Look a VC’s gift horse in the mouth, but be aware it could bite


Good news: there are a number of seed incubators, venture capital options and small business incubators which promise to help you nurture your young business and grow it into a profitable pillar of the economy.

Bad news: taking advantage of these support services often comes with a substantial price – your business.

Starting and growing a business is really tough. It takes more time, more money and far more persistence than you initially anticipate. It is a lot of hard work for what could become a tremendously rewarding enterprise that supports you and your family. The early stages are particularly challenging for most business which need money and resources to function. Both are usually in short supply and although banks tend to be happy to lend money to small businesses, that is often not the panacea you may be hoping for.

Fortunately a number of alternatives are increasingly available to startups and small businesses in different stages of their development. These alternatives include early stage incubators where startups have access to expertise, working space and facilities; angel and later stage venture capital to fund your development and co-working facilities (such as JoziHub which I contribute to). But these alternatives frequently come at an unexpected price.

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One of the surprises that greets many first-time entrepreneurs is that there’s usually a requirement that you will sign away a more significant stake in her business than she expected. In some cases, it might be that you’re left without any stake at all.

The people behind these support services rarely expect payment upfront and providing these services is on risk in the hope of a pay-off later but do they require too large a stake in your business for what be a relatively small contribution in your business’ life cycle? Contributions in exchange for these services can take the form of shareholdings or options to take shareholdings at prearranged values down the line. It may be worthwhile for you to hand over a stake in your business so pay careful attention to your agreement with the incubator or venture capitalist (well, for starters, make sure there is an agreement – be very sceptical if none is on the table).

There isn’t a standard model for these contracts,  so read it carefully and, if you are unsure, get help from a lawyer who can translate for you. Don’t just sign whatever is put in front of you. Remember what happened to Eduardo Saverin. Saverin famously signed a shareholders agreement that left him with a diminishing stake in Facebook as it grew and took on additional investors. Although he emerged with substantial wealth by most people’s standards, he found himself squeezed out of Facebook in the process.

The same thinking must apply to competitions geared towards start-ups. We’re seeing a lot of big money prizes which will tempt enthusiastic entrepreneurs, but receiving that prize means giving up all rights to your idea. Is it worth it, you have to ask yourself.

Starting a business is exciting and finding people willing to give you access to much needed resources can be a rare opportunity. As focused as you are on using those resources meaningfully and fulfilling your dream, don’t lose sight of the consequences of your choices. Take some time to consider the ramifications for your business in the years to come when the stake you consider giving away becomes an impediment to your company’s continued growth in the near future. The offer may be as good as it seems but it could also turn out to a metaphorical Trojan horse and that didn’t turn out so well for the city of Troy or Brad Pitt in the end.

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