Gone is the job for life; the portable career is a thing of the past too; even owning your own business is no longer what it used to be. These days, it’s all about scaling fast, exiting and starting again – welcome to the world of serial entrepreneurship.
The energy, innovation and determination which accompany this movement are all positives for UK plc, but there are also some pitfalls to avoid when growing and exiting a business.
Business owners should not acquire with equity what they can pay for in cash. After all, founders can only dispose of their equity once and they need to be careful about how they give it away. Of course, it’s not about keeping 100 per cent, but making the correct decisions about when, and how, to give it away. Equity is the most precious currency an entrepreneur has and it should be treated with great care.
Perhaps the toughest part of bringing someone else on board is deciding how much equity to give away and with what accompanying rights. Certain such rights are conferred by operation of law with, for example, owners of over 25 per cent able to block special resolutions while owners of 50 per cent or more are able to block ordinary resolutions. Other rights can be contractually agreed and this combination, of law and contract, will represent the backdrop against which future decisions of shareholders (whether consensual or otherwise) will play out.
It’s also important to decide whether the business would benefit from one key partner or a more diverse base of smaller funders. Each option comes with its issues, but what is undoubtedly true of both is that the funding must bring with it more than simply the cash itself. It should also satisfy strategic needs of the business, whether that be plugging a skills gap or perhaps opening a network of contacts to help the business grow.
When it comes to exiting, every case is different. Some founders want to gain maximum liquidity and retire, while others will want (indeed may often be required) to keep an active interest in their business. If maximising cash is the top priority, certainty of payment is just as important as headline price, and those exiting need to ensure that not too much can be clawed back, on account of historic issues, future performance, or otherwise.
One error that many exiting entrepreneurs make is to misunderstand or even disregard the restrictive covenants placed on them at the point of sale. If the intention is to start another business in the future – one which could be interpreted as competing with the first – then those restrictive covenants might frustrate such plans before the new venture even gets started. A degree of restriction is, of course, fair enough but it must be proportionate. This is important, as many of the most successful serial entrepreneurs tend to create their businesses within the same sector, building on prior experience gained with each incremental venture. The risk of being “competitive” is therefore heightened.
The UK has always fostered a culture of entrepreneurship. But with the more traditional routes to employment increasingly limited – indeed, being positively rejected – a new generation of business builders is coming to the fore, and these serial entrepreneurs are more valuable, and more valued, than ever.
Kevin McCarthy is head of the private equity group at Mishcon de Reya.
This article first appeared in City A.M. on Friday 26 November 2015. You can view the full City AM article here.