Should he take it?

By John Paul- email director for smallstarter business
And when it comes to starting a business, there are usually two types of people in the world.

The first are people who have promising business ideas but don’t have the money or resources to develop the idea into a business.

The second are people who have the money and technical resources but are looking for good ideas and opportunities to develop.

Naturally, a partnership between these two groups would be a marriage made in heaven.

But that’s not always the case.

Recently, I received an email from one of my readers concerning a potential partnership. But he’s concerned about the deal.

Here’s an excerpt of the email from Joseph who’s based in Nigeria.

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Hi John-Paul,

My tech business is in the idea stage and I recently got a partnership offer from a programming company.

They want a 30% equity stake in my company, and in exchange, they’re offering to build the website with their funds, develop the application, and also provide the services of a graphic designer for my platform.

I am not well grounded in business but as desperate as I am to work with them, I feel it’s a bad deal.

What do you think? Please help.

Joseph

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Thank you for sharing your dilemma with me, Joseph.

A lot of people are going to learn from this experience and the lesson I’m about to share.

So, should Joseph take this deal?

The answer would depend on the upsides and downsides of this proposed partnership.

Every partnership comes with risks.

But if the benefits of the partnership outweigh the risks, it makes sense to take deal and take precautions to protect yourself from the risks.

So, what are the benefits?

First, your business is in the idea stage, the riskiest stage of the business lifecycle.

And here comes a programming firm that’s willing to use their own financial and technical resources to develop the idea.

They’re taking a risk. And if your business fails, they get nothing.

They’ll only get something if your business succeeds.

So, if they’re prepared to take the risk, it means that they believe your business is more likely to succeed than fail.

It means they believe in the potential of your idea, so they’re willing to make a bet on it.

This comes with two benefits for you.

The first benefit is that you have transferred the risk of failure. If the business doesn’t succeed, you owe the programmers nothing.

The second benefit is that you don’t have to pay cash. If you had to pay for their services, that would have cost you money.

Using equity to pay for services is a common way that startups use to develop their business on a very tight budget.

In fact, big tech companies like Facebook paid their early employees with equity. So, it’s quite a common practice.

Now, let’s look at the downsides

There are usually two major downsides to this type of deal.

The first is that equity can be more expensive than cash.

Let’s say the partner’s services would have cost you $10,000 if you paid in cash.

But by paying with 30% equity, the company will own 30% of your business and have the right to earn 30% of your company’s net profits for the next 50 or 100 years.

Essentially, while a cash payment for service only happens once, an equity payment is for life, as long as they remain shareholders in your company.

And that can be a lot of money if your business becomes successful.

But again, you can’t have your cake and eat it.

Would you want to own 100% of a $1,000 company, or 70% of a $1 million company?

There’s always a trade-off that has to be made.

The second downside is your exposure to intellectual property theft.

By working on the technical aspects of developing your business idea, your partner will become intimately aware of how it works.

They will have the passwords, access rights, codes and source files that your website and application will be built on.

If the partner is trustworthy, this shouldn’t be a problem.

But if there is a fallout or disaffection in the future, they have the power to cause serious damage to your business.

Tech businesses are usually very vulnerable to this kind of threat.

So, here’s what I think…

The reality is, both parties will be taking a risk by entering this partnership.

For them, they could end up losing their investment of time, money and expertise in your business.

For you, your idea could be developed and stolen.

But again, the real question is: can you do this on your own?

If you can do this on your own and pay cash for their services, that would be great!

But if you don’t yet have the financial or technical resources to develop the idea, then a partnership makes sense.

Remember, an idea on its own is worthless. It’s only execution and resources that can bring an idea to life.

So, again, do you want to own 100% of an idea that’s worth $1,000 or do you want to own 70% of a business that could be worth $1 million?

How to protect yourself from the risks.

Now that you know the potential risks of a partnership, here’s how you can protect yourself:

1) Do some background checks on the leaders of the company. See if you can find information or people that can vouch for their character and integrity.

2) Make sure you get a signed partnership agreement that clearly spells out the roles, responsibilities, rights and obligations of both parties.

3) Get a lawyer/attorney to review the agreement before you sign. Make sure you understand the terms and keep a copy for reference purposes.

4) Make sure the website, application and any other digital assets created are registered in the name of the company and not in the name of the partner.

5) Ensure you have the same admin rights, and that passwords are jointly controlled. A tool like Lastpass can handle this.

6) What does your gut tell you about the partnership? If you don’t feel right about it, then don’t do it!