‘50-50 rule’: good for equity, bad for decision-making



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Q: My brother-in-law and I are starting a business. Is a 50-50 split on ownership the way to go? A: An equal division of equity is a fair way to distribute ownership, assuming that the opening contributions of each party — especially start-up capital — are going to be similar. Differences in effort invested as the business matures can be recognized in the form of other benefits like salary and perks. However, if by “50-50 split” you also mean equal control, forget it. While both of you probably have similar interests, desires and degrees of commitment at this point, things can change dramatically once the business gets rolling. In the heat of entrepreneuring, radical contrasts in philosophies and approaches can, and usually do, emerge. The strength of any business is a product of the varied talents and ideas of its founders. But in its operating mode, a business will only prosper if sound decisions are made, and made quickly. Often the differences of opinion or style that crop up between owners with an equal say will harmfully delay or dilute needed decisions. It’s best to agree at the beginning who will render the final decision in the case of a conflict. Ownership and control can be allocated differently. An independent board of directors can also be extremely helpful to a decision process. Q: Recently laid off, I’ve been thinking about starting my own firm. With the rate of failure among small businesses so high, is the deck stacked against me? A: While success can be elusive in a fledgling company, the survival rate among entrepreneurs who are truly serious about building a business is much higher than commonly believed. Most of the companies that quickly disappear are led by venturers who are not truly committed to creating a lasting enterprise. Many firms are short-term by nature, created for tax reasons or investment purposes. Quite a few firms are started solely for ego gratification. Finally, a lot of companies are formed by entrepreneurial wannabes who are willing to take a stab at a perceived opportunity with the hope that “magic” will happen. All of these new businesses, however, are included in the mortality statistics of firms that fade away after a few years. The good news is the survival rate of new firms is much higher among those entrepreneurs who started out with conviction, determination and a willingness to work hard over the long haul. A study sponsored by American Express showed that 77 percent of such firms made it to their third anniversary. Q: I own a two-year-old small business and spend most of my day dealing with my subordinates — answering questions, giving direction, re-doing mistakes. There’s very little time for customers. Is this par for the course? A: One of the most difficult things for a business owner to do is to give up control. In fact, an inability to delegate is a major reason why small businesses with potential fail or remain small forever. It’s important for a founder to stay in total control at the beginning because no one else will have the vision, drive and willingness to sacrifice that is necessary to make something of the entrepreneurial idea. However, once things take off, the venturer must learn how to depend more on the people “who can’t do it as well as he can” (and never will if he doesn’t give them a chance to try). In the beginning, your employees won’t match your talent for accomplishment, and they might even fail, but they will learn and eventually free you to do the things that are most important to your growing, prospering business. Why not meet with your team and solicit their ideas for giving them more responsibility and independence? It’ll build their self-esteem, provide you with some new ideas and help you tap some extra talent that you are already paying for. Paul Willax is a professor of entrepreneurship and chairman of the Center for Business Ownership Inc., Amherst, N.Y. He also is the author of the book, “Brass Tacks Tips for Business Owners,” available at barnersandnoble.com. If you have a question or suggestion for his column, or to receive a free, weekly e-mail newsletter, “Brass Tacks Brainfood,” write to Willax@TheBrassTacks.com. Edit ModuleShow Tags