
Should a Cash-Poor Entrepreneur Give Up Control to Keep Her Start-Up Alive? - mikek
http://boss.blogs.nytimes.com/2013/01/02/should-a-cash-poor-entrepreneur-give-up-control-to-keep-her-start-up-alive/
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dmk23
Giving up 75% of your company to some huckster is absolutely ridiculous.

If you give up control the new guy in charge will always be able to get rid of
you. You are basically signing up for an employee type of deal, but with a
fundamentally broken employment relationship. The real owner will know that
you'll be resentful rather than grateful and will try to get rid of you as
soon as practical. If your deal on paper is too costly for them they'll find a
way to restructure / dilute you in some way to avoid paying out anything
substantial.

People get desperate, I understand that. But it should be better to just walk
away. The real solution though is to plan things through and not get yourself
in the situation of "needing" to raise cash or go bust. There are tons of ways
to avoid getting stuck is this situation.

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ChuckMcM
You've captured a lot in this comment.

You've characterized Arthur Shorin as a 'huckster' which in many places would
be considered insulting. This guy spent 27 years at his Grandfather's company
and grew its revenues by 5x [1]. That is some pretty serious credibility in
the candy business. Not 'huckster'.

Then you talk about by giving up 75% you lose control. Which is true, but 100%
of 0 is 0. But lets imagine that there is a chance that Arthur can grow the
value of this particular company with his knowledge of the candy business and
his credibility. If your company is valued at $1M and you own 100%, you give
up 75% and with the help of that investor it becomes worth $5M. Your 25% stake
is now worth $1.25M.

Contrast that with going broke. Having your net worth gro 25% is much better
than having it shrink 100%.

Then the last lament, which I have heard many many times, is this _"The real
solution though is to plan things through and not get yourself in the
situation of "needing" to raise cash or go bust. There are tons of ways to
avoid getting stuck is this situation."_

I think of it as the parallel universe theory of wishfulness, because we know
that every decision creates two parallel universes, one where you made the
right decision and one where you didn't. The "right" answer is not to be in
this damn universe but to somehow step across dimensions into that really
awesome one. Sadly people get lost looking across at that other universe.

It is the _opposite_ of ridiculous here is to take the offer, not dwelling on
all of the 'could have been' things, and resolve to learn everything you can
about the candy business from this living legend. They have to take your
meetings because they are in it to win, not lose their investment. Our
entrepreneur is just hitting 30, spend 5 years learning the candy business
(its not taught in business school) and then, start yet another candy
business. Her 25% stake in this one is much more likely to be worth a decent
chunk of change, she will know the people in the industry, and she'll have
gone through all of the stages of getting a candy business from where she got
it too before, into the big leagues. It will be _much_ easier for her to
succeed, and in that new business she will know _exactly_ how much work it is
to get into distribution and _exactly_ how to negotiate with contract
manufacturers, and _exactly_ how to find the market and increase awareness.
Perhaps we'll add her name next to Wrigley's or M&M Mars.

[1] <http://artuitive.com/bio.html>

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rhizome
_Then you talk about by giving up 75% you lose control. Which is true, but
100% of 0 is 0. But lets imagine that there is a chance that Arthur can grow
the value of this particular company with his knowledge of the candy business
and his credibility. If your company is valued at $1M and you own 100%, you
give up 75% and with the help of that investor it becomes worth $5M. Your 25%
stake is now worth $1.25M._

This would appear to be a combination of Sunk Cost and Gambler's fallacies.
The time and money is gone, the only question is whether this guy can make
anything more than she has out of the company. Like I state elsewhere, the
$250K he's offering for the stake amounts to only ~$60K per year of time she's
already put into it, with nothing substantive but possibilities (without any
indication of probability) for the future.

Said another way, this could just be a cheap setup for his friends to nibble
away at her remaining ownership now that he's got his. Once they all have her
down to nothing, well...it's happened before.

~~~
ChuckMcM
I don't doubt for a moment that the guy _could_ be a schmuck. I disagree with
characterizing him as a 'huckster' simply because of the terms of the deal.

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mrcodedude
It looks like she already took the deal, or at least some variation of it -
<http://artuitive.com/recent.html>

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kalms
That's sad. It's understandable, but I don't think she can keep her motivation
going with that deal. I know I wouldn't be able to!

~~~
jmvoodoo
Much easier to stay motivated with 25% of a growing company vs a larger share
in a failing company. Hopefully she negotiated some better terms, and has some
protection from being pushed out and diluted. If so, this could end up being a
very lucrative first business for her even if she doesn't make her earn out.

~~~
kalms
That depends on ones frame of mind, doesn't it? If you consider that buy-in a
failure - and who in that situation wouldn't? - Would you really be able to
push on after that? Would you really want to?

If she maintains control, then sure - that might work, depending on how large
amounts of sale she can gain from this move. But 25% doesn't smell like
control to me.

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rhizome
Wow, 250K for 75% with a 15% max earnout for ultimately 40% on her part?
That's $60K/yr for her for a handful of possible gravy. Sad story.

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mvkel
She took the deal as written.

It's easy to justify early on, convincing yourself the company wouldn't be
able to get off the ground otherwise.

It's easy to justify even later, when you think about how the company wouldn't
be where it is today without that cash infusion.

Unfortunately, it doesn't matter if you don't have majority control. It
doesn't matter if the company is doing $10mm/year if it got there based on a
strategy (driven by the investor) that drives you up a wall. As an
entrepreneur, what makes you crazy isn't a lack of funds, it's a lack of
control.

Conversely, if you and the investor share a similar vision, it's a legitimate
partnership that could work well. You sacrificed a lot more equity, but your
company is only worth what someone is willing to pay for it.

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tudorw
25% of something is a lot more than 100% of nothing

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rhizome
What's the opportunity cost of working for office manager wages on something
you created? The guy offering this deal is a shameless vulture, she should
counter (at least) $250K for =<49%.

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tudorw
I did not see that she had a whole lot of other opportunities, so the
opportunity cost is hard to quantify, would she feel happier just closing the
business and going and getting another job, maybe but it did not sound like
she was ready to do that.

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rhizome
If someone is offering her $250k for 75%, she can get enough to pay for 6mos
from a distribution person to get her product out there. It doesn't sound like
the Topps guy is offering anything more than "Yeah, you need distribution. Try
calling these three guys," which could certainly wind up getting her more
business, but it's not guaranteed results so why give up the farm?

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wiradikusuma
It reminds me of a deal with a businessman (but willing to invest):
[http://blog.wiradikusuma.com/2011/07/on-using-new-
technology...](http://blog.wiradikusuma.com/2011/07/on-using-new-technology-
and-setting-up.html)

~~~
rhizome
That post appears to be completely irrelevant.

