Hold 'Em

Struggles Of Selling Equity

No Other Options

Seeing his team disintegrating, Mohit took action. He persuaded David Reibstein, a Wharton professor, to get involved. "With Reibstein on our board, we had validity," Mohit says. "With his investment in the company, we were worth $1 million on paper."

Using the newfound credibility and company valuation, Mohit raised $220,000 in seed capital from friends and family that would last until March 1997. Only Asseily and Mohit stayed on, relocating the company to Mohit's parents' house in Los Angeles. Mohit describes the move: "Here I was, 27 years old, moving back into my parents' house, with $80,000 in school debts. I thought the world had come to an end."

By mid-1997, he had several VC firms vying for the opportunity to fund his company. He settled on two: Mission Ventures and Media Technology Ventures for a total of $4.5 million.

"Suddenly, it became serious," Mohit says. "I had real pressure, because with the money, I have to make something happen. Now I've got guys in suits asking for budgets for putting the capital to work."

When advising clients, Robison warns that one risk of selling equity is managing new relationships. "With selling equity comes requirements to report to someone else," he says. "The entrepreneur has to confer on things like his or her salary."

But Mohit saw the advantages of capital. They had six workers when they got financing and almost 100 just 18 months later. It also accelerated marketing. In 1996, Outpost.com signed up as BizRate.com's Charter Merchant. "We started this thing signing up one vendor at a time. It took us two years to sign up 1,500 vendors." That figure doubled in the last months of 1999, when 1,500 more retailers signed up.

Mohit seems to have dealt with his concern about bringing in investors, having given up his role as CEO to be Chief Technical Officer. "We're just finishing another capital raise of $22 million," Mohit says. "This was a walk in the park compared to the first one. But now we've got even more urgency to create revenues, to make it grow."

Getting It Done

The risk in borrowing money is the potential loss of assets used as collateral-and the end of the business. The reward is continued control. The risks of selling equity, on the other hand, are losing operational control and future dilution of ownership as capital is needed. But the reward is accelerated growth. So although entrepreneurs lose ownership, the value of the retained stock sometimes makes it worth it.

Financing methods differ but entrepreneurs are the same. "There's no real difference in the personalities of entrepreneurs who choose to borrow over those who sell a portion of their company," says Robison. "Both are characterized by a single-minded purpose."

Buddhists say there are many paths to the mountaintop. And as Robison puts it, "You get what you can get, and give up what you need to give up, to get the deal done. The best entrepreneurs mature into successful managers of enterprises they just happened to start."

Contact Sources

  • Garden-Ville Inc., 14080 Nacogdoches Rd., PMB #314, San Antonio, TX 78247, jane@garden-ville.com
  • Robert Robison, (941)472-7704
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This article was originally published in the July 2000 print edition of Entrepreneur with the headline: Hold 'Em.

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