by Lance Walley
This is a bit off-topic for the Chargify blog. We usually write about things that help you run your recurring revenue business!
But many of our readers are entrepreneurs and small business owners, and after a recent post, some said, “Hey, along with stories about features and strictly business topics, we’d like stories about running a business with friends, raising capital from family, etc.”
Business with Friends
When you think about it, the interaction of business and friends is very important, especially for people in small businesses.
Many people start businesses with friends, or they hire friends.
Losing close, long-term friends is bad, because you don’t have many of them in life. I’m talking about people you have as friends for 15 or 20 years, people with whom you spend formative years and/or build great things.
I’ve partnered with and hired friends for 25 years, with outcomes from great to terrible.
I’m going to focus here on a 10-year story with many good things but a terrible outcome in terms of friendship.
Lost Friend #1 (“LF#1”)
LF#1 and I met near the end of high school. I can’t remember exactly when. We were hard-core nerds in the 1980s, before it was mainstream. We were building circuits and writing assembly language in junior high and high school. The love of electronics and code led to friendship.
Our Startup: Starting the Business
We started a company about a year out of high school, when we were 19. I had a day job earning $7/hr. It was 1987.
Our first product was a 1MB memory card for the Apple IIgs. I reverse-engineered Apple’s card, which was $399, and had a wire-wrapped prototype that worked! We figured we could sell the same thing for $199, produced right here in Sacramento.
We were roommates to keep things cheap, plus we were always working together, so might as well share a place. My only “extra” was a used motorcycle I bought from another long-term friend, Tom.
We raised $20K from friends & family so we could pay for circuit boards and magazine ads and trade shows. My friend and I each owned 40% of the company. Our extended families owned the remaining 20%. We made sure our respective families each owned 50%. Years later, we let that balance slip.
Finding our Niche (Product/Market Fit)
It took us several years to find what today is called product/market fit. We “pivoted” a few times. (It’s funny now, because there were no such terms back then… we were simply “surviving” and “having fun” back then.)
We started with the Apple memory card but memory chips prices skyrocketed and then Apple started giving away their card. Whoops! We ended up making development tools for hardware/software engineers: things like EPROM emulators, in-circuit (processor) emulators, assemblers, etc., for 8-bit microcontrollers. Our most successful product a few years later was a tiny single-board computer that did truly amazing things for just $39. (The company remains today and has made other cool products.)
Along the way, other things fell into place: we found the right magazines to advertise in, that reached the right customers, at a high enough price to run a company. Distributors came calling, pushing us to learn how distributors work.
We built the company from apartment, to apartment + storage room down the street, to small office down the street, to larger office down the street, etc. We hired people who were friends or who became friends.
The business was fun and frustrating in those early few years (ie, trying to sell memory cards). I remember my dad telling me on every visit, that I should really consider going to college and becoming a professional. From his perspective, I was 18, 19, 20, 21, maybe 22, and treading water. I believed we’d make it, but he was just concerned like any parent.
Once we found a market we liked and that liked us, our business grew.
I reduced my “day job” hours to nights & weekends so I could work more on the business.
At one point, my mom gave me $25K that she couldn’t really afford to give, so I kept $6K and gave back $19K. The $6K gave me $500/mo x 12 months of “runway” so I could quit my day job entirely. (btw, I knew I’d need to help support my mom by my late 20s, so using $6K to focus on the business was basically an investment in her future.)
I’m leaving out tons of details over several years, but let’s just say that LF#1 and I were best friends all along the way.
Stable Growth Years
When I was 24, I rode my motorcycle around the USA for 3 weeks. I had been working full-time for our company for a year or two, we had a fantastic little team of 5-6 employees, and while I was on the ride, our first full-page, full-color ad came out in Circuit Cellar magazine.
I checked in with the office every few days, and the news was good: the ad was generating calls and sales. We had introduced the first affordable, complete set of dev tools for Microchip “PIC” microcontrollers. I think we had credit card processing by then (which was *actually* hard to get back then, requiring assets and banking relationships).
Living The American Dream
We grew our company to something like 15 people. We moved to a nice suburb where we got “AAA” office space with trees and open space (and it was cheap because there was a recession). We both bought (well, mortgaged) modest 3-bedroom new homes nearby. Pretty much American Dream stuff, right?
Over the course of our 20s, we built this thing that gave us a decent life. In our early 20s, we struggled but then eventually paid ourselves something like $2K/mo. By our late 20s, I think it was up to $7K/mo. We were on par with educated professionals, and we loved what we were doing.
