Published on January 6th, 2016 by Alan L. Sklover
“Assumptions are the termites of relationships.”
– Henry Winkler
ACTUAL “CASE HISTORY”: Jessica, 36, was more than excited. After five years as Assistant Director of the digital division of a fashion design company, she had been approached by Martin, a colleague she knew from a previous job, about a new opportunity.
Martin was putting together a new venture that would contract out the services of tech-savvy graphic artists, visual designers, and computer coders to corporate app and website developers. Jessica saw the idea as a very good one, as she knew there was a need for such a firm from her work, and to her knowledge no one else seemed to be filling the need on a national level. More than once she had thought to herself, “Someone ought to do that.” Martin had financial backing for the venture from a hedge fund owner, and thought Jessica would be the very best person to help him put together and run the start-up.
What most intrigued Jessica was the opportunity to be a part owner of the new company, something she had often thought about but that had never before come her way. As Martin presented the idea, Jessica would have the opportunity to earn over time up to twenty percent (20%) ownership of the new company.
After discussing it with her husband, and meeting with Martin and the start-up’s financial backer, Jessica decided to “take the plunge.” She was presented with a set of papers that seemed quite simple. She was told that “formal documents” would later be prepared. In the meantime, Martin assured her, they would get things rolling and attend to the “details” later.
After leasing a small office space, hiring office staff and assembling an initial sales team, Jessica and Martin were ready to roll. As anticipated, Martin would be in charge of sales, and Jessica would be in charge of administration. Soon after, the difficulties began.
Martin expected to receive a much higher salary than Jessica would receive; Jessica presumed they would be equal. By happenstance, Jessica learned that Martin would be receiving a forty percent ownership stake, double her own, which did not sit right with her; she presumed they were to be equal partners. The company’s accountant was a cousin of Martin’s, and seemed to answer Martin’s questions, but was always unavailable to answer Jessica’s.
One of the documents that Jessica was given to sign contained a non-compete provision that provided she could not work in this industry for a full year if she was ever to leave, or be asked to leave. Jessica was truly shocked to learn that Martin remained employed by his former employer as a consultant, and so was not devoting full time efforts to this company. Each week seemed to present Jessica with another reason to question the wisdom of her decision to join.
After seven months, Jessica “threw in the towel.” She retained our firm to help her achieve fair separation terms, which proved to be more complicated than expected, and even grew adversarial over time. It was especially difficult to get Jessica’s name removed as a guarantor of the office lease obligations. To make a long story short, Jessica was happy to end the dream, which for her had become something of a nightmare.
LESSON TO LEARN: Forming or joining a start-up company is almost always exciting and exhilarating, but can also be quite disappointing. Creating a new business is difficult, but doing so with others requires more communication, focus, attention to detail and patience than most people imagine. It’s just so easy to get caught up in the enthusiasm.
It’s hard to apply cold reason to hot passion, but it is an exercise in discipline that is highly recommended, especially by those who did not do so, and sure wish they did. Here are the 16 questions I suggest you try to answer if you decide to form or join a start-up.
Every business has its ups and downs, but start-ups have them more commonly and more intensely than established firms. These 16 questions are geared to prospective founders and partners of start-ups, but are also applicable to “early stage” employees, hired after the start-up has gotten going, especially if they are told one day they might become owners by vesting in shares.
WHAT YOU CAN DO: Whether you are forming a start-up with one or two others, or being hired by a start-up, with a suggestion that one day you may become one of the shareholders, you need to ask these questions to understand what you are getting into.
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