I SPENT MORE THAN 40 YEARS in the trenches advising growing businesses and their investors as a lawyer but also making angel investments and serving on a few company boards. I also served in senior management of a couple of law firms, including one with more than 1,000 professionals and offices across the country. During the same period, I co-founded what is now the oldest and largest trade association for venture capital and private equity investment firms in the Southeast and wrote a few books on deal making and legal strategies for business operators.
Hopefully, I have learned a few things that are not in the law books. Things about how the law and business can intersect effectively and creatively to the business operator's advantage. Things about how investors think and deals are negotiated.
I hope the perspective I have gained and our interaction can help you avoid common entrepreneurial pitfalls and make me a more effective counselor. And, I hope we can have a lively discussion where we learn from one another.
For instance, when does it make sense to consider venture capital as a financing alternative? And, when you seek venture capital, how do you go about it effectively? How should you deal with angel investors, particularly when they are family? If you are just starting, what kind of business form should you adopt? And, how should you allocate ownership among the founders? There are hundreds of these questions and few absolute answers that apply to every situation.
So let's start with founder ownership for an emerging growth company, which for us will mean a company established with ambitious growth expectations that will likely need invested capital to sustain its growth. Let's say you have two founders, each with an important role in getting the company started and building its foundation for long term growth. Each is prepared to invest a similar amount to get things started.
The right thing to do is give them equal shareholdings and seats on your board. Right?
If you answered yes, you may be making your first big and potentially costly mistake. Between yourselves, you probably know who the driver of the new business is, the one who came up with the idea and has a real passion to make it succeed. You probably know who will be working the longer hours to get the business started and who is and will be otherwise contributing more in other ways.
Try to recognize the opportunity driver from these factors and make sure the driver gets more of the stock and more rights on the board. First, it will assure you of having a person who can make decisions if there is a disagreement. Deadlock preserves the status quo which can be deadly in a new business that needs to innovate and respond quickly to survive. Second, it will force you to declare a leader and flesh out whether there are issues about who should lead and who should follow in the business.
And, while you are at it, make sure you have a shareholders agreement and that ownership rights vest over time so that if a partner does not fulfill his or her anticipated future contribution, or worse, leaves the company, you can get back ownership from the non-contributing partner. Outside investors will expect management vesting of stock, so you might as well put it in place on your terms.
Image (c) 2006. Galapagos scene.
The venture moola blog comes to you from Atlanta, Georgia. Find it at readjanus.com. Copyright Clinton Richardson.
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Clinton Richardson, has been writing and photographing for decades. His acclaimed venture strategy series is now in its 5th edition. His Ancient Selfies is an International Book Awards Finalist and an eLit Award Gold Medal Winner. Many of his images can be seen online at TrekPic.com.