The intoxication of a new beginning

But the excitement begins much earlier.  With newfound freedom to make independent decisions about finding a company name, where to locate the company, whether to lease an office or start from home, how to engage talent, even whether to provide free coffee to employees,  the newly minted entrepreneur can only think of positive thoughts and great outcomes.

Do you ignore the warnings of experts?

[Email readers, continue here…]   This moment is not to be spoiled by such mundane warnings from advisors or consultants to plan carefully, research the market and competition, and execute the plan with tenacity and enthusiasm.  This moment is to be enjoyed for what it is: the ignition point in which the dream becomes a reality and anything is possible.

This moment is to celebrate every action, including shopping for supplies, furniture and technology to support the newly minted enterprise.  There is never again going to be such a pristine, simple, problem-free time in the life of this business.  Relish the experience of creation.  Celebrate each important “first,” including the first customer order, the first day in a new office, the first new employee hired, the first earned dollar actually deposited into the bank account.

Write your own Hollywood script

Because it is yours to write alone, there is no Hollywood script more thrilling than the one you create during those first days when everything is so very new.

Images for this post created using DALL-e, MS Designer, with prompt:  Create a lifelike color image of a young entrepreneur standing in a small, bare office for the first time looking excited as he starts his journey in business. Make image transparent and ragged edges.

But I am ahead of myself…

Every entrepreneur has that moment of truth – the one that marks the decision to take the path to entrepreneurship or the path to job security with a larger employer.  And down the road a bit, most of us face another when deciding whether or not to go for growth, requiring new investment and increased risks.

My self-confrontation

My moment of self-confrontation came many years ago when deciding whether to leave behind the relative comfort of a good income from my one-person operation or hire my first employee which would allow me to spend my time in sales and in growing the business.  It was perhaps the most difficult decision of my young life.  Just out of college, managing a business that had paid my way through college and several years beyond, the cost of expansion would cut my take-home income enough to impact my life style and perhaps, if not quickly successful, cause me to put off my pending marriage.

Not a small decision. 

So, I got in my car with a small overnight bag, pointed toward Mexico, and headed to Ensenada, a place I had been to a number of times before, to find solitude for a short weekend just to think about the future.

[Email readers, continue here…]   Checking into an inn I had visited before, which was located right on the beach, I walked out to the shore and found a large, smooth rock, perfect for a long, hopefully productive sit.  And I sat.  I sat for five hours that night, thinking about the alternatives and what I really wanted for myself over time.

The momentous decision

After that evening of isolated, quiet thought, it was clear to me that I wanted to take the risks, to go for it, to attempt to build a big business, to leave my comfort zone.

Executing the plan

The next morning, I returned to the rock and sat.  Planning ‘how,’ now that I was comfortable with the ‘what and when.’  And after a few more hours, I had devised my personal plan.  I would hire one full time employee and one independent contractor for a start.  I’d take no bank loans or ask for any outside investment.  This would be entirely my risk to take unaided.  Satisfied, I left that rock, checked out of the seaside inn, and drove home excited and ready to execute my plan.

The result

The story is true. The outcome was excellent.  I grew that company to over fifty employees, even taking it public after a number of years, and later selling my interest in that first company to get into the computer software business, just at the right time to take advantage of its amazingly rapid growth.

But it all started with the decision on that rock.  If you have a life-changing decision to make, where do you retreat to think?

Images created with DALL-e, Microsoft Designer, using prompt: “A realistic 3D image of a smooth rock large enough for a person to sit upon, located at the shoreline of a beach cove, in the afternoon sun. A young, casually dressed man is sitting on the rock, contemplating his future.”

… and here is the usual early-stage trap…

First, a brand-new enterprise is often formed from the efforts of several “partners”, each with an expertise valued by the others.  Equity is divided between the founders and the business begun.  Although this insight does not address this point of ignition, we should note in passing that things always change over time, and formerly strong founder-contributors can become a drag upon a business or lose interest if the enterprise is not quickly successful.

How to protect against founder role changes over time:

To protect against this, there must be some document in place from the beginning that clearly states the expectation of each founder as to contribution of time and resources to the enterprise.  The document should also contain clear buy-sell clauses, forcing any sale of shares to first be offered to the corporate treasury, then to the other founders in proportion to their holdings, and then if there is no interest, to outside investors.  It should contain a mandatory sale clause in the event of separation of a founder, so that a major owner who is passive in the enterprise cannot easily vote against measures other active founders endorse.

