There is a key test of any entrepreneur.  You don’t know the real answer until you get to that point.  It is easy to say one thing, but when the emotions of the moment kick in, something very different happens.

 

The test is giving up control.  Is the entrepreneur willing to take less than 50% ownership?  Is he/she willing to have a smaller share of a larger company that could be worth much more than a larger share of a smaller firm?

 

This can be very important to the investor in the company.  The investor may start out with a minority share.  What often happens is that follow-on investments are needed.  The additional money required later can tip the scale and put the entrepreneur below 50%.

 

The trick is to figure that out in advance.  The reality is that it is easy to say yes to give up control but harder to do it when the moment of truth comes.

 

I saw a situation come up just like that.  The entrepreneur told the new investor he was willing to give up control.  Later on, the relationship got strained as the venture needed more money.  The investor appears to be left holding a minority interest in a smaller company, something they never intended in the first place.

 

Like many things in life, there might be signals elsewhere that could tip you off in advance if you are an investor:

·         What kind of valuation is the entrepreneur putting on their company or what have they done in past rounds?  A high valuation can be a signal of inflated expectations which makes it harder to raise later financing.

·         What have other investors said?

·         What is the read of others who have looked to put money into the company but passed?

·         How well does the entrepreneur delegate operating decisions and tasks?

·         How does the entrepreneur speak of other people?

 

This same test can be used by the entrepreneur as a gut check. 

 

Whether you are the entrepreneur or the investor, give this one some hard thought and do a reality check.  It can save a lot of heartache later on and avoid walking down a dead end road.