This Saturday I will have the great pleasure of attending two parties. They are – in a sense – birthday parties, for they celebrate the anniversary of the launch of two spirits businesses here in the Seattle area. At one, I’m told there will be bourbon and a roast pig. At the other, there will be gin and pie. Life is good.
But I’m not happy simply because I have the opportunity to enjoy these treats. I’m happy about it because these two businesses have been in operation now for 5 years and 2 years, respectively. This is significant. According to the U.S. Bureau of Labor Statistics, roughly 33% of businesses fail within their first two years of operation. And roughly 50% of businesses fail within the first five. So these two parties are special. They represent success.
Success for each has come at a cost – measurable not only in dollars but also in sweat and frustration. But then again, if it were easy everyone would do it.
While celebrating this achievement, I’ll also be reflecting on the challenges faced by spirits entrepreneurs who didn’t quite made it this far – or who made it this or farther only to find themselves out of work – because they ran afoul of their investors.
I see this with some frequency, unfortunately. Entrepreneurs, eager to take in the cash necessary to capitalize their business, occasionally will take any check that becomes available. And because everyone is happy and friendly at the time of the investment, the entrepreneur doesn’t necessarily take the time to protect herself.
Some entrepreneurs (of all stripes – not just spirits) try to minimize this risk by simply refusing to take in so much capital that they might lose control of the business. But doing this is often false protection. Many of the stresses that cause a rift between entrepreneur and investor come from being starved of capital – so refusing to take in enough to give the business legs may actually be more harmful than not.
In some cases, a better course for the entrepreneur is to take in the capital and recognize at the outset that she may not always have a controlling stake in the equity of the business. If she acknowledges this up front, she can plan ways to protect herself against bad times that may arise in the future. Those protections – which can range from severance agreements that kick in if she’s kicked out, to buy/sell provisions that allow her to take out her investor partners (assuming she can find the cash to do so) and anything in between. If drafted correctly, they can offer her significant comfort that – if (i.e., when) she and her investors’ interests are no longer perfectly aligned there is at least a relatively expedient way to address the problem.
Note that this does not mean that a separation of entrepreneur and investor(s) will be easy. Breaking up is – as they say – hard to do. But if you take an opportunity, when all parties are currently still happy with one another and on speaking terms, to determine how these things will be worked out if and when the time comes to part ways, you will help smooth that transition. In so doing – even if it means that the entrepreneur is no longer involved – the entrepreneur actually benefits the business she created by allowing it the best chance of making it to its next birthday. And that is certainly something to celebrate.
HoochLaw 