Some rules about stock options and phantom stock:

[Email readers, continue here…]   The real insight here is that stock options or phantom stock are the tools of early-stage businesses used to attract great talent when there is not enough cash to pay market rates.  Here are some rules.  First you must create a stock option plan using your attorney, which must be registered in many states as a security offering. (The fee for registration is well under $100, so this is not an issue.)  Options are usually best with “C” corporations but granting options for either LLC’s or “S” corporations are not a real problem.

How to give away too much too soon:

Most early-stage companies make the mistake of making option grants to new hires at all levels that are too aggressive and distort the capital structure of the company to a degree that damages future professional investment.

Let me try to advance a few rules of thumb to help guide you here. 

An option plan should carve out an addition of about 15% of the “fully diluted” shares.  If there are 85,000 shares issued to the founders, then a plan calling for 15,000 shares in a pool reserved for future hires is appropriate, making the fully diluted shares 100,000.  The board must approve the plan including this number of shares in the plan, and shareholders must approve the plan as well.

It is important to note that each grant to new or existing employees must be approved by the board before issue.

Pricing your options:

The price per share for option grants is also an important consideration.  IRS rule 409a specifically calls for an appraisal of the value of the corporation’s stock current to within a year of any grants of options, although there is an exclusion for early-stage businesses in which expert members of the organization or board may make such an appraisal if they qualify according to the exemption.  But after the enactment of the Dodd-Frank legislation over a decade ago, there are few if any insiders willing to step forward to provide this expert service from within.

Pricing rules:

If there is only one class of stock, the same as the founders, and the appraisal of the single class of shares yields, say $2.00 a share, then options must be priced at that amount.  In other words, you cannot create bargain options at below “market rates.”

How about multiple classes of stock?

If you have a preferred class of stock with special protections, that class of shares will be valued at a price higher than the founder common shares, allowing stock options to carry a lower price per share than preferred investors may have paid.  This is important because high quality candidates should be induced to consider coming aboard at lower than market salaries using the tool of “cheap” options, properly priced.

What percentage of the total company shares should be reserved for what specific job titles? 

Inducing a new CEO to come aboard usually means creation of a stock option package of 5-8%. That size of grant would take much or most of the option pool.  A vice president, or CxO candidate, typically is offered between 1% and 1.5%.  Director level employees are typically granted ½%.  All other grants usually are much lower, allowing for the typical 15% pool to last for quite a while in most companies.

We will cover board members and advisory board members at a later time.

How about “vesting” shares over time?

Options typically are earned over time, which we call vesting.  If a grant of 10,000 shares is made on January First, typically there is a four-year vesting period in which the employee earns the right to exercise (buy) 1/48^th of the shares each month.  Many plans also call for a one year “cliff” in which an employee who is separated from the company before a year is unable to exercise even the shares which would have been vested at that point.

A little sophistication- offering advantages for senior staff:

There is an important consideration that will become an issue with sophisticated candidates for VP and above.  We call these “trigger” provisions, in which selected options negotiated for a select group of senior managers, fully vest to 100% upon any change of control.  This provision allows these select individuals to perhaps profit handsomely in an acquisition by being able to exercise their options in full at the time of sale.  The negative side of this is that the buyer may not want to so enrich these managers that they may not be willing to come aboard the buyer’s organization, even if the existing options are replaced with options from the buyer company.

If all of this seems a bit overwhelming, we have just scratched the surface of option plans and incentive compensation.  This is an area of expertise that a CEO is required to quickly learn and carefully manage with the help of the corporate attorney and the board.

If you have been following our recent insights, you’ll be up to speed knowing that professional investors negotiate tough terms, from provisions of control over asset acquisition, eventual sale of the company, future investments, forced co-sale when others attempt to sell their shares and more.  And yet, in an earlier post, we spoke of the problems that come when taking unstructured investments from friends and family.

So how does this fit into this sandwich of alternatives?

Trusted, close resources include sophisticated relatives, friends and business associates who know how to structure a deal as a win-win for you and for them, while allowing you to retain control over your vision and execution.  Their investment should be structured with the help of a good attorney who understands the mutual goal of maximum leverage of funds with minimum interference in your business decisions.

