Three's a Crowd

Happy Sunday!

I write this email from beautiful western Idaho! I’m on a ranch that doesn’t even technically reside within a city, so I suppose I’m in no-man’s land. But I’ll bring back lots of stories…

Thank you for all the support on the Koerner’s Corner show. I’m having a blast, and it’s looking more and more like I might actually run with this idea. The podcast side is growing the fastest. BTW, it’d mean a ton if you subscribed here:

1. Spotify

2. Apple

3. Youtube

Ep #004 is live at those links and may be our best one yet. Starting with #004, I am editing out the calls that just aren’t that exciting, and then reordering them from highest to lowest ranked. So what you watch and hear in the edited version will be shorter, but the best of the best, starting with the very best. Let me know what you think!

Almost 10 years ago today I was sitting in a cheap hotel room in China. In fact, it was almost the same time of day as right now, around 2am.

15 months’ prior I had sold my chain of iPhone repair stores to a couple of local guys. They owned 1 store and I owned 3, and they wanted to buy me out and merge them together, taking on my name and brand. The deal we cut was this:

1. They pay me $30k upfront

2. They invest $50k into the business

3. They make this their full time, sole focus, and I become a silent, equal, 1/3 partner and receive free mailbox money profits until the day I die.

It was such a bad deal. But hey, I knew my next idea would be literally 10x bigger (and it was), and so I was anxious to move on to the next thing.

We tried to close the deal by 12/31/12 but my lawyer wasn’t getting back to me in time. They pressured me by saying “This is gonna be a total mess if we close after the end of the year. We gotta get this done by the 31st.

I needed more time, but we closed anyway. What an idiot I was.

We closed, they wrote me a check, and the very next day I incorporated LCDcycle, LLC in person at the courthouse. I got my first distribution check about 31 days later ($3k or so) and that was the last one I ever got…

You see, I was an idiot again. My new company was growing like wildfire, and these guys knew it. $32k month 1…$68k month 2…$158k month 3…They were a customer of mine and could see how fast I was growing.

**justification enters the chat**

They later told me they had wanted to start selling iPhone parts too, but they’d never told me that and there was no noncompete. I was squarely in the legal clear, but that didn’t prevent their jealousy and justifications behind the scenes.

These guys went way back as friends, you see. They were good ol’ boys and I was the odd man out. Partnership tip #47: Don’t ever be the odd man out unless you’re at a crack-smoking party.

Remember that $50k they were going to invest into the business? It turns out they just used the profits from the business to do that instead. Profits that were supposed to pay my mortgage. It’s almost like I should have covered that in our legal docs…

Over the course of 60 days I went from profitable business owner to income-less. A fast growing wholesale business is not a profitable one. When gross margins are 30% and MoM growth is 50-100%, you never ever have free cash flow, because you have to keep buying more and more inventory to keep up with demand!

The next 12 months were awkward. They made some great changes to the business, opened another store and increased revenue, but I wasn’t seeing a dime and had almost no visibility into the finances.

Were they not paying me or were there no profits. They were light on details.

Back to that cheap Chinese hotel room…

One of the partners told me they had good news but needed to hop on a Skype at 2pm. 2pm their time was 2am my time, as I was busy hunting down new vendors in Guangzhou.

This was a call I’ll never forget as long as I live…

It was me, the two partners and their lawyer and went about like this.

“Great news, Chris! We have a buyout offer! $1m, all cash! We need your vote on whether we should take the offer or not.”

“Wow! That’s great! This is a no brainer, right?”

“Total no brainer.”

“Ok, let’s do it.”

“Sure thing Chris, we’ll get back to you with some docs next week.”

And then we went to hang up…but right then a still small voice whispered something in my ear. “Verify your shares.”

Huh? That’s weird. We each own a third. What’s there to verify? Ah well, I’ll ask the stupid question anyway.

“Hey guys, dumb question but, just confirming, we’re all splitting this in thirds right?”

Dead silence. Dead, deafening silence.

“Hello? You guys there?”

The lawyer spoke up for the first time, clearing his throat.

“Umm…hmmmm…not quite sure…let me check the docs…”

He fumbled around for his words, but I already knew. You know I already knew…

Long story short they diluted me in half without my knowledge or consent, almost a full year prior. From 33.33 to 16.67%.

I was livid and slammed the laptop closed. I had thought my headphones were connected to my laptop but the port was broken. My best friend/business partner had heard the entire conversion.

There was no sleeping that night.

I got home and immediately retained a lawyer. I’ll never forget how comforting it felt to have someone else on my side. He was flabbergasted that these guys had the audacity to pull this off.

What ensued was 18 months of on and off again legal hell. The best things I had going for me were:

1. They broke the law and that was very clear.

2. Their lawyer was a certified idiot. They called Saul.

That buyout deal ended up falling though, but they were able to find a different buyer. I got back about 90% of the equity they stole and then got a $300k check in the mail when it was all over.

Success! But not without some stress along the way. This experience taught me a number of lessons, namely

1. Good people make bad decisions, and they will always justify them.

2. It’s never a good idea to be the 3rd wheel in a business partnership. 3-person partnerships are fine, but don’t be the odd man out. And by odd man out I mean

   1. The one silent partner.

   2. The one with the least amount of experience with the other two.

In this case, I was both.

This is my 2nd email about partnership tips, in case you missed the first, here.

You’ve now heard two nightmare partnership stories from me regarding being the 3rd, odd man out. Trust me, I’ve been around this block.

I’ve had about 20 business partners, and most have been great or so-so, but the ones that didn’t go great sure make for great life lessons to write about.

Quick chat about equity and then we’ll wrap this up.

How to split up the pie? Here’s what works best, in my experience.

Option 1: Two partners at 50/50. This only works when:

1. Both are working physically side by side, no remote.

2. Both are all in on the business, no side projects or other jobs.

3. Both have contributed the same amount of capital.

4. Both have similar amounts of value to add. They don’t have to be the same type of value, however. If one is an engineer and one is a marketer, great!

If all 4 of the above aren’t true, don’t go 50/50. 50/50 is the easy fallback but it’s rarely a good idea.

Remote partnerships can really suck, just like long distance relationships can suck. They do’t have to, but you have to be much more intentional to allow them to thrive, whereas a 50/50 in person partnership just flows…

Option #2: A lopsided 70/30 cap table:

Guy #1 is solely the money, does nothing, adds no value and guy #2 is the guy doing all the work.

Guy #1 - 30%
Guy #2 - 70%

Option #3: A lopsided 30/70 cap table:

Guy #2 is the money, the industry expertise, the business experience and the connections, and guy #2 does the work by learning from guy #1.

Guy #1 - 70%
Guy #2 - 30%

These 3 options work best.

Don’t get hung up on the exact 70% and 30% numbers. You can move those around as you both see fit. But I think lopsided partnerships work best, because a side by side 50/50 arrangement as spelled out above is really hard to find.

It usually works best at the college age and then never again. Family, geography and differing industry experience starts to pull people apart.

Conclusion

I feel very passionately about partnerships, but I want everyone reading this to know what they’re getting into.

Like a marriage, a business partnership can either be on of the biggest blessings or one of the biggest trials of your life.

Everyone talks about marriages, but no one talks about business partnerships. I’m glad you’re reading this and I hope it helps!

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As always, thanks for reading!

Chris Koerner
chrisjkoerner.com