Avoiding the Short-Term Mindset
It’s amazing what can happen when you forget about the long-term and focus on the short-term side of business. When I founded my company, I brought in two senior executives to join me. As my partners, I treated them as such and agreed to give significant equity stakes to each. When I eventually incorporated as a C-corporation, I issued blocks of founders’ shares to the executives and myself, as well as a series for our early investors.
At a time when money was tight, spirits were high and our focus was on building a business, I didn’t think too hard about the stock grants. I assumed that the caffeine-fueled whiteboard sessions and long days full of energy and camaraderie would continue without a problem. In retrospect, I think we all shared the same confidence and naïveté. We felt that by not creating rules and restrictions on ownership, we would prevent potential power-plays or squabbles down the road. That was my first mistake.
I also assumed that, like my previous companies, I would only be in the business for two or three years before selling it and moving on. I had a short-term mindset, and believed that because the personal relationships were great at the time, they would remain so for the next few years. The founders grants were outright, effective immediately, and had no clauses or restrictions related to ownership. Less than a year into it, one of the two partners I had brought on became so problematic that we had to kick him out of the company. He left, taking his big block of shares with him. Six months later, he sold a big portion of his shares to someone he owed money to.
Fast forward to today. The company is now in its fifth year of operation, we’ve weathered the economic storm and we’re thriving. Still, we operate under the knowledge that when we do sell the company, all of our shareholders will see a sizable return … including the guy who left and the person he sold his shares to. After spending years pouring my life into this business, I can’t tell you how frustrating it is to have to shell out a big chunk of the gains to someone who created so much trouble and had so little to do with our ultimate success. Overall, I’ve made a lot of smart business decisions, but I can never undo that whopper of a mistake I made in the beginning.
Here are some of the valuable lessons I learned from this experience:
Don’t be cheap when it comes to legal fees. Get a good lawyer who works for you and you alone. He should advise you on the startup documents, terms and processes involved in starting a business. I saved a couple thousand dollars in legal fees five years ago by not doing this, and it’s going to cost hundreds of times that much in the end— not a good trade-off.
Create practical equity measurements. Everyone, including founders and partners, should have their equity tied to time or performance measures, or both. Also, to avoid confusion down the road, there should be a clear set of rules regarding getting rid of a major partner or shareholder.
Focus on the specifics. Be specific about the company’s and/or other partners’ rights to re-purchase shares in the event a key partner or stockholder dies, leaves, gets divorced, etc. don’t allow him to sell or transfer his shares to an outside party unless you pass on the right to buy them yourself. Above all, plan for it, even if you think it will never happen.
Derek Preston is the founder and CEO of Snapforseniors, Inc. E-mail Derek at [email protected].