Guy Kawasaki became an inspiration to a generation of young entrepreneurs when he wrote the book The Art of The Start ,which has practically become required reading for young Silicon Valley types.
Mr. Kawasaki recently released his latest book, Enchantment: The Art of Changing Hearts, Minds and Actions . I sat down with the entrepreneur, venture capitalist and former chief evangelist for Apple Inc. to discuss his latest book. Here is an excerpt from our conversation.
Mr. Warrillow: What’s the main idea behind your book Enchantment?
Mr. Kawasaki: The three key points are [that]you have to be likeable, trustworthy, and have a great product. Nobody has all three. There are some companies that come close. For example, Apple has a great product, Virgin America is a very likable company and Zappos is very trustworthy. If you had all three in one company, you would own the world.
Mr. Warrillow: Okay, so I get that companies have to be trustworthy, likable and build great products, but what can a business owner do to position themselves to sell their company?
Mr. Kawasaki: Call me romantic, but when you start a company, I don’t think the primary motivation should be selling it. I think the primary motivation for starting a company should be to build a great company with great products. And one of the possible outcomes is being acquired.
If you and your co-founder are sitting around planning how to be bought, and you don’t even have a product, that’s just ass-backwards. You’re doomed to failure because your priorities are wrong. You should be thinking about building a great company, not how to get bought.
The key is, you make the company so successful, generating so much cash that you don’t want to sell. And then the phone rings. Then you’re in the driver’s seat because you don’t want to sell because things are going so well. So they have to make an offer that sucks your eyeballs out and that you can’t resist.
Having said that, you need to avoid doing stupid things that, when the phone call comes, you don’t blow it.
Mr. Warrillow: Like what?
Mr. Kawasaki: A simple thing is your legal structure. Are you a normal corporation or are you one of these weird offshore companies? Is it going to take [an acquirer]a lot of work to undo a lot of crap?
Mr. Warrillow: Okay, so avoid anything too exotic when it comes to legal structure. What else can you do to ensure you don’t blow it when the call comes from a potential acquirer?
Mr. Kawasaki: Avoid having unsophisticated shareholders who are going to stand in the way of the acquisition. You don’t want a bunch of rich dentists blocking a sale because they didn’t know what they were getting into…
Mr. Warrillow: Okay, so have a simple legal and capital structure. What else do business owners need to do to avoid shooting themselves in the foot?
Mr. Kawasaki: You need to clearly and cleanly own the intellectual property. For example, you want to avoid a situation where you started a business while working for another company, because your employer could say that it owns the intellectual capital.
Mr. Warrillow: What else?
Mr. Kawasaki: Your employees need to be happy and stick with you after the acquisition. I think it is important that the equity be spread so that it’s not just you who owns 99 per cent of the company and all of the other employees own 1 per cent, so you’re thrilled to be acquired, but they look at it like “we just got everything sold out from under us.”
Mr. Warrillow: Are you suggesting you give stock or options to employees?
Mr. Kawasaki: In technology, we definitely give stock options, not outright gifts. The clean deal is that your employees have stock options and that they are vesting over 48 months with a one-year cliff. A cliff means that you get one forty-eighth of your stock for 48 months, but you have to be there at least 12 months.
If someone works there two months and quits, he shouldn’t get two forty-eighths. The company doesn’t want a whole bunch of ex-employees with small amounts of shares, so the minimum someone has to work is a year.
Mr. Warrillow: Is there anything else that can be done to make yourself irresistible to acquirers?
Mr. Kawasaki: A clean capital structure, indisputable ownership over the intellectual capital, and motivated employees are the hygienics. The real key is that you have a great product that customers are buying.
Tomorrow: Can you ‘enchant’ a buyer for your company?
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released in April.