Equal Partnerships? No.

When starting a business, founders tend to divide ownership equally among the partners. Many start-ups are incepted with founders knowing each other. When friends join together, they are equal and hence they must get equal share in the venture they are starting with. If the partners are not contributing equally, is it desirable?

Let me share a case example. Ankit, Joseph and Dimple were in the same college. Ankit is one year senior to the other two and is also the harbinger of starting this venture. He knew Joseph, for his technology passion and Dimple for her outgoing public speaking and reach-out skills. Ankit, quite convinced with his idea, shares it and asks them to join him. Joseph has issues with non-supporting family to his start-up idea and Dimple can’t relocate to the city the venture is starting in.  Still, Ankit is left with these two, as he has approached many others in the past three months, with a promise of they joining him but never did. Ankit settled for this option. They agree that Joseph and Dimple will be in full time job and support the venture by contributing Rs 20,000 each month, besides shouldering some responsibilities relating to their area of passion, for an equal share in the venture. Dimple plans to join Ankit, full time in a year’s time.

The understanding is innovative as is expected from a startup founder. But there are two problems in this arrangement. One, Ankit is left alone to manage the affairs of the enterprise with very selective and specific role shouldered by others. That makes his team a no-go before any investor. Second, the venture needed about Rs 20 Lakhs over two years, 50% of which Ankit will need to invest from his side. Ankit is full time. Joseph and Dimple are not. Major risk is borne by Ankit.

If we analyze further, simplistically, let’s take only two key parameters into consideration – role and investment.

There are roles of CEO, CFO, CTO, CMO and CHR to say the least in any venture. In the above case example, CEO and CFO roles are with Ankit, CTO with Joseph and CMO/CHR with Dimple. If not in full time engagement, would Joseph and Dimple be able to perform their CTO and CMO roles completely or any spill over will need to be managed by Ankit himself or through outsourced help? Joseph being at Mckinsey argues that his technical prowess and work environment will help him come up with better technical solutions faster, to make up for his less time involvement.

The investment share of three is in 50%, 25%, 25% composition. It is also unequal. In such a scenario, should the share of three in the venture be equal? I feel no.

What is likely to be fallout from such an arrangement? Is it not an innovative method of win-win-win situation created by the founders of this venture?

The venture soon will see the frustration of not only Ankit, but also of other two. Most likely decisions will be taken by Ankit, sometimes not in consultation, as generally is demanded of the situation in any small organization. Also, Ankit’s un-intentional encroachment on CTO or CMO roles, as necessitated, may not find approval from Joseph and Dimple. Soon, based on human psychology, every chance is for Ankit to feel cheated and frustrated for doing ALL the work, while others are not contributing enough, but is equal partner.

The solution thus is to make unequal partnership based on these two factors – role and investment. Give weightage of 70% to the role and 30% to the investment. This is also the way to indicate defined leadership with adequate authority to make final decision and sufficient compensation to remain motivated. In the scheme of things, only distribute 90%, keeping about 10% of the share reserved for ESOPs that will come handy to attract key talent later. Considering each of Joseph and Dimple are able to contribute about 75% to their role in this fashion and kind of investment mentioned, the share of partnership should be 38%, 26%, 26% amongst Ankit, Joseph and Dimple respectively. When Dimple joins full time after a year, this percentage should change to 35%, 26% and 29%. Whatever is the share, keep a period of vesting from 3 to 4 years at least.

It is equally important to note what happens in the real life. Circumstances change and partners do quit. In the identified situation, some partners due to their peripheral involvement have low risk to quit the venture and thus have more likelihood. It is pertinent to design the smooth exit safeguarding the interest of all involved. As revenue results and valuations may not be available (quit decision less likely if they are available and sound) by the time quit decision comes from any of the three, it is prudent to provision for about double the market rate returns (of 10%) on the invested amount in the year 1 and triple the returns in the year 2.

The given solution is indicative and variations in situation may impact a change in the share, keeping approach the same.

