your own terms and giving up only minority share in the company. One way to start this process is to start charging more money to your clients. I've tried this many times, and it can be made to work. Let profits drive your growth. Raise money when you least need it.
If you must partner with this individual, then I would say a 70 / 30 split in your favor or better. Or an even smaller share and give him the role of an advisor. Just don't lose majority control. this is your business. He should be working for the business, not YOU working for HIM. If you want to work for someone, then then there are less riskier options than starting your own business.
Hope this helps.