Small Business Advice (1 of …)
In the past few months I have been exposed to a myriad of issues stemming from the decision by a small business to associate with an outside group to grow the company, taking it to the next step. This is the first blog of a series describing issues and pitfalls that could have been avoided. The goal of these related blogs is to help other small businesses owned by Naive Americans to make the right choices when and if the time comes to grow. By hard learned experience, it is a jungle out there in the business world.
The first thing to consider is if the owner(s) of the small business are ready to take the next step. In the case at hand, the company was in existence for about 15 years. During that time it had provided a steady stream of revenue. Like most business some times it was a feast, while others belts had to be tighten. The company is involved in software development for products sold worldwide. With time the owner’s children married and started families. In the good old days it was common to work 12-hour days 7 days a week. As times change, the number of hours had to be paired back to allow for the additional individual family time. The adjustment was expected and encouraged (kids grow up so fast).
When looking for a partnership to take your small business to the next step make sure they have the proper qualifications, track record and knowledge in the market space. People with business administration degrees might mistakenly state that any business is just a business, no matter what they produce. The partner must have knowledge and experience in the vertical(s) your business is involved in. If this is not the case, it is just like going to a bank and borrowing money. If your business qualifies and gets the funds, that is great, but the most important factor is the relationships that the partner brings into the party. For example, if your business were computer software related, then partners that have computer hardware experience would probably not fit the requirements. If your business were into scientific computing, then partners with experience in business software would probably not bring in the proper expertise and connections. Most venture capital and management companies are not interested in the business, employees or customers. They only see their return on their investment, typically in a very short period of time, and with the minimum amount of work on their part. This is how business is taught in schools and conducted in the USA. This is why America is in the economic turmoil we are currently experiencing.
The best advice regarding investors and partners is to compensate them based on a predetermined and mutually agreed set of goals. If the investor or partner is not willing to accept only stock options after each accomplishment, then the Naive American is better of looking for a different partner or investor. In other words, compensate your partners only for accomplishments. Given that different tasks would take different amounts of time and considering we do not live in a perfect world, the tasks must have a reasonable amount of time associated with 100% compensation. At a later date one could award the partner a reduced compensation (e.g., 75%) and if the task is not completed within some additional time, then most of the stock options should be canceled and the partner fired.
If you are a Naive American considering expanding your small business via the investment or partnering route, make sure to spend time discussing the points mentioned in this blog. You are better off holding for the next opportunity than rushing into something that you would probably regret later on. Small businesses are the foundation of the US economy. They are the ones that produce real innovation. Do not allow sleek partners or investors take your hard earned money.