But once we reached 27 or 28, LF#1 and I were drifting apart. We had our own houses and personal lives, but more importantly, some of our views on how to run the business and just how to look at life had changed.
You drift apart in small increments that accumulate, and at some point, you find that you and your friend are noticeably distant.
I remember LF#1 and me having a chat somewhere near Lake Tahoe at that time. We wondered if it was time to split. We could see that we were no longer the same friends, but it wasn’t yet all that bad.
Opportunity may be disguised as something negative.
And it may not match your timing.
If there was going to be a nice outcome to this story, the Lake Tahoe chat was the right time. It didn’t have to be right then, but sometime after that, say within 6 months.
Know you can win a fight before it starts.
My friend’s family owned 53% of the stock by this time, so any real fight was not going to end with me running the company. It might get dragged out, but 53 is greater than 47. At best, there would be a big fight and I’d get something decent if I played my cards right.
(I know that people like Carl Icahn wield a lot of power with 9% of Dell, but I’m not Carl Icahn and I didn’t even know his name back then.)
I did nothing. Complacency + ego + uncertainty about any other path + not having enough money & confidence to make an unknown future seem more acceptable.
Had I known and heeded this lesson, knowing that my family only had 47%, I would have at least consulted a mentor or a lawyer to discuss future options and outcomes. That might have led me to realize that now was the best time to pursue a different future, probably on good terms personally and financially.
The business had great cash flow but thin profits.
Personally, we got paid a decent salary by our late 20s, but we didn’t save any real money. I didn’t think I could last very long without my paycheck.
Having money saved would have reduced that fear and allowed me to make better decisions.
You have opportunities.
You probably just can’t see them, especially if you’re been living and working in the ‘burbs and focused on your business for 8 years.
Guess what year it was? It was 1995 or 1996. The Web was just starting. The Yahoo founders were on the cover of Fortune or Forbes as the representatives of this hot new industry.
I was pretty hard-wired to work for myself, especially after spending most of my 20s doing so. I didn’t think I could work well for others, and I didn’t think employers would want me. I was a programmer and a marketer and a sales guy and a many other things, but not an expert in any area.
The terrible shame is that I didn’t even take a week to drive to SF and knock on doors.
Continuing the story…
Alright, so we had our chat by the lake and nothing changed. Another year or two passed.
We continued to grow more distant. We went to work, occasionally disagreed over this or that, sometimes openly. A couple of LF#1’s extended family members worked there or came to work there.
I remember a couple of events that really strained our friendship:
• Some people we knew/liked/trusted helped another company develop a direct competitor to one of our core products. LF#1 made most of our products at this point, and he was personally hurt, offended, and angry. I was, too, but in a much less emotional way – trying to be the voice of calm & reason. No matter who was “right”, we were different on this, and that really stressed our friendship.
• Somewhere in there, my friend wanted to try being CEO. I had been CEO and he had been VP & CTO for all of those years. It’s hard to remember now, but I handed the title of CEO to him. That’s about all I remember. I’m sure there was a board meeting to make it official. But the 53% wanted me out, or at least marginalized and on the path to being out.
As you can see, our friendship was unraveling and it was intertwined with the business. It was going downhill faster now.
From Vegas to Jobless
Somewhere about when I was 28 or 29, I went to CES in Las Vegas, came back, and found out I no longer had a job. The board had met or at least the major shareholders had spoken (I was on the board, but oh, well).
My cell phone and credit cards were cut off. I was no longer welcome at the office and the locks had been changed. They hired an armed guard in case I went ballistic. (We all own guns.)
That hurt, because we had known each other for 13 years or something. I save spiders!
Anyway, we lawyered up. Me first, since I was the guy on the outside. The time for a friendly outcome had passed.
Over a period of several months, they made me an offer that was “okay” but not “good”.
But I’ll give them this: keeping in mind that our business back then didn’t actually make much money after paying everyone, any purchase of my equity was going to require a loan somewhere, probably with personal guarantees.
Make money in your business.
If we had run the business better for all those years, I bet there would have been less stress all around. And maybe, just maybe, that would have led to a better offer for my equity and less stress on them to come up with the money.
Extend / take a “good” offer.
This one is tricky, because everyone is playing poker, maybe through lawyers.
They were saying $x was the most they could offer. My lawyer was saying my equity was worth at least 2x or 3x, and that it was their problem how to come up with it if they wanted me out.
