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!
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.
Answered 10 years ago
Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.
Already a member? Sign in