Protect the investor as well as yourself.

Remember the admonition that investment from such close sources carries an additional burden for you – to protect your investors and their investment as if they were your alter egos, offering money as if from your own pocket.  Such money should never be taken without clear understanding of the terms, whether a loan with a reasonable interest rate and strict repayment terms, or an investment valuing the company at an amount considered reasonable by a third-party professional, even if as a sanity check as opposed to an appraisal.  This money is personal, an investment in you as much or more than in your company.  The degree of care you take increases with the reduced distance between you and your investor.

A personal story as an investor…

[Email readers, continue here…]    My very first investment as a professional angel was in a small startup where the entrepreneur’s vision fueled my imagination in the audio market niche where I had run a business in an earlier life.  I was so enthusiastic that I coached the entrepreneur to approach his mother, who invested $50,000 under the same terms as my investment.  A small venture firm and a few more angels rounded out the total investment.

Building the business with investors and board members

As the company grew and became profitable, it became more visible to others in the market niche.  Two of us who invested served on the board of the company, advising the first-time entrepreneur with our business and industry experience.

A liquidity event opportunity

Several years later, with the approval of the board and entrepreneur, I was able to engage a very well-known potential acquirer of the business who offered an attractive price for the still young but successful enterprise.

The shock I didn’t see coming…

After weeks of negotiation, the entrepreneur suddenly disengaged, claiming that he was no longer interested in a sale of his company.  The rest of us were shocked and disappointed that after weeks of work and a fair price, we were left with nothing but to follow his lead and disengage.

My reaction and proposal to the entrepreneur…

Shortly thereafter, in a board meeting, I brought up the issue of starting to pay board members for service in cash or in stock options, typical for outside board members but rarely for venture investors.  The entrepreneur was angry, abusive, in his negative reaction to even bringing the issue to the board for a discussion.  Five years had passed since my original investment in what I now clearly perceived as investment into a lifestyle business, one where the entrepreneur had no interest in selling or sharing.

So, I made my move…

I resigned from the board on the spot and negotiated a sale of my stock to the entrepreneur at five times the earlier investment, a fair return for both, since the company was by then worth much more.  It is now years later, and his mother along with other early investors are still in the passive game, not likely to see liquidity from this mistaken investment in an entrepreneur unwilling to take money in exchange for the eventual promise of liquidity.

Why tell this story at all?

Mother is surely satisfied as a passive investor who probably would have given her son the money without structure.  The other investors are probably in the unhappy never land of not being able to see liquidity after a decade and unable to write off the investment as a loss for tax purposes.   This story would probably have ended in a lawsuit if a larger professional investor had been involved, since the entrepreneur did not follow the rules and seemed to have no desire to do so.

Trust works both ways.

Take money from close resources but treat it as if the responsibility is even greater to protect the investors and their money than from a professional.   These investors trust that you will do the right thing for them if at all able.

The subject of raising money is critical to many businesses and a passing option to others, depending upon the capital efficiency of the enterprise.  Some businesses require very little capital and the founder can self-finance the enterprise and retain 100% of its ownership and control from ignition through liquidity event (startup through sale).  For those of you who fit that description, nice work.

When the need is high…

For the rest of us, desiring to build large, valuable enterprises quickly, the need for outside capital is high on our list of requirements and even the source for some sleepless nights as we worry over the availability and cost of capital.  It is for this group that we explore the implications implicit in raising money for growth.

It might be useful to list some of the ways in which you can raise money for growth with and without outside investors.

Bootstrapping: 

This term describes your ability to start a business with little investment and grow it using internally generated funds.  Certainly, bootstrapping is a preferred method of funding growth if it does not hold back the speed of growth or hobble the quality of product or service to the extent that better-funded competitors can overtake the business.  There is a lot to say about retaining control.  You will realize much more from the ultimate sale of your business even if at a considerably lower price than if splitting the proceeds with investors.  You will have more control over strategy and execution than with an outside board overseeing planning and performance.  But few businesses grow into the sweet spot of $20 million to $30 million in worth to an ultimate buyer without the injection of outside capital.

