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Being Stingy With Your Equity

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It can be tempting to offer shares in your company to finance its growth. These days,
there are plenty of investors chasing promising new companies and, in today’s tight labor market, employees are getting more brazen in their demands for equity-based compensation. However, using equity as a form of currency dilutes your position and may not be necessary with a pinch of creativity.

How David Hauser Bootstrapped His Way To a 9-Figure Exit

David Hauser has been an entrepreneur for most of his life. He had a number of small
money-making ventures in high school and studied entrepreneurship at Babson
College. He started a web design business after graduation, followed by an internet
advertising company.

Through his early experiences in entrepreneurship, Hauser discovered that one of the most frustrating parts of starting and growing a small business was acquiring a phone system. Back in the late 1990s, big companies used a PBX system to route calls throughout a switchboard, but a PBX system was prohibitively expensive for most small companies to acquire and maintain.

Hauser and his friend Siamak Taghaddos imagined a “virtual PBX” that allowed small
business owners to leverage the internet to create a phone system without having to
buy any of the hardware. They built a crude version of the technology, named their new company GotVMail (later rebranded as Grasshopper), and launched in 2003.

By 2004, they had acquired their first few customers and could see that in order to
scale they would need to buy servers and a lot of advertising to drive demand. The
venture capital markets were starting to thaw after the dot com bust of 2001 but
Hauser chose not to raise venture capital. Instead, they clung to their equity and
bootstrapped their little business.

Instead of ordering servers from Dell, Hauser found a local computer company and
sold it on his vision for the future. Hauser asked the owner to make a server for him
below cost arguing that if Grasshopper achieved its vision, Hauser would soon buy
many more. When Howard Stern moved his show to satellite radio, Grasshopper
offered to support Stern’s new medium in return for major concessions on the price of
a commercial.

Grasshopper also offered discounts if customers paid for a year’s worth of service up
front, effectively turning its customers into financiers of the business. Despite its
growth from start-up to $30 million in revenue in just 12 years, Hauser was able to
retain the majority of the equity in his business, which he sold to Citrix in 2015 for
$165 million in cash and $8.6 million in Citrix stock.

As the story of David Hauser illustrates, owners who focus on value building will guard
their equity like a greedy child hoarding a bag of Halloween candy. Rather than selling
their friends and family cheap shares or giving every new employee options, they use
other forms of financing to start and grow their business.

Rather than thinking of your shares as a currency to distribute lavishly, consider your
stock as the essential ingredient to building value.

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