It was long after he sold his last business that Jeb would meet me for lunch, reminiscing about people we knew, fights we had won and lost, and lessons he had learned after fifty-two years as an entrepreneur. His memory in retirement actually seemed to improve, at least as to events that had transpired thirty years before, and if old age is supposed to make you mellow…well, that didn’t seem to happen with Jeb.
“Power, son, power. Not money, but power. That’s the essence of business.”
I would raise my eyebrows while concentrating on the soup.
He would lean forward. “After the first few businesses, money becomes the score card, not the motive. You’ve got your nest egg. Now you want to strut your stuff.”
“Not everybody. I have plenty of clients who care only about making a good net.”
“Some, maybe, but not the real entrepreneurs. Oh, you want to sell for a big profit, want to show you can do it. But what you really want to do…” he hesitated for a moment, looking for the right phrase. “What you really want to do is change things. Make something from scratch. Control your world. Your reality. Make ripples.”
“The average fellow running a mom and pop store isn’t thinking about changing the world, Jeb…”
“No, maybe not. Has to feed his family. But the average fellow owning half a dozen stores…someone beyond that basic level…he just ain’t in it for the money. His whole being is defined by…the creation of something new, some value that wasn’t there. It’s our version of having a baby, I guess.”
Well, maybe, I thought. True for him. For others? Less clear.
But one comment he made did strike home. I was complaining about a client who had failed to firm up his business structure when starting a new venture, didn’t bother with formal issuance of stock, buy and sell agreements, minutes of the first meeting of organizers, employment contracts. With things becoming tense between the owners he had asked me to review the power structure and to my horror, there was almost no protection for a minority owner…which my client was. When I expressed dismay, my client had sadly said, “These are my friends. Guys I had known and worked with for ten years. He sang at my wedding, for God’s sake. I trusted them.”
Jeb shook his head, smiling. “Heard it a million times. They don’t get the iron rule of starting a business.”
“The iron rule?”
“It’s always friendly at the beginning. Love abounds. So…that’s when you tie up all the loose ends and get the full package together…for when the love wears off. Which it will.”
“Look…either you make a lot of money in which case people get greedy for a bigger piece of the action…or you begin to fail in which case fingers start pointing and people jostle for position and protection. Either way, love is replaced with survival and desire for more…and by more I mean more money, power and protection. Simple as that. Worse with friends and lovers by the way…”
“Sure…cause feelings get hurt and past commitments are thrown aside. If I go into business with a tough guy I have worked with before, we both expect the rules to be business rules. But if I go into business with my wife, we both have rules of emotion thrown in.”
“So, what’s the iron rule?”
“It’s always friendly at the beginning. And seldom friendly at the end. Get your ducks in a row for the end at the beginning.” He laughed. “Not that I always did that…but I should have…”
I had to agree with him. During the excitement of starting a new business, with the desire to rush into the market place or develop the product, doing the complex and often expensive tasks of allocating in detail power, roles, and what happens if things go wrong are seldom treated with the energy that designing the product or evaluating the market gets. Indeed, all too often the first time the new owner checks what power he or she has is when it’s already tense and it’s impossible to fix the dysfunctional structure. Invariably there is surprise, disappointment and bitterness. And usually the expression of dismay that a “friend” would treat a friend this way.
And it is all so easily avoided. The corporate and limited liability structures are ancient now…hundreds of years of give and take and tens of thousands of businesses have used them. By now, most any issue has been litigated thousands of times and structures and approaches invented that can anticipate and resolve most potential disputes.
Typical: an owner faces divorce and half of her ownership is community property. Owned by her husband who is angry, bitter and plans to use the stock to pummel her by making her company falter. He wants to attend all the shareholder meetings, wants to be on the board of directors, demands access to financial documents, wants his attorney to cause as much turmoil as he can. She, meanwhile, suddenly has control of only half of the stock that she once owned. Assuming she was a fifty percent owner before, now he controls half of that so she is a minority owner and no longer had effective veto in the company. Too often that situation results in her walking away from the company since she no longer owns half.
All that could have been avoided with a simple buy and sell agreement providing for buying out the divorcing spouse over time with a set formula. Standard stuff.
Or take the owner of 40% of the company who gets into a fight with the majority owner and is fired. Without a binding written employment agreement, his minority interest is worth next to nothing since there is no California requirement to pay out dividends or even sell the company thus most small companies take out the value in salary and bonuses…and with no employment, there will be no salary for the minority owner. The ownership becomes valueless and that could have been avoided by a simple employment agreement executed at the beginning.
And it goes on and on. A dozen properly executed safeguards both protect the owners and avoid future disputes and power plays. But often, those are never executed until it is too late.
And it’s not just excitement and preoccupation with the new business that stops the new owners from creating the right protection. As so often, Jeb put it well during a sailing evening we were having.
It was cold and foggy but the wind was blowing so we were both happy, he at the wheel, me huddled under the dodger. I was complaining again about a friend and client who had not executed employment agreements with key employees at the startup phase and thus was going to have a hard time protecting confidential information.
“Power and money,” laughed Jeb, “always power and money.”
“You explained it to me years ago. You buy power in this country. Either by paying attorneys to fight or paying attorneys to draft documents…that’s power. But power costs money. And money is in short supply when starting up. So, you allocate. You buy the marketing plan or the key employee…but you short change the power you buy…you don’t buy the contracts.”
“I get that. But in the long run…”
“Yeah, in the long run all that money spent on the business is worth nothing if you didn’t buy the power to keep the business.” He laughed some more and we tacked towards the Gate.
“Besides,” he said over his shoulder as he went forward to reef, “You’re always friends at the beginning. Why do you need protection with friends…?”
I could hear him chuckling at the mast.