My Biggest Mistake in Business and How to Avoid It

I made some HUGE mistakes in my first business...

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.

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

I'm going to tell you what I learned so you can avoid my mistakes...

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❗️

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

To start, here are the 3 main questions your partnership contract should include:
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...

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

When I started my first business I was 50/50 partners with my co-founder.

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...

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

In hindsight here is what I would do:

1) introduce an independent board member or have a mechanism that mandates one after 2 years in business.

You need a tie-breaker.

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

2) have a share repurchase plan.

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)

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

3) include a mechanism today to value shares in the future.

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.

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

4) chose a mediation/arbitration process and person.

(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...

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

It ends up costing everyone more money and nothing gets resolved

(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.

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

5) long vesting.

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.

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023

6) buy preferred shares.

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?

— Sieva Kozinsky (@SievaKozinsky) April 5, 2023