Having a great idea and building it out into a viable business could be quite daunting and difficult in a harsh business climate like Nigeria. Any founder who can build a company from the ideation stage to a certain level, surely deserves some accolades. In discussing the challenges faced while building their businesses, founders would often narrate their experience on how they bootstrapped, faced regulatory hurdles, had difficulties accessing funding to build their products, paying themselves little or no salary to keep the business afloat, and working hard to keep their team constantly motivated, even in the face of dissipating revenues. Somehow, these founders are able to surmount the hurdles and achieve a degree of success, while still maintaining complete control and ownership of their companies.
Although founders can be credited with laying the foundational stones of a business, this may however not be sufficient to enable the company take advantage of opportunities and scale. To sustain a business and eventually scale or expand, founders have to seek funding, which normally entails bringing in lenders and or investors.
This is the stage where founders may be faced with the harsh reality that they may need to give up an element of control or ownership of their businesses. Founders are visionary. They can dream dreams and execute that dream – its their passion. However, investors are largely focused on the bottom line and profitability. So, whilst the founder is able to create that business and its products along the lines of his/ her dream, the investor coming in will largely be looking at how to make the business more profitable in multiple dimensions. With these almost conflicting values, some founders may come to face the reality of losing certain levels of control of their company, from board positions, appointment of C-Suite executives to significant amounts of equity. With this, is the additional reality that, where the founder is no longer in control of the board, his/her or her role as the Chief Executive Officer (“CEO”) of the company becomes uncertain.
One acknowledges how incredibly tough this situation could be, considering that a founder would have nurtured and built the company to a certain degree, only to have to relinquish ownership and or control to keep the business going. The truth is, the founder needs to realize the company is no longer his or her own, it now has a life of its own and the umbilical cord has been severed. Some founders realising this, attempt to resist giving up ownership or control - but largely, this rarely augurs well for the business.
The founder’s emotional attachment with his/her or her business indeed fuels the belief that the business will stand a higher chance of succeeding as long as he or she is in charge (failing to realise this may be more along the lines of their vision). Whilst such attachment, overconfidence, and naïveté may be crucial at the early stages of setting up the business, and getting it up and running, it is these kinds of feelings that later create problems for the growth of the business. But then again, the founder’s vision may not be growth, it may be fame, validation, pride or any other emotional feeling completely unconnected with business.
Now, there are two choices here; take the road less travelled – by taking less of a stake in your business and let the experts who know how to catalise business growth take the business to the next level, or maintain your pride and control of the company, with the possibility of watching it plateau or fail. In our view, it is better to hold on to a 25% of something as against a 100% of nothing. It is important for founders to accept that when the need to raise growth capital arises, the harsh reality of business sets in – he who pays the piper, must certainly dictate the tune. So, the choice then becomes whether the founder is willing to keep his shirt on.
Smart founders have to understand the need to be less emotional at the point when their business requires growth capital. When you discover a unique product, process or service, and have decided to exploit it by starting a business, then it’s absolutely imperative that you don’t get yourself kicked out from the company you created and helped grow. To do this, founders need to ensure certain investment terms are properly negotiated, from the Term Sheet stage through to the Investment Agreement and Shareholders Agreement. With a proposed equity investment, founders must make sure the terms below are in place, at a minimum. They must also make sure they seek independent legal and financial advice.