April 12, 2022 by Clawdia
“I Feel Like 20% of my Company was Taken from Me”
“I feel like 20% of my company was stolen from me”
These were the words of an entrepreneur who emailed firstname.lastname@example.org earlier this week.
If you have ever thought of reimbursing a service provider (for example, a software development company) by giving them a slice of your business instead of simply paying them, you should read this article thoroughly.
So, what am I talking about? We all know that launching a start-up without a co-founder is extremely difficult. Next to impossible. Our co-founder should have qualities that would compensate for our own shortcomings in both personal characteristics and professional capabilities.
I’ll give you an example (and this is what often happens in real life).
Consider this scenario: An entrepreneur needs to find a technology-savvy co-founder who will lead all the technological aspects of the startup (CTO).
Finding a suitable partner may be challenging, especially considering that they must both share the same vision and be ready to get on this journey together. Nevertheless, this does not mean you should give up on your dreams. How do some entrepreneurs handle this issue
They might hire an external service provider for a certain percentage of the business: 15%, 18%, even 25%
How do you feel about such an approach?
Sounds like a great deal, doesn’t it? What could be better than getting services without investing any money? And let’s face it, when you start a startup it’s really difficult to get into any expenses whatsoever.
But the truth is: it is a very bad deal for a start-up.
The answer is twofold:
Think about a software development company that agreed to provide its services for 15% of the startup. Imagine you are the owner of this software company. Would you rather focus on delivering large-scale projects for paying customers or would you rather focus on developing a product for a startup for a hypothetical 15% of a nonexistent profit? Given the statistics on start-ups’ success rates, it is virtually impossible to know whether or not these profits will ever be realized. It is inevitable: existing paying customers will always be the first priority. Thus, it is clear that your start-up will take the very last spot on the company’s priorities list. Therefore, no external party could ever fully commit to the project passionately.
No wonder that entrepreneurs who follow this path are constantly complaining about the external party failing to perform:
“They did not live up to their part of the bargain.”
“I got a lousy product. There’s only one use for it: garbage.”
“The project is half a year behind schedule.”
“I feel like 20% of my company was stolen.”
And so on and so forth…
Having Trouble Raising Funds
Giving up a big chunk of your company to a party that is not fully involved in its operations and development may interfere with your ability to attract investors and raise funding. Investors might find investing in a construct like that unappealing.
That being said, I know that when you, on the one hand, lack a technologically skilled partner and, on the other hand, lack the capital to develop your dream product, reimbursing the external service provider by offering a piece of your startup could prove the only solution. In this case, treat this third party as a genuine partner by applying all the mechanisms and standards typically adopted by and between founding partners (aka founders agreement).
I will be writing more about the founders’ agreement. For now, you can read about reverse vesting here.
All the best,
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