I support the arguments of un-equal share in partnerships even if all the co-founders are on-board full time. Differentiate by small percentage, based on the amount of investment, but the governance structure must be clearly defined in case of disagreements. All significant decisions must be made on consensus, transparency kept fully else partnership will break sooner than one thinks. However, clearly defined conflict resolution goes a long way in smooth running of the enterprise and bringing in order.

Ashish Jain, Chief Evangelist

www.thestartupboard.com

About Author - Ashish mentors founders of start-ups on strategy

Social pullback from Start-up dream

Start-up dream is now-a-days seen by many youngsters but not everyone ends-up with his /her start-up.

I happen to know a youngster, who passed out in 2015 from a prominent southern private engineering college. Let’s call this youngster Pranav. He has been active in college fest, organizing activities for “societies” and getting “tech-app” made from his juniors. Highly connected with students, professors and evangelists from other colleges in the area, he had a dream to commence with his own start-up and even had firmed-up his ideas on technology and domain to venture into. On campus placements, he rejected four such offers, including from the big Indian IT companies and consulting MNCs. He knew, for sure, the challenges he was likely to face in his start-up. Usual ones were finding a team with same zeal and passion as he had, funding it, getting the product ready, competing against competition, sustaining the various ups-and-down of a startup and then making it big to succeed. He graduated and was ready for all of these challenges.

He was ready but his family was not. He has discussed the options with his parents before rejecting his campus placement offers, but parents were under pressure from the “society”. Few relatives were skeptical of his choice in life and were not seeing the vision and life he was seeing for himself. Anyone, Pranav or his parents discussed the idea with, brought the rejection of the start-up idea in favor of more established options of higher studies (post-graduation) or taking up a job.

Pranav isn’t along. There are numerous graduates, hailing from middle-class, who are facing challenges even before starting their own venture. The society in India is yet to reconcile to what’s-the-big-deal-to-failure mentality. Is it a big blow if someone fails in an experiment? What about the learning from such a failure?

I did a simple arithmetic of the options that are available to be engineering graduate, soon after college.

Please allow me to exclude the outliers from IIT and IIM.

Based on latest figures, an engineering graduate gets about Rs 3 – 3.50 lakhs as his starting salary. Assuming everyone, who gets into a job gets an increment of 25% in the year 2 and 3 appraisals, 20% for the next two and 15% subsequently, as the base salary is growing and this percentage reflect the general 60% of the candidates who fit in the middle of the bell-curve. An engineering graduate gets about 11 Lakhs after about year 9, unless he reskills himself or switches jobs too frequently, with a cumulative earnings of Rs 61 Lakhs after 9 years of service.

			25%	25%	20%	20%	15%	15%	10%	10%
	Option	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9
1	Job, Right now	3	4	5	6	7	8	9	10	11
			7	11	17	24	32	41	50	61	Cumulative
2	Higher Edu India - PG (2 Years)	(5)	(5)	7	8	10	12	13	15	16
			(10)	(3)	5	15	27	40	55	71
3	Higher Edu Abroad - PG (2 Years)	(20)	(20)	10	12	14	17	19	21	23
			(40)	(30)	(18)	(4)	13	32	53	76
4	Startup - Failed, Join Job after 2 years	(20)	-	15	18	22	25	29	31	35
			(20)	(5)	13	35	59	88	119	154
5	Startup - Successful	(20)	-	40	48	58	66	76	84	92
			(20)	20	68	126	192	268	352	444

Consider the same graduate going for higher post-graduation studies within India. He invests about 10 Lakhs in the fees and hostel and gets to start at about Rs 7 Lakhs. Assuming the same increment percentages as earlier, his CTC at year 9 is at 16 Lakhs, with cumulative earnings of 71 Lakhs over 9 years of service. If the same graduate had gone for higher studies abroad, he had to invest about Rs 40 Lakhs an would have been much better taking CTC of Rs 23 Lakhs (cumulative 76 L) after the same period.

