How I confused an early investor, and why I’m thankful I did.
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I am a man who likes to give people options-always has been and probably always will be and when we started my software business, I was so eager (desperate) to get our first long term client, I brought with me loads of options to that first meeting. After all, I had a partnership team who followed me on a dream and I was damn sure not going to let them or my family down.
When I decided to start my business, I went to a long term customer (who we will call Barry) who I had been helping as a side gig for several years. He was (and still is) a guy who has always believed in me and I knew if I couldn’t sell him on my dream, the road ahead would be bleak. But my proposal for a managed contract was, at least for me at the time, a substantial amount. The proposal was a standard annual contract with a set amount of guaranteed support (hours) for development and technology consulting. The proposal looked something like
$9,500/mo
12-month guarantee
80 hours/months
Now, at the time, Barry’s average spend with me was FAR less, more or less averaging under $1,000/mo. so this contract represented a substantial increase of my expectations, and most importantly, his money. Like any new business owner, I was confidently nervous in making this first pitch. If he said yes, I knew our business had the start it needed. If he said, no, it was back to the drawing board which is not something I wanted to do. It wasn’t as dramatic as if I would eat or not, but it was a very important day for me.
So, I made the mistake of doing with many new business owners do, I started to try to cut deals before the proposal started. In fact, I began to negotiate with myself on the spreadsheet. And apparently I was pretty good too because before I knew it, I had convinced myself to add a pretty sweet kicker to the proposal, which now looked like
$7,500/mo
12-month guarantee
80 hours/months
5% equity in my new company
What’s worse, I had also convinced myself that if this customer took the offer, I would present this same opportunity to my current employer. I was so good at negotiating apparently that I was benefiting other people. Armed with this new stranger of confirmation bias (who later would become my enemy), I met Barry, offered my new proposal, with the conversation going something like this…
Me: So Barry, as you can see, I would love to get your business and I think we can do some really great things for your...
Barry: looks at his watch, 25-microsecond pause (which at this point in my life, I immediately interpret as him saying No of course)
Me: and of course you can see there is a 5% equity available too, which if we make ….
It was at this point that Barry, who is by no means an angry guy, started to lecture me about how I didn’t deserve any equity, how there were many people in line before me, and how I had no business making this offer. I sat confused for quite a bit, after all, it was a brand new company and I was employee #1 until it hit me-Barry thought I wanted equity in his 300 man company. I wanted to correct him, but I became so embarrassed and flustered that I shifted the conversation quickly in an attempt to save the proposal, and more importantly my relationship which had been built over 10 years.
Long story short, we ended up agreeing on some sort of handshake agreement (which to this day is still my favorite kind) and the equity thing was thankfully dropped. More importantly, now that I had seen this offer in the wild, I immediately dropped it from my presentation to my current employer, which I was going to make the same week.
For a few years afterward, these 2 clients remained my biggest customers and are still customers to this day so all-in-all it worked out, but that’s not the moral of this story by any means.
I think of that story a lot, and in all honesty, it often brings a big smile on my face. I’m not sure if it’s the realization of just how naive we were, how much we have grown, or if it’s the weird nostalgia about the early times of running a business, when it was still a startup and when deals were seemingly around each corner. Those were fun times in a way and there is an early fire that is sometimes hard to replicate as the business grows.
Recently, over 6 years later, I happened to stumble across that exact proposal and got a chance to see those exact numbers for the first time since that day. To say it was fun to revisit is an understatement and the CFO/CEO in me decided to do spend the morning doing spreadsheet analysis on what that decision really meant for me and my business partners. We have an owner's meeting coming up soon and these little anecdotes are fun to share over a beer or two afterward.
I’ll also confess… I sort of enjoy these analysis sessions and in a weird way, they become a bit meditative to me.
In my fancy new spreadsheet, I created two alternate realities.
Alternate Reality 1: Barry takes 5%, my current employer does not.
Alternate Reality 2: Barry takes 5%, my current employer takes 5%.
For comparison purposes, we’ll assume that all projects/spend from that point forward would have remained exactly the same. We’ll also assume however that because each would likely be a little influential in our operations with the equity, that we would have avoided any rate increases over the years for their loyalty.
Between the rate increases and profit-sharing, in Alternate Reality 1, Barry would have saved somewhere around $400,000 — 500,000. In Alternate Reality 2, the amount saved by my existing employer would have been somewhere between $550,000 — $850,000.
So, what did that single misunderstanding really save us?
Best case: $400,000, Worst case: $1.25M!!!!!
I was stunned, literally stunned. I mean I knew it would have been a good deal for them, but I had no idea it would have been that good.
Every business has stories like this and it’s on all of us as business owners to share these stories so that we can all learn the lessons of the past to make ourselves and our businesses better. For me, I think there are 3 key lessons from this that are important to remember.
- Don’t overthink your first proposal and hold off negotiating until you have to. Be confident in your services and if you need to wheel-n-deal, trust me, the other party will gladly let you know.
- Sometimes a NO (or in this case a misunderstanding) can have had just as much positive impact on your business than a YES. In fact, each year I start understanding that the word No, or the action of not taking action, tends to be a far more powerful business tool than the practice of saying Yes.
- It pays to get lucky and whoever tells you luck is not a big factor in business, particularly in the early stages, is full of you know what. I’ve worked my tail off, but I’ll always remember that there were several times in this journey, and in my personal journey, that the stars aligned nicely for me to have success. All you can ever really do is constantly put yourself in a position to take advantage of those lucky situations.
It’s been a wild ride the last 6 years and those stories are what makes the journey so special. I could never have guessed that a simple misunderstanding (maybe I should thank my Cajun accent) would lead to so much success. I didn’t plan for that and it surely was missing from my early business plans and forecasting spreadsheets. Quite possibly this is the most important lesson of them all, the fact that at the end of the day, you never know where your journey will take you, just try to enjoy the ride either way.
