My Biggest Mistake in Business and How to Avoid It
I made some huge mistakes in my first business and it cost me. Learn from my experience and find out why you should always have an UNWIND contract when getting into a partnership.
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Sieva Kozinsky
Follow me for lessons on how to invest & generate cash flow for your life. Own 17+ businesses at https://t.co/ZVHgFAOAUo
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I made some HUGE mistakes in my first business...
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
We grew to millions of revenue in just a few years.
Then everything came to a stop.
We couldn't decide what to do to grow the business.
In hindsight my lack of experience hurt me and the potential of the business. -
I'm going to tell you what I learned so you can avoid my mistakes...
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
But first...have you heard of a Prenup?
If you’re getting into a partnership, you MUST have an UNWIND contract.
Read more why below:
📣 PS: if you're low on time, skip to point #6 .
❗️It's VERY important❗️ -
To start, here are the 3 main questions your partnership contract should include:
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
how do you make decisions if you disagree?
what happens if one partner wants to leave in a few years?
how will you value the company?
I recommend you role play different scenarios... -
When I started my first business I was 50/50 partners with my co-founder.
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
We built a nice business but we disagreed on a lot of things and we didn’t have a strategy to resolve those disagreements.
We also never considered what happens if one partner leaves. It was painful... -
In hindsight here is what I would do:
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
1) introduce an independent board member or have a mechanism that mandates one after 2 years in business.
You need a tie-breaker. -
2) have a share repurchase plan.
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
If a founder leaves, you don’t want them walking away with 40% of the business and riding the coattails of the business.
One option: have a mechanism that buys 90% of their shares at Fair Market Value (FMV) over the next 5 years (yearly) -
3) include a mechanism today to value shares in the future.
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
One option:
Calculate Fair Market Value (FMV) using multiple on earnings.
Something like this:
- 3x earnings at $1M/yr EBIT
- 4x at $1-2M/yr EBIT
- 5x at $2M+
Alternatively you can agree to hire a 3rd party firm. -
4) chose a mediation/arbitration process and person.
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
(pay attention to this one❗️)
Include in your contract a mandate for arbitration, and select a process for how that arbitrator is chosen.
You don’t want to leave disputes in the hands of lawyers or a judge... -
It ends up costing everyone more money and nothing gets resolved
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
(sorry the legal system doesn’t work here the way you think it does)
An arbitrator can take all the information on hand and make a definitive judgement on the outcome if you give them that power in the contract. -
5) long vesting.
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
Normal stock vesting is over 4 years.
❗️That's a trap.
It takes 10+ years to build a great company.
I would align my vesting schedule with that timeline.
If a founder leaves after 2 years with 25% it is highly demotivating to those that stick around. -
6) buy preferred shares.
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
Founders will own all of the Common Stock at the start.
But founders should each buy 5-10% preferred shares at founding as well.
You can use a SAFE note to buy $5k of shares at $50k valuation...
Why? -
In case things go sideways you want to own the same class of shares as your investors.
— Sieva Kozinsky (@SievaKozinsky) April 5, 2023
It will protect you, trust me :)
One last thing...