Consider starting a venture. What does it take for founders to start a venture and take it to a level recognized in the industry? He needs to build product (technology savvy), understand market dynamic including competition (marketing plan with branding), define go-to-market strategy (led sales), arrange funds (CFO role), hire and retain people (CHR role), manage organization growth, address regulatory compliances, etc. If this venture has made its presence, founders have learnt which no other course in the world can teach them! Innovative and modern outlook companies are constantly looking for such people who are not only all-rounder, but also possess fighting spirit and attitude to solve problems as they come. It makes these founders in-valuable, whether they lose out on their venture or make success out of it. Anyone who fails still has a better market value and conservatively valued at 15 Lakhs as starting salary, if he had to resume job after venture failure. Not to mention, he is better off than any of the earlier discussed cases, even if he has burned about Rs 20 Lakhs of his own.

What if he succeeds? There is no looking back. What one earns is un-comparable to job that could have given. Pranav has been able to convince his parents to travel on this path.

If one argues higher education in India or abroad provides connect with fellow batch-mates and this can be leveraged for better opportunities in life. This is no-doubt a take away. However, this is much more explicit had one started his venture.

It is also pertinent to mention that business is not for everyone. Only some have the aptitude and attitude to take the risk and have the endurance to undergo the hard work physically and emotionally. So, for all those we are appropriate for it, startup venture is the right way to go.

It is time that as parents we support our wards to take the path less traveled and enable them to be the torch bearer for the generation to come, without compromising self-interest.

Ashish Jain

www.thestartupboard.com

About Author - Ashish mentors founders of start-ups on strategy

Free Basics versus Free Internet

The divide between propagandist of for and against net-neutrality debate is getting louder. Facebooks’ Free Basics is the lone corporate warrior along with ISPs, who is pushing ahead with its agenda of discriminatory pricing regime for the Internet in India.

Two things make Internet fancied around the world. It is a platform that existed since the 1970s but was consigned to only research institutes, to collaborate. With the advent of World Wide Web (www) the power of connecting each other evolved and more and more people started connecting to it. It is a platform that became powerful as it was able to connect any and everybody from one continent to another seamlessly without any barriers. In true sense, the world became one market for sourcing of information and collaboration. Secondly, as it was evolving and its power growing, thankfully, no country or its government controlled it, the reason enough people trusted Internet to be non-partisan.

Internet has grown in its acceptance from 16 million (0.4% of world population) in December 1995, to 3366 million (46.4% of world population) in December 2015. This growth is faster especially in the last two years, even on the high base. In India, the number of Internet users has increased from 5 million in 2000 to 243 million users in 2014, covering about 19% of India’s population and this growth rate is much higher in India than world’s average.

With the introduction of Free Basics by Facebook and zero rating by Airtel, the real intention does not seem to give access, but mere profit. While profit may not be a bad word, at the cost of the platform’s existence of non-partisan one platform-one world, should be a definite no. The arguments of increasing the access to people in India who can’t afford the Internet, is a lame excuse. If this argument, for argument’s sake is accepted, what will it create is not a WWW view of Freebasics or Non-FreeBasics view, but probably more than 300 views of Internet worldwide, divided by the ISPs through their “programme”. The corporate may successfully be able to divide it even further based on the “view” that they would like to perpetuate. In this scenario of shrinking slices of available “programme members”, any view from any continent would not only be distorted, but also biased. And that is detrimental to the platform itself.

Facebook cited TRAI’s 1999 tariff order to justify that non-discrimination requirement reaches only discrimination between subscribers of the same class and argues “Thus that prohibition would not appear to reach zero rating or sponsored data programmes, since all subscribers pay the same price (zero) are subject to the same terms, for the same class of service,”. This justification is not valid, as it would kill the competition theory, if one with muscle power can sustain the initial period of “Investment”, to flourish when all the competitors have been vanquished.

Internet is oxygen to the digital world, and any dissection in the name of flavored oxygen should be resisted, however tempting it may be. It is better to remove the pollution from this oxygen, together, and facilitate its greater flow to larger masses in its purest form.