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Howdy folks,

Today, I will open the post a little bit differently. I will share a conversation between a founder and a potential partner regarding a merger.

Trisha, the entrepreneur: Hello Samsa, good afternoon. How are things?

Samsa, Twitter follower: Hey Trish, I'm doing great. Thanks for taking the call. I’ve been following you on Twitter as you build out Swapster in public. What you’re working on is impressive.

Trisha: Appreciate the kind note. There’s still a long way to go.

Samsa: Yeah...but I think you have great potential. Anyhoo, I want to throw a proposal to you. Since what we’re working on is quite similar to Swapster, I think we should merge our two companies and crush the market.

Trisha: Hmm...never thought about it. If we do this, what do you bring to the table?

Samsa: For one, there is the tech stack we can consolidate to create a strong product and engineering synergies. Plus, I can bring in new businesses by leveraging on my network. In exchange for these contributions, I think it’s fair me to get a 37.3% of the combined entity.

Trisha: 37.3%? That seems high! How much revenue are you clocking in right now at Shadyapp?

Samsa: Well, we’ve been perfecting our product, spending lots of resources on paid acquisitions and hosting online events to create awareness of the brand. But yeah, we have $689 revenues in the last 17 months.

Trisha: $689 and you’re asking for 37.3% stake? That’s a bit much, I think.

Samsa: I know, I know...but we’re really firing on all cylinders and I truly think that our two companies combined can conquer the market in a big way.

Trisha: I think I have to pass. Thanks for reaching out though. All the best and bye! [Leave Zoom]

In the journey to build their companies, founders often encounter potential investors, partners or employees who claim they can contribute substantial value to their startups at the outset.

As a (struggling) young startup, these propositions may seem like a wish come true. Particularly if these proposals come from folks that appears to have good credentials - working experience with State Owned Enterprises or Multinational Companies. There could be some truth in the proposition. Yet, there is no way to ascertain that at the outset.

Offer a Trial Period

Therefore, a more discerning founder ought not turn down the offers outright (unless you really know the persons or institutions they represent are dodgy), instead turn the table with a counter proposal.

The founder can ask the person to prove that his/her claim to grow the client base by introducing several new clients to the founder or securing $XX amount of investments from legitimate investors. Once proven, the founder formalizes the relationship through monetary compensation, giving out equity or a combination of both, in return for their efforts.

Similar approach can be done for hiring too. Assign prospective employees (paid) small tasks over a 2-week period for example. Only hire if s/he produces satisfactory deliverables by offering cash and/or equity as part of the employment compensation.

These approaches are no different than buying a car. We would typically take cars on our wishlist for a spin to see how they feel when the rubber hits the road. We then buy the car that matches our expectation the closest during those test drives.

Talk is cheap, but equity on the other hand is more expensive. Before you part with your equity (or for that matter, any precious resources) in return for any business proposals, it would be wise to test drive before you buy, in order to avoid any buyer’s remorse.

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Extra Reading

Every time you're having a bad day, watch this.

David (Engine1) vs Goliath (Exxon) with only 0.02% shareholding. Stuff of legend. This is going to be Harvard Business School's case study at some point. 🦾 

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To those in Malaysia and other countries experiencing Covid-19-induced lockdowns, stay safe and be well.

Until next time,

Reez Nordin

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