Lessons Learned

As the years have progressed, my views about equity and partners have changed.

I had to work to pay my way through college and was hired by a start-up owned by an HBS grad that maintained mailing lists and printed computerized direct-mail campaigns for clients ranging from local hospitals to national automobile companies and from the Evangelist Reverend Ike to the Christian Science Publishing Society. ÿDuring my six years there, I was awarded stock options. They weren’t much, but I was thrilled and felt wonderful about having some equity. ÿHowever, I learned that the options were not worth much until an “event” happened, and because of “vesting” I lost them when I left to come to HBS.ÿ

Several years later, while both of us were out of work, I joined forces with an old boss from GE, who had been a Booz Allen consultant, to look at buying a business for ourselves. He was the money guy and I was the operating guy. He made the calls to the owners, developed the banking and mezzanine financing connections, and I looked for prospects, worked on projections, analyzed competition and assessed their operations. ÿWe found a “deal” and finally got around to discussing the equity split. He proposed 80/20 – I was shocked. It did not seem fair since I was going to move to Vermont and run the business, and he was going to look for more deals. ÿÿ

As we got within 10 days of closing, he announced that he was taking a “job” as a CEO for a company in Texas; needless to say, the deal was dead and I had to go find a job, too! ÿI had known him for six years, but how well did I really know him? ÿHe had been my boss, I had worked for him and that is how he still saw it. ÿI should have talked about equity sooner with him, and we should have considered the value of the contributions we were each making. ÿI had to admit to myself that his “contacts” were critical at the early stages of the process. ÿAnyway, I was not a “partnering” kind of guy; no team sports in college or high school, a lot of solo pursuits like hitchhiking through Ireland and juggling, and did not play well with others in the sandbox during kindergarten!

When I struck out on my own to buy a business, I wanted no partner and to retain 100% of the equity; no surprises this time! ÿDuring the search process, a number of business owners wanted to hire me with offers of equity or an earn-out; however, I wanted full control. ÿI could imagine working to improve the business for a number of years and the owner taking credit for providing theÿ”platform” and asking for more value, reneging on the deal or just letting me go. ÿI even had an “angel investor” tell me how he had invested in a start-up that gave him 50% of the equity for providing the financing and had been sharing profits with the founder for the last 10 years; it just did not seem fair to me that he was just a “silent” partner in the business and got his money back after 2 years! ÿSince I was unwilling to take on angel investors or to give up any equity for mezzanine financing, I had to set my sights on a smaller, troubled business, but it would be my own!ÿ

Even when Debby came on board as CFO, we did not have any discussions about equity; she knew that as my survivor she would get it all! ÿAt one point the business was moving toward a potential sale to a private equity company, and we decided to bring in A-Team staff and began to offer a small percentage of the sale price if there were a transaction. ÿ The transaction never materialized, so we canceled them all, except for the CEO. ÿMy feeling was that the staff did not feel this was a form of incentive and preferred to have profit sharing and bonuses instead. ÿWhen the company finally was sold, the CEO got 5% of the selling price and the staff got bonus payments along with distributions to all the employees.

Equity had grown to be very “dear” to me. ÿI was comfortable in making the compromises of slower growth and limited expansion and taking all the risk. Self-funding acted as a good “throttle” and encouraged me to re-invest in the business. Sharing profits rather than equity felt like a much better balance to me.

If you have comments…website or letters to editor. The Harbus and Jim would love to hear from you at letters@harbus.org, or comment online at www.harbus.org.

Jim Sharpe (MBA `76) is one of theÿHBS Entrepreneurs-in-Residence for the 2009-2010 academic year, who ran an aluminum manufacturing business for 21 years while working with his wife, Debby Stein Sharpe (MBA `81) after both left careers at GE and large companies and sold the business in late 2008. Jim can be reached at: jsharpe@hbs.edu, 310 Rock Center, 617-496-6285 or sign up on his wiki for office hours or Brown Bag lunches at //wiki.hbs.edu/confluence/display?Sharpe/Home.