Friends, family and fools: 

[Email readers, continue here…]   This term, although pejorative, describes the typical mix of early investors in a small, young growing business.  Money from these sources is relatively easy to come by, and most often comes with no strings as to oversight by a formal board composed of these investors and management.  However, most often, these funds are solicited by a well-meaning entrepreneur from investors who are not qualified as accredited investors under the law (currently requiring a proved income of $200,000 a year or $1 million in net worth for an individual investor).

My experience with early valuations by founders for friends…

I’ve arrived at a significant number of companies that were looking for additional growth capital after a “friends and family” round and had to “clean up” the cap table more than a few times over the years.  Taking this kind of money has several pitfalls you should be aware of.  It is most common to greatly overprice such a round of financing, valuing the enterprise well above what it may be worth at the moment for friends or related investors who do not have the sophistication or willingness to challenge the valuation.

The result of early over-valuation…

When professional investors look at such overvalued prior investments, they may refuse to become involved with a company, knowing that there will be, at the very least, universal disappointment and anger from prior investors when a new round is priced lower than the earlier friends and family round.   Sometimes this money is just too available, and the risks seem so far away; so, an entrepreneur will take the money and put off the worry over the eventual consequences, all in the hope that no more investment will ever be needed and everyone will be richer for the effort.

Using your bank credit line and credit cards: 

Even with the credit crunch signaled by the recent threat of recession, many banks will issue business credit cards with a $50,000 limit if the entrepreneur is willing to personally guarantee the balance, and has the net worth to do so.   And even with the significant cost of credit card debt, many entrepreneurs aggressively use existing cards to finance a startup.  It’s an option, even though an expensive one.

 “Strategic partner” investors:

If you can find a strategic partner willing to invest in your enterprise, consider it a blessing. Whether the partner is a supplier looking to gain a lock on your business as it grows or a customer looking to create a competitive barrier through use of your product, such an investment typically carries fewer restrictions than from a professional investor and less oversight.  Better yet, the valuation of your enterprise is often higher than if the same investment were taken from a professional investor.  Strategic investors validate a business, by their presence creating the very value they pay for with increased price per share purchased.  It is most often a win-win for both you and the strategic partner.

Professional angels:  

This is the arena where I work and play.  This class of investor, once quite disorganized, has become much like the venture capital community, creating a process including due diligence (careful examination of a business before investment), terms of investment that match those of venture capitalists, and a process that sometimes takes months from introduction to investment.  Yet, professional angels are usually willing to take active board seats in a young enterprise and act as cost-free consultants to the CEO-entrepreneur, giving freely of their individual and collective years of experience, often in the same industry as the investment target.

Do not expect grand valuations of your enterprise from these professional angels. They have been burned too badly during the last decade by overvaluing businesses and finding themselves like friends and family, “stuffed” into a down round of lower valuation when a company takes its next round of financing from the next step, venture capitalists.  Professional angels, often organized into groups, usually invest from $100,000 to $1 million in a young enterprise.

Accelerators:

This relatively recent combination of coach and limited investor is available to some early-stage businesses, usually in major cities, and requires that the entrepreneurs spend from weeks to months being coached by the accelerator team.  In return, the accelerator often invests $25,000 to $100,000 in the young enterprise and takes from five to ten percent of the equity in return.  At the conclusion of the acceleration period, the company participates in a “demo day” in which institutional investors are invited to review the company in a live pitch session.  Many accelerators have come and gone during these past five years.  Several are well-known and professional investors pay special attention to their graduates. These include Y-Combinator and TechStars, among others.

Venture, private equity and more: 

Here we lump a large number of investor classes into one.  Venture capital comes with a cost, and there are no bargains for the company when taking such an investment.  VC’s value an enterprise lower than others might at the same stage of investment, always aware of the need to create opportunities for “home run” profits at exit, since over fifty percent of their investments typically are lost when companies die before an opportunity to sell to others.  Further, as a class, VC’s have not done well for their own investors over the past decade except for several first-tier entities, making it doubly important to fight for low valuations and high profits at exit.