Somewhere in all of this, I did get a sweeter offer. It was for the same cash PLUS a product and cash flow that was declining. I didn’t want it for the same reasons that no one wanted it – it was slowly dying and not sexy. But it was still a better offer. Cash + cash flow.
I also VERY MUCH wanted to keep a little bit of equity. It was emotionally important to me.
If we could have worked out a “good” offer that included some non-voting equity, I was ready to sign, and to do so happily. To this day, I don’t understand why they couldn’t meet me on that one.
If you hire a good lawyer, follow his or her advice.
This was happening during the holidays in 1996 or 1997. My lawyer took off for two weeks. He told me not to sign any offers.
I remember getting a fax from the board/owners that said, basically, accept this offer soon or we’ll dissolve the company and start over with the IP somewhere else. I didn’t want to see that, and my dad (who was now involved) was getting nervous about a messy fight, equity destroyed, etc.
So I signed the offer. Exactly what my lawyer said not to do.
When my lawyer got back, he was flabbergasted. He said, “Oh my god! You should have gotten 2x or 3x, and by the way, if they did dissolve the company, we’d sue for 40% of the assets and other damages!”
Besides, he was convinced that calmer minds would prevail and they wouldn’t actually destroy the company, but it was too late.
Sometimes emotion is best.
When I got that fax that said take it or else, I thought about writing “jump in a lake” on it and faxing it back as quickly as possible. That would have been very satisfying!
But I wanted to be reasonable and civilized. I wanted to confer with others.
My close friend, Tim, wanted me to fax “jump in a lake” instantly.
He was a close friend and had witnessed the years of growing the company, but Tim’s thinking wasn’t clouded by details and fears. He just saw the top-level stuff, and ironically, he and my lawyer agreed 100%.
Today, with more time under my belt, I’ve seen that sometimes it’s best to throw out civility and just act on emotion. I have seen situations where the emotional, raw response gets a better outcome and generates respect.
In a fight over a prize, be willing to lose the prize.
(Or, put another way, be okay if the prize gets broken & redistributed).
My desire to keep the prize intact yielded big negotiating leverage for them.
They were already using the scorched earth strategy, right? So, you might ask, what would be gained by both sides using that? Wouldn’t that just result in a ruined company?
But remember, it was an unlikely outcome, and EVEN IF THEY DID, assets would be redistributed. It would be very disruptive but life goes on.
Negotiate from a position of relative strength.
That’s obvious, right? But I didn’t do some things that should have been obvious.
If you find yourself in such a situation, step away for 2-4 weeks and think about what you can do to put yourself in a better position.
Your opponent wants you constrained in terms of time, money, and options, so you need to reduce or eliminate your weaknesses (and, if possible, their strengths).
Sometimes the best position is to not care.
I should have taken off to explore new opportunities, and just left my lawyer as the only contact. That would have said, “I’m caring less by the day” + “My bulldog is in charge”.
There are times when I think it’s better not to let the lawyers run the show, as they tend to complicate and escalate things. But in a fight where the other side has dug in and where emotional attachments may put you at a disadvantage, I can see just leaving your lawyer in charge.
As you can imagine, our friendship was utter toast after those few months.
Where it may have been salvageable a year earlier, this was a fire that utterly destroyed our friendship. There were very bad feelings, lawyers, threats, etc.
It’s been 16 years since.
It’s weird to think that only 2-3 years before the end, we considered ourselves best friends. Someone asked about our friendship and how we ran the company, and we both said that we couldn’t imagine it any other way.
Unfortunately, sometimes things take a bad turn.
To keep the friendship and get a good deal, since I was the one with the minority stake, I needed to happily walk away at that early time when we spoke at Lake Tahoe.
Doing that would have required me to see leaving at that time as a golden opportunity, one in which I could have created a better outcome.
Doing that would have required me to not be afraid of my lack of college education nor lack of specialized skills. Having more money saved would have helped.
Of course, I would have had to swallow my pride and my belief that “this is as much mine as yours”. Although that was in fact true, the respective family ownership structure made the reality more complex.
Lessons for the Future
I learned many lessons in that 10-year span, and some of my other friends learned those lessons by watching.
I also learned some “wrong lessons”. I resisted involving other owners in my next business, and then that bit me later.
When my friend Tom and I founded Engine Yard nine years later, we did a better job and we planned for various outcomes.
I have another good story (a shorter one) about friendship destroyed in business, but that’ll have to wait.
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