Entrepreneurs: The Five Tests for Choosing Partners and Shareholders
Why is the average income of an “entrepreneur” in the US so low? Because most solo business owners are just that – solo – and they seemingly can’t get out of that solo box.
One of the biggest lessons I learned from interviewing champion entrepreneurs in How They Did It: Billion Dollar Insights from the Heart of America is that none of us do it alone, at least, not at the level of champions who start from scratch and make it to $100 million+. You have to form strong partnerships and develop a serious management team if you want big-time success.
This is the supreme test: can you scale beyond yourself? And even if you are truly open to it, how would you know who you should put at an equal level? And by equal I mean sharing ownership.
There are two usual routes to partnership in startups. The natural one and the serendipitous one. There’s the natural route -- for example college roommates getting to know each other over the years. They later go on to rule the world after graduation or after dropping out. Think of Bill Gates and Steve Ballmer. Then there is the serendipitous route: the chance circumstances where you happen to meet someone and somehow figure you’d be good in business together. I interviewed Phil Soran, founder of Compellent and Xiotech, whose co-founders included a neighbor and a mutual friend. Their threesome made for an incredible team, creating billions of dollars in value from scratch. That’s serendipity.
So what happens when you find a standout performer amongst your team – a rookie or previous unknown who could be as good as you, the irreplaceable brilliant founder and CEO? Here are five tests for partnership and sharing equity ownership.
Leadership. It is not enough for a trusted lieutenant to just be a lieutenant. The test of equity is – can this person lead? Does anyone follow them? Are they acting independently and with confidence?
Integrity. We give lip service to higher qualities, but does your potential partner live it? Here’s the hard case: when he or she screws up, and invariably in leadership we all do things at times we’d rather do over - does he own up to the mistake, no excuses?
Strategy. When you give out equity you are getting married. Does your partner think globally – about the entire range of business, and beyond that, about various opportunities and threats? Is their view commanding, like the general surveying the whole field? Or is their view local - a soldier in the trenches? You need to have both qualities, but if strategic, that means your partner can have a massive multiplier effect on your thinking and business.
Action. This kind of goes without saying, because any founder worth his salt won’t put up with inaction. The test of partnership is someone who is pushing as hard as you to accomplish great results.
Results. Your partner has to move the meter, and I don’t just mean revenue. Yes, ultimately it’s about the money, but does all of this add up to something wonderful? Is your partner creating new product/services/processes? There’s a great story about one of Google’s engineers who tested bold face type in search results in response to a search term query. His one little test lifted ad response results 400%, ultimately increasing Google’s valuation by many billions of dollars.
When you see a great potential partner you should be able to calculate in your head what the impact is of her decisions and actions. If the resulting number is in the millions of dollars, start talking equity.