VC’s do not even engage in discussion with most of those entrepreneurs seeking capital. By some estimates, 95% of contacts are ignored unless they come as referrals from trusted sources such as known lawyers, accountants, or fellow VC’s.  And just for measure, VC’s fund less than 2% of all deals they do investigate.  Typical VC investments begin at $2 million and quickly rise to $5 million and above, depending upon the size of the fund and stage of investment.  Terms are much more restrictive than from strategic or angel investors, often requiring the entrepreneur to escrow his or her founder stock for a number of years to prevent the founder leaving, and restricting the sale of prior stock without the VC also being allowed to offer a share of its holdings in the same sale.

Micro-VC’s:

This is a recent class of venture investors, often with smaller funds, and willing to invest from $1,000,000 to $2,000,000 on average, filling a gap between professional angels and VC’s.

Private equity investments are available from firms created for this later stage opportunity, but typically are available only for businesses that have achieved revenues well above $50 million.  Often private equity investors will want control of the business as well.

Bank lines of credit are often available to businesses that are profitable, most often personally guaranteed by the entrepreneur, but available at a cost in interest less than most any other source.  Small Business Administration (SBA) federally guaranteed bank loans are available again after years of limited activity.  With some restrictive provisions, these loans are favored by many banks as carrying much less risk than loans without the guarantee.

But it is the outside investor that validates a business, often influencing growth with shared relationships, experienced guidance and providing a gateway to needed resources.  In the next weeks, we will investigate several insights that relate to these money resources, all to help you to determine what is right for you, and how to prepare and succeed in securing funds.

Note that none of these three famous innovators were inventors like Thomas Edison, but visionaries who see a new marketplace or niche or how to reach the mass market in ways not previously attempted.

Innovation does not always equal invention.

Leaders and companies that innovate new products, services and methods of delivery are the ones that stand out in a crowded business world, especially when attempting to gain recognition among the throngs of competitors visible on the web.

And innovation is what creates value.

Innovation is valued by our society, by investors and certainly by consumers.  It is the focus for state and federal governments worldwide, many finding ways to reward innovators with tax incentives or investors with tax credits to finance innovative new enterprises.

My experience describing innovation.

As a keynote speaker on technology trends, I often started presentations beginning with a short history of innovation in the United States, using the twist of examining innovation through the lens of 150 years of cyclic bursts of bubbles, leading to subsequent recessions and depressions.  It is not hard to find strands of gold in the carnage left by failed businesses lost when a bubble bursts, such as in 1857, 1902, 1929, 2001 and 2008.

Sometimes, innovators enable unfinished visions of others.

[Email readers, continue here…]   Innovators make use of golden strands of opportunity left when the unfinished vision of another cries for completion, or when a genuine new concept changes the very way people think about their lives.

ARPANET becomes the Internet.

Leonard Kleinrock and a few of his UCLA computer lab students worked to send the first several text characters from UCLA to Stanford in 1969 over a direct line established for the test.  They could send only the “LO” of “LOGON” before recording the very first crash of what was to become the Internet.  And I’m sure they had no idea what they were fathering with that effort which eventually became ARPANET, and then of course, the Internet itself.  They had no mantra, and a limited vision to connect mainframe computers to share academic information.

The Internet and AI – new opportunities for innovation.

How many entrepreneurs used that new Internet infrastructure to create an expansive vision of what could be?  Tim Burners-Lee wanted to use it to create a friendlier “web” of pages, sharing data like the pages of a massive library of books extending throughout the world.  The result was the worldwide web, upon which Mark Andreeson and his crew in Chicago built the Mosiac browser with his vision to make this data more available to anyone.  Which in turn allowed innovators worldwide to create applications inside a browser, share detailed information previously locked inside libraries and corporations, and ultimately to change the world by making the exchange of information frictionless.

So, who will be the next Ford, Jobs, or Musk for AI?

We can’t help but be amazed by the rapid developments in artificial intelligence and artificial general intelligence (AGI).  Yet, so far, we have the foundation, thanks to development teams at OpenAI, Google and Microsoft among others.  It won’t be long before we hear names of innovators who invent new uses for AI forming highly profitable companies around the work of inventors who laid the groundwork for these yet to come applications.

What about Edison, Bell and tesla?

We can look back to Ford and other visionaries who were not inventors as well as Edison, Bell and Tesla who were inventors – as great innovators of their time.  And perhaps the most impressive invention of recent times is the result of hundreds of people, firms, and institutions, each adding a new brick to the building of the Internet and AI.

