Thoughts on giving equity for my business

[KRage888]

Hi

My name is John. I'm new to this site. I've had my tech business since 2000 and pretty much have done this by myself.

I had a question as I'm debating giving 10% equity for my tech business to my IT sales friends and it's mostly sweat equity. He has 20 years in the IT sales space and I feel he can grow this business better than I can.

He will not accept anything else agreement wise.

I like the guy but is he a really close friend, no, he is more of a friend.

He is looking at this as a means to supplement his income so not sure how much time he can devote.

Most people including my accountant are telling me not to do this. But I could use the assistance he is providing.

Can you give me your experiences? Is this a major stress inducer which I am looking to avoid if at all possible.

 

[eliquid]

You have several things in your message that tell me you shouldn't either

1. Friend
2. Not sure how much time he can devote

Don't do money/business with friends and family.

If he is your friend, you prob know a lot about him. The fact you don't know how much time he would have to devote to this means, it's prob not a lot ( you should know him, right? ).

Both are bad things.

If you do this, have a clause in your operating agreement how you can get equity back if things don't work out ( ex. - He gets vested over time, if X happens then you get the equity back, selling his equity is not possible unless both of you agree in writing, etc ).

This would be different if he wasn't a friend already. It would also be different if you knew he could devote a lot of time to it.

Also 10% is rather unmotivational unless you are pulling in a lot of money already. Factor that into how you think someone else would perform the first 12 months with very little coming in ( if that is the case ).

.

 

[coredev]

He will not accept anything else agreement wise.

then find someone else.

don't do it - too many things can go wrong.

just hire someone to do IT sales. maybe do a base salary then % of sales they bring in

EDIT:

Not sure how much time he can devote.

This is a really good point.

I once partnered with someone and they got 50% of the company. 2 months go by and he TELLS me he can only commit 5 hours a week. Yes - it's a very self-centered thing to say.

I put an end to that partnership real quick.

 

[Ryuzaki]

Like eliquid listed, here's some keywords and phrases that raise major red flags:

• Close friend (not for long)
• Limited time (minimal effort)
• Ten percent (minimal effort)
• Supplement income (not serious)
• Everyone says not to (as do we)

Just pay him a salary for his 16 hours a month, if you must include him for whatever reason that's probably not valid enough to include him. If all he wants to do is supplement his income then that achieves it. How much growth can you really expect to get out of someone who can't offer more than a 10% effort.

I don't want to put words in your mouth, but just offer an outside observation. It seems like you're making this decision out of emotion instead of logic. Maybe he has a sick kid or he's your pal and you feel obligated to subsidize his lifestyle. The only reason I think that could be a possibility is that you've asked several people including your accountant and they all said no, and you're asking again here. It's as if you're seeking a "yes" so you can ignore a barage of "no's."

There's a million people that could offer what he has to offer, but could take it a lot more seriously.

Alternatively you could cash out entirely if you've hit your peak and sell the project to someone else. If it's pretty stable, hanging on to a majority percentage could make a nice on-going revenue stream though.

It sounds like you're at a point in the project where it makes a lot more sense to play it safe. The only way I'd move forward in this deal is if I had an air tight contract like eliquid mentions where every single possible angle and aspect is locked down with zero wiggle room or room for negotiation. He either delivers or is out.

Even that sounds like you're just going to end up hiring someone who does very little until they force you to buy them out, effectively paying them far more than they ever deserved, and losing a friend in the process.

We've all been there and done that. You really don't have to join the chorus if you can heed the warnings and build upon the experience of others.

 

[Syrinj]

The only reason I think that could be a possibility is that you've asked several people including your accountant and they all said no, and you're asking again here. It's as if you're seeking a "yes" so you can ignore a barage of "no's."

This. @KRage888, the fact that you've made your business last for 20 years with this sort of behavior makes me very hopeful that if you can do it so can an idiot like me.

In my recovery circle, we call this behavior "looking for someone to cosign your bullshit." It's not your fault you have this line of thinking, but a helpful solution to that thinking would be to revisit Day 1 - Intro & Taking Inventory and account for this habit there. Reassess. Doubt and denial can be eliminated via an honest inventory.

As far as the answer to your question, it sounds like the universe is screaming a hard "NO," bud. I would step back, breathe, and try to trust it a bit more.

 

[KRage888]

Thank you to everyone who has replied. Very kind of you to offer your generous advice.

It's a lot to take in and I have to seriously consider all these comments.

I have think long and hard about this decision.

I'll talk to my accountant again tomorrow to get his feedback yet again.

As Ryuzaki mentioned this could be more of a sympathetic reaction.

 

[Syrinj]

It's a lot to take in and I have to seriously consider all these comments.

I have think long and hard about this decision.

I'll talk to my accountant again tomorrow to get his feedback yet again.

Seriously, this decision isn't the problem you think it is. It's not an issue of "do I want this guy or not?" The real issue here is "do I want to cut corners or not?" Don't deceive yourself.

Not to sound like I'm trying to put the pressure on, but the red flags are staring you in the face and you can see them enough to ask on BuSo, but you are actively refusing to look at them (denial). If you weren't, then this decision wouldn't be "long and hard" and you wouldn't ask your accountant twice.

Just be honest with yourself. You've already entertained the idea that you want a hard-hitting sales rep to add to your bottom line. The relevant question is NOT "do I hire this guy or not?" The real questions are: "am I trying to take a shortcut on this decision?" "Am I making a decision based out of fear?" "Am I giving great weight to this option because it's easier and more comfortable than pooling others?" There's many probable issues to visit here.

I'll throw the suggestion out there again: Day 1 - Intro & Taking Inventory. It's title is misleading because this isn't a once-over "Day One" exercise. It is meant to repeat throughout the journey. Again @KRage888, like it or not, your back is obviously against the wall emotionally. You need to get down to the exact nature of what's paralyzing you right now in this moment. Your accountant can't do that for you. But you can put pen to paper and answer those questions above and you won't be able to deny that anyone else but you wrote them down. Your answer should then become obvious.