My Mistakes. Episode 4 Over-valuing Partnerships
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I'm occasionally sharing a series called "Learn From My Mistakes". I number each episode, but I just make up the number. I've made so many. Some I just haven't written about yet.
This is a mistake I almost made and probably would have made if my friend hadn't talked me out of it. It involved me almost giving away 10% of my business to my friend for nearly nothing.
You may be saying to yourself "Well that's nutty." Actually, it is a more common mistake than you might think. With me, it happened very early on in my business, and I'm guessing this happens frequently in new businesses.
Follow my thinking here...
When you are considering starting your own business, two circumstances are at play can lead to this mistake.
- You are thinking through all of the issues, financially and personally, and you likely feel a little bit nervous and unsure. This is perfectly natural. I’d be worried about you if you didn’t feel this way to some degree. Because of this, you are probably looking to friends or family for some encouragement or confirmation that you are thinking straight. This too is perfectly natural and good. If friends or family do offer encouragement, it likely means a great deal to you. They confirm your thinking and it makes you feel confident and grateful.
The mistake is over-valuing this encouragement. It means a lot emotionally when it happens, but it isn't an enduring value that contributes financially and logistically to the business.
- At the earliest moments, the dollar financial value of your business is zero (or less). At this point, the only value is your idea and your willingness to work to achieve success.
The mistake here is to undervalue what you've got. You are about to quit a job, take a huge risk, and put what money and effort you have into this new venture. That's a lot. You may not be able to show the dollar value of it, but it has value for sure.
I made mistake #1 and mistake #2. And it almost led to a major mistake. I was so grateful to a dear friend of mine named Travis. He listened to my business idea. He encouraged me. He offered to help.
You know what I did? I offered him 10% of the business in exchange for him helping me a little bit. He had a full time job. I doubt he would have worked 10% of what I worked. But at that moment in my mind, I had such a depressed value of the business (#2), and Travis' encouragement felt so valuable (#1) that giving away 10% seemed like a fair deal.
Travis was a great guy. He thought about it a little bit and said no. He kept me from making a sizable mistake. As soon as my business grew a little, and I was putting 100% of my time and money on the line, I recognized the foolish mistake I almost made.
Brand new entrepreneurs tend to over-value a partnership. Learn from my near-mistake. If you must take on a partner, they should contribute in effort and risk that is proportional to their ownership percentage.