Don’t Give Away Ownership As If it Were Just Credit. Please.

Please, entrepreneurs, this is important. Please don’t give away ownership in your startup, ever, except to partners who offer permanent help and value to the business, and will be there forever. That’s team members working the business, investors, or strategic partners with long-term commitments you can’t live without. Separate ownership, which is critical, and should never be given away easily; from credit and kind words, which are easy to give away.

I’ve seen this so many times. People give percentages away to their lawyers, their graphic artists, their friends, and their relatives, but for no good reason. Then what happens is if the business makes it a year or two into actual business, suddenly those once-naive founders realize they are doing business with partners, who own part of their company, who don’t work, don’t care, criticize, and drag the decision-making processes. Pay the fees. Don’t save starting costs by giving the business away.

Giving a piece of your new business isn’t liking buying a round of drinks at a table, but sometimes people treat that as if it were. But the truth is that you only have 100 percentage points to give away. The best ownership structure is 100 percent you. If however you need resources, key people and investment, then you need those percentage points to trade them for absolutely critical long-term relationships, or money. Not to make your cousin happy. Not to save on attorney fees.

I recently dealt with an entrepreneur who was grateful for a ton of help, including written content, received from a good friend. He was trying to figure out how much of the company to give that friend as a reward. But the friend wasn’t going to be involved in the future, had taken another job, and wasn’t even asking.

Don’t give her a piece of your business, I said. Pay her fairly. And if you can’t afford to pay her now, write up a bonus or a percent of sales that you’ll give later if you make the sales. Everybody wins. And you own your whole company. You don’t give away a piece of it in gratitude for somebody who won’t be a permanent part of it. He took my advice and gave her money now and a promise of money later, but not ownership. Both sides of that were delighted with that arrangement.

What brings this to mind is this question I received over the weekend in my ask-me form on my timberry.com website:

I’m 19. I have been avidly working through ideas for an amazing product. I’ve gone through lots and I eventually stumbled upon one that my mom loves so much that she wants to be a part of my business. Great news, but my issue now is that I’m willing to list my mom as a founder and now she wants me to add my stepfather as a founder as well. I feel like people are fishing for credit and titles that they have not yet earned. I’m not willing to appease anyone for the sake of it. How can I build a successful business alongside my family?

Kid, you’ve got this one right and your mom and stepdad have it wrong. Read the post here. Family or not, ownership in your business is about actual contributions to your business. You say you’re “willing to list” your mom as a founder. But this isn’t like the acknowledgements at the beginning of a book; this is ownership in the business. List, sure; stocks and shares, no.

Titles and credits are nice but ownership should be reserved for people who are going to actively contribute either money or long-term help. List them as advisors and give them credit on your website but give them ownership in proportion to the work, contribution, or money. This is business.

(Image: bigstockphoto.com)