Financial Foundations: Part 2 – Sign Up For Our April 30th Free Webinar – REGISTER NOW

10 Owning a Large Portion of a Small Company Is Better

4 Reasons Why Owning a Large Portion of a Small Company Is Better

One of the basic issues that all business owners must answer is to choosing between owning a large portion of a small business or getting a small portion of a big company

According to Forbes Real-Time Billionaires rankings, Jeff Bezos and Elon Musk, two of the world’s wealthiest people in the world, greatly benefit from owning a small portion of a large company.

Musk only keeps about 20% of Tesla, and Bezos has about 10% of Amazon, so they both decided to sell the majority of their companies to fuel their goals. Given the stock market’s performance over the last year, their bet’s success has recently been heightened.

However, selling a portion of the company has several serious drawbacks. Let’s look at four reasons why Owning a Large Portion of a Small Company Is Better.

1. OPERATIONAL CONTROL

The most apparent advantage of owning all of your shares is that you get to determine how the business is handled. Nobody will tell you what products or services to sell or which markets to join. You are the king or queen of your kingdom, and you have the authority to make the laws.

2. NO OBLIGATION TO QUIT

Tim Ferriss, the author of five books, including wildly influential New York Times bestseller The 4-Hour Workweek, recently encouraged his Twitter followers to think their endgame before investing in a business: “Before you get into an investment situation, know-how and when you’re going to get out, or at least how and when you’re going to reevaluate.” Getting in is the simple part…”

When you allow outside investment in your business, you should try to earn a profit for your shareholders. You must sell your business in order for your investors to benefit (or part of it). Running your company indefinitely and must start worrying about how your shareholders can get.

When you need to sell so that your owners will make a profit, you give up the possibility of liquid.

Some will put pressure on you, and others will wait passively, but if you allow outside investment, the exit clock starts ticking.

3. NOBODY AHEAD OF YOU IN LINE

When sophisticated outside investors participate in your business, they often expect favored returns, which can reduce your take from a sale.

Ana Chaud, for instance, opened Garden Bar to serve fast-casual salads to Portland hipsters. The first location was a hit, but the restaurant industry’s razor-thin margins inspired her to expand in order to gain some economies of scale. She received two rounds of outside funding, one of which came from a group of convertible noteholders. Chaud skimmed the term sheet but trusted her partners, so she didn’t give much thought to a clause that gave noteholders 2.5 times their money if she sold the company before the note expired.

Chaud then expanded to nine cities, with a tenth on the way, when she was approached by Evergreens, Seattle’s fastest-growing salad restaurant. All was going perfectly before Chaud’s lawyer noticed the investors clause, which had the power to wipe out all of her equity.

Chaud agreed to distribute the proceeds of her acquisition to investors. She arranged an earn-out, hoping that it would help her to recoup her years of sacrifice. Then came COVID-19, which caused Portland restaurants to close, and Chaud was left with nothing.

4. AVOID AN $80 MILLION MISTAKE

The most obvious justification to keep your stock is to prevent dilution. It can be enticing to give away shares to lure a key team member when the business isn’t worth much in the initial periods, but doing so could cost you a fortune if you’re too generous.

Take a look at Greg Alexander’s story, who founded the Sales Benchmark Index (SBI). Alexander began the sales consultancy from his kitchen table and offered two employees a quarter stake in the company early on.

10 years later, Alexander sold SBI for $162 million, referring to the easy sale of half the business as a “$80 million mistake.”

After the recent runaway success of several high-profile stocks, it might be tempting to try collecting capital to finance the growth, but there are some advantages of owning a large portion of a small company.

Leave a Comment

Your email address will not be published. Required fields are marked *