Start-ups with a Difference – Rewarding Risk Early

Matthew Caine Uncategorized Leave a Comment

I wonder how many start-ups actually result in the holy-grail of an Initial Public Offering (IPO) and to get listed on a stock-exchange? It cannot be many. Surely, the percentage is tiny.

Indeed how many start-ups actually become successful businesses that get bought? This percentage although greater than an IPO, must be tiny too.

So the risk that people take, the probability of being rewarded for that risk, in the time it takes, is quite frankly frightening.

In either case, it is necessary to start the business, but after a while we could find ourselves in one of these two scenarios:

  1. You are in classic start-up which is in early phase. Yet this early phase is being supported financially by investors. Typically your minimum salary is being covered. You may of course have invested time and money yourself in producing a minimum viable product (MVP), but now the investors are helping you take the product to your local market.
  2. Or, you have bootstrapped your start-up, meaning that you and your colleagues have lived off your savings or the first drips of revenues but you are just about present on the local market with a view to scaling. Clearly you are still taking a lot of risk here.

In both cases to scale the start-up, will require serious investment. The investors will demand that the entrepreneurs have a vested interest in success. In other words one huge carrot dangling in front of them, meaning that they are taking risks.

Either way, we have to recognise that people have

  • Risked their own savings
  • Invested their own time
  • Have no guarantee of returns on the risk they took

Therefore at NineAligned we want to reduce this risk of failure (by using things like Lean-Startup and the practices of Responsive Organisations) but we also want to do something else.

We want to reward the risk earlier than IPO or sale.

Because we are using collaborative investment techniques such as “slicing pie” we know at any one time who has contributed what in terms of money and time.

Therefore, not only can we can determine ownership but we also have the potential to payback people who took the risk to get the start-up to where it is.

Clearly this payback can only occur when the start-up becomes a viable business. I.e. one that covers its costs including salaries.

So this is our idea: When a business becomes viable the owners can decide what to do with the profits.

Nothing new here, I hear you muttering to yourself.

But the owners must not only decide whether to invest or pay dividends or a profit-share bonus, but they may also decide to payback people who took a risk, at a premium.

At the time of writing, there is still the decision to be made whether or not people who do receive payback lose their ownership or not. This decision is made by the owners.

If for example all the “Slicing Pie” contributions are paid back, and the “owners” lose their ownership who is then the owner?

Therefore the simplest solution is that they remain with the owner and that percentage of equity, but maybe in a different “share class”.

In either case investors for later stage growth may want to put a stop on any pay-backs because in their view, it reduces the size of the carrot. But by then there will be enough money to pay people properly anyway and the work will be so-goddamned interesting and challenging for everyone concerned anyway.

But at least we have the potential to reward those that took their own savings and their own time to build a Business and reward them early so that they do not have to wait for an IPO or to be purchased.

And that is surely reasonable.

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