Is Equity Really That Important? | Ryan Daniel Moran

I don't want to give up equity in my business. That's a common thing that I hear from entrepreneurs when they're justifying why they don't want to bring on investors. But when you consider that Jeff Bezos, the richest man in the world, only owns 11% of Amazon, the company that made him rich, and Mark Zuckerberg only owns about 25% of Facebook, and even Elon Musk, who founded Tesla, only owns about 19% of the company, you can see that it doesn't require you to own even a majority percentage of the company in order to, in those cases, become billionaires. So in this video, we're going to look at equity and ask the question if it's really that important. Now, the point of this video is not to persuade you to just give out equity. Of course, that's a silly thing. We don't want to be willy nilly about our equity. But it's important to understand what equity actually is and how we can use it strategically in order to get the results that we want. Most people treat equity like it is untouchable, when it's really just another tool to use in order to grow a company as big as possible. So we'll go into a couple different options and how to use it strategically in order to grow your business. I'm Ryan Daniel Moran. Welcome to Capitalism tv.

So the first thing that I want to comment on is the fact that when someone has equity in a business, it does not necessarily mean that they're getting the profits or that they even have control of the business. I remember one time I walked up to a food truck here in Austin. They were doing some mock meets that were actually really, really good. And so I just asked them, I was like, hey, have you ever considered taking on an investor? And they said, no, we don't want to give control up of our business. And I was like, I, uh, okay. This happens a lot with entrepreneurs who have their baby and they control the entire baby, but they don't want to give up any points in the company in order to grow. Well, when someone owns shares in a company, it doesn't necessarily mean that they have access to profits or access to any control at all. Ownership does not equate to profits. They're different. And there are plenty of times that you can have ownership in a business, but you not get any of the profits of the business. You only get the money when you sell the shares. For example, I'm an investor in several different brands. On it is one of them. They're a Big fitness company, Outstanding Foods is another business that I'm invested in. They're a plant based snack company and I don't get any say in the businesses. I don't get any profits from the business. I will only get compensated if, if that business goes on to sell to someone else. So when you're an entrepreneur and you're thinking about either raising money from an investor or maybe giving out points in the company, remember that just because someone else owns a piece of the company does not mean that they have any say or any access to the profits. You can still be in full control, just like Jeff Bezos is in full control of Amazon even though he only owns 11%. So you don't have to have that tenseness around giving up control when you're not doing that at all. Everything comes down to the agreements that you set with the other shareholders. The next thing that's important to understand is that equity is simply a way to compensate people in a non cash way. Now if you think about this, between long and short term, in the short term, equity is a cheaper way to for an entrepreneur to get help when they're growing their business. In the long term, it's the most expensive. So it's a trade off between the short term win and the long term win. So when you're at the beginning stages of a business and you don't have money, then it makes sense to take on an investor and to sell shares in the company to that investor. And I do this when I'm starting a new business. I'll carve out about 20% of the business that I reserve for access to capital. I also carve out 20% for advisors, influencers and audience. So I only really care about owning 50 to 60% of the company. But at that beginning stage, when you are raising money or you're creating relationships, equity is less expensive than throwing cash at something. Now if you're a big funded Silicon Valley startup and you've got millions of dollars in funding to throw around, well, first of all, you had to get that money from somewhere and it's usually from somebody who has ownership in the business. But if you have a lot of money to throw around, then you have that flexibility to make mistakes. You can hire wrong and you can bring on people that are advisors that you pay rather than give equity to and all that's fine. But for most people who are starting out, they have to compensate those people in another way because they don't have the money to do it. So. So equity is just another way to give somebody an incentive to be invested in the business. Cash is one way, equity and long term growth is another way. So many entrepreneurs that I know are stuck because they're trying to control the whole pie and they aren't willing to bring on help when they need it because they say they can't afford it. But if they were willing to play with the points and ownership of the business, then they would have other ways to compensate those advisors, those investors, those partnerships that would really help them get to the level that they want. But because they're not willing to do that, they stay stuck. So do you want to own 100% of a very small pie or do you want to own a big slice of a really big pie?

That's the question that you should be asking yourself when you're deciding whether or not to give out equity in your business. The last thing that you should understand is that there are different types of equity. Now, equity in most people's minds means that they own 10% of a company, for example. But that's not exactly how it works because there are different levels of equity, different levels of shares, and different ways that the equity can fold into the business. For example, when I create an equity partnership with someone, I usually do it on a vested schedule. Here's an example. On one of my businesses, I partnered with an influencer and that influencer had the opportunity to earn up to 10% of the company. That's a big chunk. So we did it over a four year vesting schedule and either party could cancel it at any time. So we could stop working with that person and that person could stop working with us for any reason if we didn't like working together. So what we did is I, on day one, that person got 2.5% of the company. And then if we liked working together, after a year, it was another two and a half percent. And so over four different triggering events which were just scheduled a year out, that person could become a 10% partner in the business. This allowed us to test working together and have an easy way to end the relationship if, for whatever reason, we didn't like working together. Another structure to consider is share buybacks. For example, if you bring on an investor and they are bringing in $100,000 for a business, one way for you to protect yourself from giving up too much of the business is to have an agreement that you can buy those shares back at three times their original value. So you could say, all right, at any point, I want the right to be able to buy these shares back for $300,000, which would be a 3x return on your original investment. And that's something that you can negotiate. So shares can be negotiated and played with and bought back and forth between different parties. And it's all about the agreements that you set between the different people who are deciding to work together. So an equity relationship doesn't necessarily mean that you are tied to that person forever. It just means that you're working together right now to grow the value of everyone's equity. If I could give an entrepreneur just one shift on this topic, it would be that your purpose as a business owner is not to control as much of the pie as possible. It's to create the biggest pie possible. And in order to do that, you have to collaborate with other people. In some cases, that means investors. In some cases, that means strategic advisors. So remember, your primary focus as the entrepreneur is to grow as big a pie as possible. And if you do that, then the 60% of the business that you own will be worth far more than 100% of a tiny little pie that you might have been able to build on your own. In today's world, it's very difficult to succeed on an island. We need each other and we need each other's skill sets. We to come together in order to make the biggest opportunity possible. If you want some help, we have a community called the 1% over@capitalism.com the number one capitalism.com one that's our community. We are where we are collaborating and working together to help each other's businesses grow. My name is Ryan Daniel Moran. This is capitalism tv, presented by capitalism.com thanks for watching and I hope to see you on the next video.

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