Questions

A new startup in the same industry as my current startup asks me to join in order to leverage my current startup's insights. Should I do it and how?

I'm the founder of my current startup. The new startup is an opportunity to leverage my industry expertise twice. I would get shares in the new startup, but not have control. Obviously the idea would be to create a close partnership between both startups (they are quite complementary). I'm afraid of two things: 1/ This new startup may become a direct competitor one day. The industry is very big, with the largest player having only about 5% of the market. Still, our two startups are two of the very few players with an innovative concept in the industry. 2/ The insights that I transfer to the new startup, may spill over to the rest of the industry more easily (as I have little control), reducing our competitive advantage. How could I craft this partnership so that my two fears can never materialize?

4answers

I am not a lawyer and am not giving you professional advice here. Merely discussing the topic.

I see what they are getting from you...but what are you getting from them?

You lose control...they get your expertise...you can be booted out at any time thereafter.

I don't see the upside.

If they want your expertise, they can pay you for it: hire you, license your product, etc.

If they don't want to work with you as a separate entity, that should tell you a lot about their true intentions and how badly they truly need you (or don't).

I personally would not get involved in an offer like the one you've described. You can still be friendly, offer to work together, be complimentary as you say, but I don't see any reason for you to give up control for a few shares in someone else's company, transfer your knowledge, and then be at risk of being kicked out because they don't need you any more. Plus, do you really want to be a minority shareholder and treated like an employee, rather than the owner?

I suppose you could have a legal agreement drafted but secrecy never lasts and your insights WILL be leaked sooner or later. I also doubt your position in the firm can be protected. Speak to an attorney as I am not an attorney.


Answered 7 years ago

Once you have your strategy figured out, make sure you speak with a lawyer to protect you. I am not a lawyer but will give you some advice that has guided me in the past.

Firstly, It really depends on what you want and what you want to do. First you need to look at your current marketshare versus them and also what you project your future marketshare versus them will be. If you have about equal (or greater) marketshare then getting a minority share is not reasonable and you should negotiate for a fair share. If you have less marketshare than them, and you feel you might be losing traction, then you may want to take a deal with them, working with a lawyer to protect your interests and stake. I'm sure the lawyers will go over this, but you need to ask about anti-dilution clauses, employee termination (fight for termination only via just cause), board seat and/or visitation rights and share with minimal (or no) vesting period.

I would also base the decision on your personal familiarity of developing a business. If you believe you have and can get all the pieces to grow and build the business then I probably wouldn't take the deal, however if you are lacking talent aspects of your business, such as sales and business development, they may be able to provide it for you, or alternatively you can try and recruit a full time biz dev expert.

Also, in my personal experience, at this level litigation is far too costly and you should due your diligence on the company. How do they treat/handle their employees? How do they handle clients and vendors? Do you get a bad feeling that they will try and take advantage of you? Would you get along with them on a day to day? Do you feel that their company will grow yours or that it will be an anchor to you?

One more thing to consider, is the education from the exposure of being in relation with the firm. For instance, I made zero money from the equity from my startup but the education that I received being around business developers, angel networks, VCs and experts in various industries, as well as the contacts was well worth it. It can be like an PhD in entrepreneurship and that can be worth it.

Would love to know more about your specific situation and give some more industry specific advice if you like!

Have a great day and good luck.

Jay


Answered 7 years ago

1. If they are providing you a significant portion of equity and salary. Look at it as an acqui-hire.

2. If you have revenue and are growing then perhaps your evaluate the opportunity differently ask have them buy your company out.

3. If you want to stay on your own then stick to it. Don't worry about the competition it just motivates you to stay ahead of them.

4. If you really want to work with them and have your own company. Create a JV (joint venture) you have a lawyer work through this to iron out all the details.

If you want to talk just give me a shout.


Answered 7 years ago

I share those fears that you have mentioned, and if I were you, I would not take a risk because a lot will be at stake if anyone of your fears were realized. Rather than looking outward to acquire new forms of capital, this post focuses on taking full advantage of your existing business asset. Explore how to rework them so that they better serve your operating goals, customer needs, and emerging needs new prospects may have. Where you have already invested a lot of effort and money to build and improve an asset, I suggest that you consider new ways to leverage it instead of starting from scratch again. When you first start, you must create several assets, but as you become established, you can shift more of your efforts to renewal and re-purposing of existing assets. You do not have to reinvent the wheel, especially when the spokes, axle and schematics from the last wheel are still lying around. Build on what you have accomplished, on successful customer relations you have fostered, and on investments that have paid off. Look for additional growth and profit from the efficient and effective use of your established assets. When determining which assets could be leveraged or repurposed, ask yourself:
a. What would allow you to create new offering?
b. What would allow you to scale more rapidly?
c. What would allow to lower costs and increase profits?
d. Where are you getting inquiries?
Money is easy to repurpose. It is almost instinctual for small start-ups to look for ways to leverage cost and increase profits. Just beware of relying solely on cost reduction and not looking at faster and higher quality resources. Leveraging equipment and process capabilities gets a bit harder.
Sometimes you develop a technique or resource for one purpose, but then realize it could be better applied in a different way. Maybe a customer “misused” the product and now you have discovered another need to market. Or maybe multiple customers made the same request for an additional or different offering. Look at areas where you are getting inquiries and work backwards from what your customers value.
Another way of figuring out what to leverage is to look at frequency and dependency. Create quarterly review where you take stock and assess your various working capital. Look at how your assets fit with your business model and ask yourself:
a. How has this helped in the last year or two? In the last quarter or two?
b. Do you see continued interest?
c. How does this fit with where you are trying to go?
d. How recently have you used this particular template/building block/piece of content?
e. How frequently do you rely on it?
If you are frequently using something, or frequently referring to something, it makes sense to try and squeeze as much utility out of that something as possible.
Let us not forget to leverage social capital. Accumulating expertise and developing trust take a long time. Once you have built solid relationships, work to maintain and leverage them rather than starting from zero all over again.

Maybe you have operated in one industry, worked with a set of people, pooled your knowledge together, but now they have gone to another company and you are building a start-up. Whether or not everyone is still working within the same industry, it helps to reach out to people you’ve shared a success story with and ask if there is some way their capabilities could work in your firm/industry. Start sifting through LinkedIn contacts and think in terms of “calling in favours.” Worst case scenario: their capabilities no longer fit with your goals, but they might introduce a new connection. Be constantly aware of your environment and practice taking stock regularly. The temptation is to always be ahead of every innovation wave but that is just not realistic. At the same time, you do not want to lag and risk obsolescence of your product or technique.
My advice to you is to ride the waves. It is hard to see the future coming, but change is a constant. Keep an open mind and integrate new technology and processes into your business whenever you can.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath


Answered 8 months ago

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