Now we have the infrastructure for innovators to create applications with open-source software – building innovations for mobile, artificial intelligence, virtual reality, augmented reality, blockchain and drones.  And millions of innovators are at work extending these capabilities.

So, could you be the next Ford, Jobs, or Musk? 

You don’t have to invent the next big thing, just see the place where you can fit technology into a new, much larger environment.

And who said that “Everything that can be invented has been invented?”  Ah yes. That was Charles H. Duell, U.S. Commissioner of Patents in 1899.   Oops.

Pardon my English. But this is one of my favorite statements.  You’re at the ignition stage of your newest business venture.  Of course, you have a vision for what you will do to change the world.  Let’s stress test that vision and sharpen it further to help ensure your success.

Stress-testing your vision.

First, if your vision is limited and you will be happy with a successful local dry-cleaning enterprise or small restaurant around the corner, you are not the target for this epic effort to help entrepreneurs build great businesses that do change the world.  (Please take what you can from these weekly posts.  Many will apply directly to you.)

For the rest of you who want to change the world, let me repeat using different words: vision is everything.  A great vision for a new enterprise drives innovation. It serves as the rallying cry for future employees, investors, customers, and suppliers.  It sharpens the understanding for those new to the enterprise and moves them to follow and even to become unpaid advocates for the business.

Think of some of the great visions from the past that did change the world. 

“Absolutely, positively overnight” made FedEx an indispensable name in supply chain management.  “A computer on every desk” made Microsoft a partner in the growth of most every business.   You can think of many more, visions expressed so clearly that their enterprise became critical to your success.

There are other, less dramatic ways to express a vision. 

“Be the largest supplier of laser toner in North America”, or “Make dining into a five-star experience.”

How an entrepreneur’s vision statement affected me…

[Email readers, continue here…]   Years ago, as a panelist at an entrepreneurial seminar, I watched as over fifty aspiring young entrepreneurs filed past a microphone, each tasked with making a thirty second pitch to the panelists of professional investors.  About halfway through this painful exercise, one man walked up to the microphone and said, simply, “We move oil through the Internet” and then he moved on.  Immediately after the panel presentation, I found that one entrepreneur and began a conversation that led to my investing $100,000 in his vision of a supply chain enterprise based upon perfect knowledge of oil delivery systems, precise timing of delivery and coordination of resources to move oil from source to customer using the Internet as a frictionless tool for communication and coordination.

Although that business ultimately failed, I remained in contact with that entrepreneur as he used his experience in a new field, better off because of his learning experience.  I carry no rancor because of the loss, since I bought into the vision, helped as I could with the execution, and came to the realization along with the entrepreneurial team that the number of uncontrollable elements far exceeded those which could be controlled by any third party at that stage of development of the Internet.

Express your vision in just a few words – so that others will remember them and remember you, and hope that they get behind your excitement and singular focus for success.

Looking for an entrance into a VC, an angel group, a bank, a CxO for a sales opportunity, or any other entity?  There are always gate keepers whose job it is to filter out the inconsequential or inappropriate and allow through those with most promise.  That said, gate keepers can and do block some great opportunities before the decision maker even has a chance to use his or her expertise to evaluate.

So how do you reconcile this? 

Getting beyond the gate keeper and finding your way directly to the decision maker(s)?  Every salesperson with a bit of street history will resonate with this question.

The third-party relationship

One answer is to find someone with a relationship to the gatekeeper of the decision–maker.  LinkedIn might be good as a start, but beware.  Few of your contacts will be willing to use their valuable social or political capital helping you with a sales effort, and you will definitely strain your relationship with the intermediary if not a close friend.

Remember your closest opportunities.

[Email readers, continue here…]   Using your attorney or accountant to find who is close to the decision maker sometimes works. After all, you have a paying relationship with these resources, and asking for help is not considered a daunting request.  Do you have any contacts or friends within the target company?   An inside name is an excellent ice–breaking opportunity.

Here’s a gate-opener that almost always works.

Are you working with or selling to a particularly important competitor to your target customer?  Dropping that name will often immediately draw a response if the decision maker is curious or particularly competitive. Just remember, selling can be a strip tease in which you reveal very little in the name of confidentiality, making it appear to be valuable comparative information.  Let me reinforce this:  never reveal competitive information to gain access or advantage.  It is unethical and your target will immediately worry whether you might do the same someday.

