Being Stingy with Your Equity
It can be tempting to offer shares in your company to finance its growth. These days, plenty of investors are chasing promising new companies, and in today’s tight labor market, employees are getting brazen in their demands for equity-based compensation. However, using equity as a currency dilutes your position and may not be necessary with a pinch of creativity.
How David Hauser Bootstrapped His Way To a 9-Figure Exit
David Hauser has been an entrepreneur for most of his life. He had several small money-making ventures in high school and studied entrepreneurship at Babson College. After graduation, he started a web design business and an internet advertising company.
Through his early experiences in entrepreneurship, Hauser discovered that one of the most frustrating parts of starting and growing a small business was acquiring a phone system. In the late 1990s, big companies used a PBX system to route calls throughout a switchboard, but a PBX system was relatively inexpensive for most small companies to acquire and maintain.
Hauser and his friend Siamak Taghaddos imagined a “virtual PBX,” which would allow small business owners to leverage the Internet to create a phone system without having to buy any hardware. They built a crude version of the technology, named their new company GotVMail (later rebranded as Grasshopper), and launched it in 2003.
By 2004, they had acquired their first few customers and could see that to scale they would need to buy servers and a lot of advertising to drive demand. The venture capital markets started to thaw after the dot com bust of 2001, but Hauser chose not to raise venture capital. Instead, they clung to their equity and bootstrapped their little business.
Instead of ordering servers from Dell, Hauser found a local computer company and sold it on his vision for the future. Hauser asked the owner to make a server for him below cost, arguing that if Grasshopper achieved its vision, Hauser would soon buy many more. When Howard Stern moved his show to satellite radio, Grasshopper offered to support Stern’s new medium in return for significant concessions on the price of a commercial.
Grasshopper also offered discounts if customers paid for a year’s worth of service upfront, effectively turning its customers into financiers of the business. Despite its growth from start-up to $30 million in revenue in just 12 years, Hauser retained most of the equity in his company, which he sold to Citrix in 2015 for $165 million in cash and $8.6 million in Citrix stock.
As the story of David Hauser illustrates, owners who focus on value-building will guard their equity like a greedy child hoarding a bag of Halloween candy. Rather than selling their friends and family cheap shares or giving every new employee an option, they use other forms of financing to start and grow their business.
Rather than considering your shares as a currency to distribute lavishly, consider your stock the essential ingredient to building value.
Mark Hartmann is a three-time Inc 500|5000 CEO with a rich sales, operations, and leadership background in the insurance, financial services, and healthcare sectors. With extensive experience growing and selling his own businesses, Mark leverages his expertise to help owners grow and sell businesses valued at $1M —$25M. He’s earned a master’s degree in organizational change management from St. Elizabeth University and a graduate certificate in executive coaching from Columbia University. Mark’s professional certifications include Certified Mergers and Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).
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