Remember Tom Sawyer getting his buddies to do his Saturday morning whitewashing of Aunt Polly’s fence on his behalf? And that he got them to pay him for the privilege?
Here’s Prof. Bill Sahlman of Harvard Business School’s definition of entrepreneurship:
“Entrepreneurship is controlling resources the entrepreneur does not own.”
“Isn't’t that a bit like Tom Sawyer?” you say. “Are you proposing we con people?”
Well, no. I’m proposing that the idea of obtaining needed resources early in the venture’s life is often the critical success ingredient, and that first timers frequently overlook the idea of creative structuring (i.e., converting fixed to variable expenses) as a way to obtain these resources.
The sales commission is perhaps the oldest (and in the minds of the best salespeople, the most revered) example. The company pays a lower fixed cost and a higher variable cost by sharing in revenues achieved.
As long as the venture can make the connection between results of the work being provided and the economic benefit, it’s often a great idea to do this. Relatively high variable costs that create revenue or disproportionately reduce risk and facilitate the next investment round are good deals.
Of course, early in a company’s life, equity is a very expensive currency. It should be used sparingly and with caution. It’s especially tricky when the equity is being valued at current value in payment for current work. (I saw a deal recently in which a $1.5MM post-valuation company was using equity at current value to pay lawyers for routine contracting work. In addition, the law firm was getting a discount to the current round price and about 25% of its bills in cash, to boot. Bad idea.)
Can you convert any of your fixed costs to variable costs, especially for the first twelve months? It can reduce your cash needs and improve your ability to move forward rapidly.
Make sure you can reach agreements that give you the required control over the work being produced, and that you establish payment terms and deadlines in advance, of course. And treat the resources you are obtaining with the care and diligence you’d use to screen people you are going to hire.