The Right Approach to Equity and Investment?
As an entrepreneur, one of the most significant decisions you will face is whether to give away equity in your business and at what terms. This decision isn’t just about raising funds or attracting talent; it’s about shaping the long-term future of your company.
In my fourth book, Successfully Scaleup or Exit Your Business, I delve into strategies for building businesses with a focus on scalability, growth, and ultimately preparing for a successful exit. When it comes to giving away equity, the principles are the same: think long-term, prioritise value, and protect your vision.
Here’s how to approach equity in a way that enhances your business rather than limits it.
Many entrepreneurs are tempted to offer equity for financial investment, especially in the early stages. However, cash alone isn’t the real currency when it comes to building a business. The true value lies in what the partner or investor brings beyond money. Expertise, strategic insights, or access to industry networks can be far more valuable than capital alone.
In Successfully Scaleup or Exit Your Business, I emphasise the importance of finding the right partners who add long-term value to your business. These are the people who will help you avoid pitfalls and accelerate growth. Offering equity to someone who only contributes cash without bringing expertise can lead to frustration down the line. Remember, equity is more than just ownership — it’s about who will be by your side, guiding the company toward its long-term vision.
My General Advice: Only offer equity to individuals or partners who will drive the business forward. If they don’t bring unique value beyond capital, reconsider the deal. Prioritise expertise, mentorship, and networks over money.
One of the key tenets of scaling or exiting a business is maintaining control. If you give away too much equity too early, you may find yourself no longer in charge of your own company’s direction. This is particularly important in the scale-up phase when the decisions you make can determine the future trajectory of your business.
I often talk about the importance of preserving control over your business, especially during rapid growth or when bringing on new partners. While equity can be a powerful tool to attract talent or investment, be careful not to dilute your ownership to the point where you lose your ability to steer the company. Performance-based equity deals can be a smart way to reward contributions without losing too much control early on.
My General Advice: Maintain a majority stake in your business for as long as possible. If you give away equity, tie it to performance milestones or long-term growth goals. This protects your control while incentivising those who contribute to the company’s success.
When offering equity, always keep your long-term goals in mind. Whether you’re scaling for growth or planning an exit, the equity decisions you make now will have lasting effects. This is why it’s crucial to think about how equity fits into your broader strategy, including your ultimate exit plan.
In the book, I outline various exit strategies, from mergers and acquisitions to full buyouts. Each of these paths is influenced by the equity you’ve given away. If too much of the business is held by external parties, you may face challenges when trying to sell or pass on the company. By being strategic about equity, you can ensure a smoother transition when the time comes to exit.
My General Advice: Make sure any equity deal aligns with your long-term growth or exit strategy. Giving away too much too early can complicate your ability to scale or sell the business later. Always think ahead.
Choosing the right partners to share equity with is like choosing a co-pilot for a long journey. You need someone who not only shares your goals but also has the skills and mindset to help you achieve them. Misalignment in vision can lead to friction and hinder growth, making it crucial to choose partners who share your values and long-term outlook.
In my experience — aligning on vision is a non-negotiable aspect of successful partnerships. When you offer equity, you’re bringing someone into the inner workings of your business. Their influence will shape its future, so it’s critical that they understand and support your goals. Misaligned partnerships can result in disagreements, slowed growth, and missed opportunities.
My general Advice: Before offering equity, ensure that your potential partner shares your long-term vision for the business. Are they aligned with your goals for growth or exit? Choosing the right partners will keep your business on track for sustainable success.
When it comes to equity, one of the most important steps is ensuring clear, legally sound agreements. A shareholders’ agreement should spell out every detail of the equity deal, from profit-sharing to decision-making rights. In Successfully Scaleup or Exit Your Business, I stress the importance of these agreements in protecting both your business and your vision. Without clear documentation, equity deals can lead to misunderstandings and legal challenges down the road.
My general Advice: Invest in detailed and transparent legal agreements. This will protect your interests and ensure that all parties involved understand their roles, responsibilities, and rewards.
Equity is one of the most powerful tools you have as a business owner, but it must be used wisely. Every share you give away represents a portion of your business’s future — be strategic in how you allocate it. The lessons in Successfully Scaleup or Exit Your Business are clear: think long-term, prioritise value, and protect your vision. By doing so, you’ll set your business on a path to sustainable growth and, when the time comes, a successful exit.
Concluding thoughts: Approach equity with a strategic mindset. Focus on long-term value creation, align with partners who share your vision, and always protect your control and interests with clear agreements. This will ensure your business continues to grow, thrive, and succeed on your terms.
