Should you cut your deal with a handshake? (Texas Startup Blog)

When you start a new business or join a new business it is important to negotiate your ownership and compensation on the front-end. Don’t rely on a basic handshake or verbal agreement. This is simply a way to avoid having the hard conversation - avoiding conflict and confrontation. Over and over I have seen co-founders or early key employees delay negotiations. Some are uncomfortable negotiating, while others are waiting for the best possible deal. You never know how a deal is going to work out, you never know what is going to end up being fair. The truth is, the whole thing is more likely to fail than not so you might as well split things up as soon as possible so that you can all get to work building the new business. Of course how to split things up (i.e., founders equity) is a whole other matter entirely. Noam Wasserman has a detailed post titled, “Splitting the Pie” that I recommend.

For Employees/Co-Founders: If you wait to negotiate your deal and the company progresses, the other owners will perceive the value of the business to have increased. This perceived value inflation will result in a smaller stake for you. It is very easy to offer half or a third of nothing, than of $100,000 or $1,000,000. I realize that in some cases it will become very apparent very quickly that your value is far greater than the other members of your team and you will be frustrated with the deal you cut. Don’t be frustrated. Assuming you delayed negotiations and make greater demands based on this new information, in my experience, the team will find a way to replace you. You may not be aware, but every human being is replaceable (thank God).

For Founders/Employers: As a business owner you want each partner to cut their deal ASAP as well. There is no value in waiting. You may think that by delaying you will be able to cut a better deal (i.e., offer a lower percentage), but instead you are opening yourself up to a world of bad blood, resentment, frustration and potential litigation. You will spend countless hours arguing about a few points, instead of figuring out how to add an additional client or build a new widget. It is in everyone’s best interest to settle the matter and move on.

My own experience

In the mid-nineties I interviewed with a small IT services business here in Dallas. Ultimately, I either didn’t get the job or decided not to accept it (I can’t recall which). I did, however, begin a relationship with the vice president of sales. He and I lived in the same historic section of Dallas and as a result we became friends and would meet occasionally to chat. I recall one conversation where he confided that he was attempting to negotiate an equity position. The negotiations dragged on for a couple of years, but as the company grew (largely a result of his efforts) the owners were less and less inclined to meet his demands. Ultimately, he left the company frustrated and resentful.

I lost track of my friend over the next couple of years only to catch up with him in early 2001. He was working for a business associate of mine and we met for lunch. Ironically he didn’t realize it, but he was in the exact same position he was years earlier. He was attempting to negotiate an equity position in an early stage IT services company. The dotcom meltdown had seriously impacted the little company and his role was to turn it around, but for a number of reasons he wasn’t making much progress getting his deal cut. In the meantime he was working for the business on an interim basis. It was obvious to me (but not to him) that history was repeating itself.

He had an idea to combine certain services from our two companies to offer something completely new and unique. I loved the idea and after several meetings with the owner (his boss) we put a deal together. I met privately with my friend and suggested that he should run this new business and suggested that it wouldn’t be unreasonable to ask for 10% of the business (with a reverse vesting agreement of course). For various personal reasons and professional reasons he was not prepared to negotiate. At this point I took my friend to dinner and attempted to help him understand why, after all these years, he wasn’t making any headway with his career or financial situation. I begged him to go ahead and negotiate the best possible deal for himself so that we could get to work building this new business. He didn’t take my advice.

Over the next few months the business grew and each new client signed up I could see that my friend was getting more and more concerned. One afternoon he stopped by my office and explained how he wanted to go ahead and ‘cut his deal,’ and I suggested he talk to one of the three other partners. The conversation didn’t go as well as he had hoped and over the next few weeks his frustration flowed into his work. He missed meetings, deadlines and generally was difficult to deal with. Ultimately, he had enough and mailed each of us a resignation letter. Later that day we received a letter from his lawyer demanding 10% of the outstanding shares in the company.

Had my friend simply taken the 10% offer, or a potentially better negotiated deal, he would have been part of the creation of something great. Instead he ended up with nothing, but a legal bill. Despite the fact that I was willing to go ahead with the original deal, the three other partners became less and less willing over time. Ironically, by the end as I argued with my partners my friends behavior deteriorated making a deal all but impossible. I lost a friend and a great asset. The moral of the story: Cut your deal ASAP!