Here’s an even better way.

Another way to approach the gate keeper directly is with a strategic idea or extremely profitable suggestion that he or she can make their own and enhance their standing within the company.  You must be willing to offer this freely, obviously ultimately connected to your product or service for implementation, but never claimed by you to be your idea.

Make careful use of your relationships and approach. 

One of my companies is in just such a position, able to offer an idea that is worth many millions and saving massive headaches but having to make the idea owned by the gate keeper.  It takes careful presentation, lack of ego, and a real focus on the implementation tactics to make this work.  But what power.   So, after all, do consider the gate keeper as a potential partner whose “commission” on the sale is social and political approval from above.  Or, if you can pull it off without alienation, don’t take the time to consider the gate keeper at all.

Taking money from professional investors such as angels or VCs usually requires that you agree to seek an exit for those investors in your plan, often targeting five to seven years as the ideal period for growth before a liquidity event.

Of course, even though that is your contract with the investors, way over half of those implied contracts never work out that way.

What if you later decide to just keep control?

It is perfectly OK for you to want to grow your company and plan to keep control for you and your offspring, with no intention to sell.  There’s a name for this.  We say that you are growing an evergreen enterprise, one in which outside money is to be taken in the form of loans or royalty agreements, not shares of stock or ownership.

Investors will not be happy and will usually react.

Of course, you will find yourself in opposition to your investors and some of most of your board members if you do this after taking outside investment.  There are clauses in preferred stock investment agreements allowing the investor in many cases to “put” the shares back to you at the purchase price plus dividends or more after a period, usually five years, if no effort is made to find a buyer or begin the IPO process.  Although rarely used, these clauses do give the investors power over your decision to turn your business into a lifestyle project.

If you have no intention of giving up ownership or even control over time, state that early and plan accordingly.  Assume that your sources of funding will be greatly limited to loans, sometimes at high interest rates and requiring personal guarantees and even security in assets.

The advantage of creating an evergreen company.

[Email readers, continue here…]   One thing that becomes obvious when there are no investors looking over your shoulder is that you can plan for a pacing of your growth, focusing upon long term strategies that might be very comfortable for you but not so much for outside investors.  (You may recall my story of the company that was forced to grow to death by a famous venture capital investor expecting massive profit or nothing, with no expectations in between.)

A personal experience that relates

I also recall vividly one of my first investments where the entrepreneur backed out of a sale to a well-known investment company at the last second, declaring his intention not to sell “his” company.  I was able to negotiate a “put” of my shares back to the company at 5x my investment.  Both of us were happy, but that outcome is rare.

More advantages to not taking the money at all

Evergreen companies can focus upon profit as more important than rapid growth, upon customer service above immediate profit, and upon people first before all of these.  For some, that comfort is worth forgoing building high equity value.

In fact, sometimes entrepreneurs will do better financially just taking profits over the long run then they might have by building equity for an ultimate sale.    And a smaller sale of the company later when the founder retains 100% of the equity may well compensate that founder with more than if outside money had been taken early on.

Because the first rule for raising money is to do it on good news – right when sales are increasing at an accelerating rate.  Or when a major customer signs a significant deal.  Or when something happens that makes an investor think this company is about to break out.

What if you have no good news to offer?

Unfortunately, the longer you wait without significant upward news, the harder it is to get attention.  It’s human nature for investors to want to buy into a fast growing future, proven by some event in the immediate past.

So, here’s the rub.

Raising too much too early dilutes the founder interest to unacceptable levels.  In recent years, I have counseled founders to raise enough to accelerate to a significant milestone that is over a year away, and to scale the business to find breakeven with two early rounds if possible.  Once at breakeven, the rush to raise more is over, and there are far more options available.  Tech businesses today can do this much more easily than a decade ago, with cheaper development costs, SaaS hosting environments avoiding heavy equipment costs, and development platforms with pre-formed routines available.  While working toward good news events, some entrepreneurs plan to take in consulting work to pay some of the costs during the early stage of a company.

Where to look if you just don’t have any good news?

If you have been in business for a while and don’t have significant good news to tell, I would make a list of possible strategic investors, people or companies that would benefit from your product or service.  They will be immune to the disinterest shown by financial investors.