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

Payment Banks - Opportunities for start-ups

My younger daughter when she was 3 years old, used to ask, what we do in a bank. I did not want to complicate things for her and answered “we put money and we get money”. This could not be more appropriate for the current set of 11 payment banks which RBI has given permission to setup. These banks can not lend and hence “we get money and we give back money” can’t be true.

New striped down payment banks have a big impact not only on the financial and technology fraternity, but also on the Indians in the remotest places, resulting in three things. One, it will help financial inclusion of the unbanked. Secondly, it will spur into greater percentage of cashless economy, and the third, banking transaction costs will reduce across the board. Payment banks are unlikely to open the branch network on a scale as “full” banks do. They are not even obliged to. Lean organization structure, technology enabled banking - mobile or net banking, specialist and limited services on offer, partnering as banking agents, will enable them to reduce the transaction costs. It is big impact for the current set of banks as many transactions and low capital cost accounts are likely to shift to payment banks. When the impact of payment banks on people is such immense, will it have opportunities for new ventures? There are many and we will discuss the same here.

First, let us evaluate the scope of opportunity for SME. Conventional banks have only been able to reach 30,000 out of 5.94 lakhs villages; resulting in almost 50% Indians without a bank account. Unbanked rural folks will find it convenient to pay using mobile. Mobile phone will become paperless cheque and ATM. Urban Indians will shift due to convenience, speed and captivating deals on mobile transactions.

Payment technologies have proved hugely popular in other developing countries. In Kenya, the most cited success story, Vodafone’s M-Pesa is used by two in three of adults to store money, make purchases and transfer funds to friends and relatives. One study found that in rural Kenyan households that adopted M-PESA, incomes increased by 5-30%, due to time saved in avoiding regular banking and savings on transactions costs.

This opens up opportunities for many start-ups. Payment banks will have to depend upon “local” entrepreneurs for reaching wide and deep. These entrepreneurs will have more accessibility to last-mile customer and hence the trust, a key ingredient. These entrepreneurs on non-exclusive basis, like in telecom tower business, can create business catering to multiple pay-banks / banks and source products and services including cash dispensing. This is cost effective and win-win model.

Faster adaptation of banking by vast majority of unbanked population will depend on correct and effective consumer education. More than 24 languages, regional biases, dialect, and cultural differences make education of masses a complex task. New ventures can be opened in content creation and local delivery of such content effectively. A friend of mine, who runs a NGO, publishes a “newspaper” with huge amount of local news and pastes them on the milk-van for people to read free wherever this van goes. His income comes from advertisement that consumer non-durable and durable product companies gives to reach this deep. Innovative solutions like this will come more when people at grass-root are involved. This also will help gain trust.

Can the money be sent from Airtel network to non-Airtel network without both collaborating? Here, aggregators come into play that is not among the banks. These new ventures will build plug-ins with each service provider and offer a platform that is ready-to-offer services, like payment gateway aggregators in today’s world, drastically reducing the go-to-market time and cost, while standardizing the platform.

Think of grocery store accepting mobile payment instead of card, as it would entail him to lower service charges (transaction deduction rate – TDR) than 2% he forgo in case of cards. How about electricity and other utilities accepting mobile payments? Purchase a magazine on the traffic light? Purchase goods and pay while talking over phone without the need to disclose the bank account or debit card details? How about lending small amount to a friend /relative in need at a distinct location without the availability of any bank or the ATM? Soon, many apps will be made by ventures on mobile cash management, setting-triggers for regular payments, usage spent limits by spend category, dashboard for predictive spends in future months, suggestions on avenues to spend basis available cash, on-the-fly proximity and spend based restaurant search among many innovations that ventures can think of. Many technology companies will bring innovation; build their application and tie-up with banks to facilitate transactions for each use case, just the same way value added services (VAS) like astrologer, cricket scores, news updates etc. happens on mobile today.

All these services will fail if trust is breached on the safety of money kept in mobile wallet or linked bank account. How to secure if mobile is lost or mobile number changed without opting for mobile number portability? Start-ups with specialization on security of m-cash transaction and reconciliation services will see the day soon.

It is an opportune time for start-ups to prepare and grab the pie, advent of payment banks opportunity throws before them. Size of the market is at least 10 times bigger than the credit card market size.

Ashish Jain