Use Equity to Reward, Not to Raise Money

Author: Ron Morris, The American Entrepreneur

The other day I took a phone call from a reporter who happened to be with the Chronicle of Higher Education. The COHE happens to be one of the oldest and most venerable trade publications for academicians and administrators.

The lady was very nice and obviously quite bright. She asked really great questions.

Her interest was in entrepreneurism. In fact, the only place where she, and in my opinion, missed the mark was when she said, "It seems as if entrepreneurism is now becoming a rather hot topic among college curricula."

I gently disagreed with her, saying, "I agree that it's hot, but I see it more in its maturation, rather than growth stage." (But then again, who am I to judge academic trends?) I personally believe that a lot of students are taking this path because they are tired of feeling the pain that their parents must endure when they are summarily terminated by large and less personal corporations.

I took her through our program and what we did and how we did it. As I said before, her questions were insightful and penetrating. She was either a very quick study or she had put in a lot of time looking at the topic of entrepreneurism on college campuses.

So I said to her, "You're the only reporter I've ever spoken to who really gets it. Congratulations."

To which she replied, "Well, you're the only person I've ever interviewed who emphasizes raising the money one needs to start a business in a way other than by selling off equity. Tell me, why do you seem to avoid this topic altogether?"

I told her at that point that she was knocking on the door of my singularly most vexing topic here at Duquesne University --- the whole emphasis by academia on generating start-up money by selling off ownership stakes.

"I tell my students that there are certainly other ways to find the start-up capital you need and that I in fact have never taken a single dime up-front for any of my start-ups. And that includes a lot of start-ups," I said.

"So, what do you recommend to your students?" she asked.

I responded to that question by walking her through what I consider my three-point plan for funding a start-up. "Money is the easiest thing to get in business," I virtually lectured, "followed by: a.) generating product ideas; b.) conducting and receiving market/consumer research; and, c.) building infrastructure."

(BTW, the hardest thing to do, and in my opinion, is finding and retaining great people --- for it is great people that will make you or break you more than anything else.)

"But don't ever, ever sell off your precious equity for mere dollars!", I said slightly raising my voice, "I treat equity as I do my own children --- you'd have to put a gun to my head to get me to trade my stock for start-up dollars."

(Notice I did not say anything about equitizing great employees. Here, there is value. And I have often used stock options to either: a.) retain my key players and/or [and far less frequently] b.) attract some hot shot four-star player.)

"This is very unusual," she said after a sufficiently pregnant pause, "You're one of just a couple of entrepreneur program directors to espouse this philosophy. I wonder why?"

"Well," I said, "I know why I believe it, but let me tell you why I think so many of the 'top entrepreneurial schools' spend time teaching the art and science of raising angel and/or venture funds.

And here are what I consider to be the top reasons why schools do emphasize this subject:

  • It adds courses – Let's face it, going after venture money and angel money is a process (and only a tiny fraction of companies ever even sniff venture money). And there's nothing that universities like to teach better than processes. For one thing, they're easily gradable!
  • There's plenty of data – Entrepreneurism is, and in my opinion, as much an art as it is a science. And as we all know, universities are not keen on teaching 'art' as much as they are teaching science.

    Thus, it just feels right for a university professor to stand up there and talk about such things as: 'The numbers of VC or angel-backed start-ups successfully launched,' and/or any of a thousand or so correlative studies (all of which are readily available on the Internet) of the sources and numbers of investment dollars floating around in the economy, and finally,

  • Because it's fun! And, it's easy.

But mostly I see teaching this subject as an 'innings-eater.' It really does take up a lot of time and you can always find a venture capitalist or angel investor to come in and tell some great war stories."

I then told her about a time that I, and as one of these "war story tellers," had been invited to guest lecture on the topic of "raising money" at a very prestigious local university. I also told her that I happened, and that night, to follow another speaker who was a stone-cold venture capitalist bigot.

Given that I got there a little early, I was able to listen in on how he explained precisely how to go about the process of acquiring venture money through his particular organization. I was impressed. He really knew his stuff.

After he had finished speaking and (I thought) had left the room, I stood up and said, "Now I want you to forget everything that you just heard."

The comment drew a chuckle from the students but I was dead serious. (BTW, he didn't leave --- he was seated at the very back of the room and thus heard every word I said.) I then proceeded to tell them of the myriad ways I had built significant start-ups out of nothing more than cash flow and sales revenue. They were, and I'm not too embarrassed to say this, both astounded and amazed.

So amazed, in fact, that they came up to me afterwards and said things like, "No one has ever told us this was even possible," and, "Are you really telling us the truth --- you built a company and held on to 100% of your equity?"

I did, and I did. And I continue to do so today.

Again, I am not saying that you cannot and should not use your pool of stock to reward your best people. To the contrary, it has been my experience that a reasonably well-equitized staff will out-perform "wage slaves" ten to one. Give people ownership in your business and then get out of their way.

Why? The answer should be obvious --- they know that you yourself have sold businesses or in some way liquefied them and that the leverage on their ownership stake can be extraordinary. So, they are highly, highly motivated! (And frankly, equitization achieves the dream of all business owners in that it forces the heretofore "employee" to think like an owner.)

Moreover, it sends this message to all: "Bust your tail around here and you, too, can become a millionaire." (And in fact, this is true and I have done it. I once sold a business where my executive assistant walked away with six figures simply because she was there for me every day and that particular company absolutely blew up; allowing us to get something like 24X our profits!)

Before closing the interview with this delightful young lady, she asked, "May I quote you on some of the more radical concepts you just talked about?"

To which I replied, "Of course, I really hope that you do because I also really hope that other institutions begin to pick up on the fact that you can indeed build a great company without having to sacrifice equity for something as trivial as investment dollars.

In a future column (next week?), I will talk about some of the ways I have achieved this objective. I think I'm going to do this because I know that many of you reading right now are asking the question, "So, how did he do it?"

Fair enough. I will indeed provide the answers you are looking for. But in the meantime, please --- stop giving it away!

Because you really don't have to.

Ron Morris

About Ron Morris

Ron Morris puts over thirty years of entrepreneurial experience to work answering your business questions, solving your business problems, and bringing you all the latest information about everything that is happening on the entrepreneurial landscape. “I’ve built companies with ZERO money and I’ve been associated with companies who have borrowed money”, says Morris, “I’ve merged companies, I’ve sold companies, and I’ve even bankrupted a company. (My “greatest learning experience.”) So, when you tell me about your business problem, it’s a pretty sure thing that I’ve ‘seen it at least once before ... this ain’t textbook stuff ...this is ‘real bullets’, real world stuff.”

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