Tutorial Six

Not long ago a friend of mine, a successful entrepreneur, was crying on my shoulder. "Fred, he said to me, "when I started my company I knew I needed a Mr. Inside, and I knew a good one, my friend George. I offered him 50% of the company. He'd have jumped just as quickly for 20%, but I liked the fairness feeling of being 50-50 partners.

Today, after five years of hard work, we're nicely profitable on $10 million of sales. We're pulling really good money out in salaries. We have every fringe benefit we can think of. Best of all, we've only scratched the surface. I can taste $25 million in sales in two to three years. At that level, we'll be the undisputed king of the mountain in our industry, and making so much money we won't know what to do with it."

"Gee, Lee" I said, "I'd like to be of help, but I'm having a hard time figuring out where the problem lies."

"It's George" he said. "I went into his office last week and said to him, George, we need to get away from here for a couple of days and map out a new business plan designed to triple our size by 1999."

"And what did he say" I asked.

He said, "Gee Lee, that's nice. Right now I've got to leave for my golf lesson. I'll be back by two, however, and we can talk about this. Quite frankly, though, it sounds like a helluva lot of work to me."

"Fred", Lee said to me, "George hasn't been in here on a weekend in almost a year. He's never in before 8:00 A.M. anymore and never here after 5:30. We're losing momentum and I can't carry this company by myself. He doesn't want to risk the investment that would be required to pull the thing off. And being exactly a one-half owner of the company, he can and does veto anything he wants. I'm going absolutely nuts."

I didn't have a good answer for him. As I was driving to a board meeting right afterwards though, I thought to myself, I'll bet that that's the tenth time in my career that I've heard this 50-50 partnership tale of woe. Why do such otherwise smart people keep doing this to themselves? After no more than an instant's reflection, I knew the answer. Because they've never been there before. Because "equal partners" seems so human-naturally fair. Boy, what a beguiling trap, even deathtrap, this has been for countless entrepreneurs, I thought.

But wait, I reflected, there's more! What about the three (or four) (or five) musketeer's death trap. Although in one sense it's a corollary of the 50-50 partnership deathtrap, in some ways it's even more insidious. You know the story. Three friends decide to start a company. They split the ownership absolutely equally, they draw identical salaries, they're going to make decisions "by consensus." It's the logical, "fair" thing to do. One of them (perhaps the oldest or the one whose idea it was originally) reluctantly assumes the presidency because state law requires there to be one.

What a recipe for failure! There are three primary problems with this set-up. First, this company has no leader, no one ultimately responsible for its success or failure. Second, sooner or later a major, honest difference of opinions will arise. What do they do then? Third, the reluctant president will almost inevitably come to see himself as "a little more than equal." If they have any success, for example, and get written up in the local or trade press, guess whose picture the reporter will want? Guess whose quotes will be plastered all through the story? Guess which other two people are going to hang the article on their family room dart board?

The solution? Pick a CEO and treat him like one. Give him the largest equity position and salary, even if they are only symbolically larger. Somebody has to sit where the buck stops.

By now I was on a roll. There was a cardboard box lying on the passenger seat of my car. I flipped it over to reveal its blank bottom and started scribbling notes relating to other deathtraps all over it. By the time I reached my destination, it was covered up. I counted them. There were exactly 25. Wow, I thought. I could turn this into a speech and get invitations to deliver it in places like Lawrenceville in November! And the rest, as they say, is history.

Sadly, so are thousands of otherwise good little companies history. Entrepreneurs face all kinds of potential adversity -- some kinds can kill them, some kinds merely set them back a little. Some kinds are unpredictable, others much more so. The saddest failures that I have witnessed are the conceivably predictable, lethal ones, the ones that could and should have been avoided.

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