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Month: November 2016

Partnership in Business. Part 2 – Right questions

Partnership in Business. Part 2 – Right questions

This is the 2nd article in the series of articles about partnerships in business. In the first one we got rid of basic delusions and assessed our chances to find a good partner. The rest will be dedicated to:

  1. who you should consider as a partner (including where to find them);
  2. who to avoid;
  3. questions to ask before you decide.

And maybe I will put a carriage before a horse, but I will start with the questions you should ask your potential partner before shaking hands. I cannot state that it is a complete questionnaire, but all the questions here are based on my own experience.

Question I: % of ownership.

Well, this question is unavoidable. But never have 50/50 ownership. Even though, this may be absolutely legal in your jurisdiction, but such partnership is doomed to be unsuccessful or at least to face significant problems. Avoid having such a ticking time bomb under your business.

Question II: What you bring into and how to measure

Discuss, what each of you are going to bring into business. And, even more important, HOW to measure that? You don’t what to end up with a partner who is theoretically responsible for marketing, but all what he does is posting a single Facebook post once a month. And, of course, I’m not talking about an influencer with a gazillion of followers. I’m talking about an ordinary lazybones.

Also, you should be acutely conscious of the equality in your partnership. I mean you should have no delusions about whose position is stronger. For example, you plan to create a business in a realm, which is totally new for you. You find someone who is knowledgeable about the realm. His experience and your money should work together. Your position is stronger, right? Absolutely, till the moment you started a business, you have a freedom to pickup any specialist in the realm you like. But what happens when you already invested your money? Now you have no freedom plus now you have to blindly trust your partner. Still believe that your position is stronger?

Question III: Compare your goals in business

Compare your goals in business and seriousness of intentions. For example, your goal in business is to prove that you are a real businessman (by creating a viable business and helping out thousands of your clients) and you decided that you are going to achieve that at any cost. Would you like a partner whose only dream is BMW M6 and he strongly believes that business is quick and easy way to achieving this goal?


Question IV: How you formulate your dream

How you formulate your dream: to rather give something to others or rather to get something for yourself? We will discuss this later in more details in the following articles. But such a difference is a fundamental one: to give is more about hero or a leader, to get – more about parasitizing. Trust me, these two types cannot go together for a long time. And yes, I understand that nobody has just one pure form of motivation, we all typically combine to-get with to-give, but you always can identify the foremost one.

Question V: How long are you able to work?

How long are you able to work even if you see no result. How many iterations you are going to take? We all know that typically a real time to implement a brand new (when nobody had such an experience before) project is at least 3 times longer than your plan. But in our first startups we never really take this into a account. Discuss this with your partner, especially if the project is quite long. Do you really have resources, stamina and firm desire to complete the endevour even if it takes 3 times longer? What if you complete the project, but will not see any significant result? Say, you planned to work for 6 month to develop a revolutionary product. It took you a year (which is super fast in comparison to average). Finally you completed the development and your product is released. And voila! Nothing happens. In theory we all say that we will switch to plan B. In reality, the only plan you really had was: I release a product, it gives me tons of cash, I go to a dealership and buy a Bentley. Plan B? Sure, if I can’t afford a Bentley, I will buy a Maserati… And de-facto you are not ready for a plan B.

partnership2_avsbLet’s assume that you are down but not out. You take a pause and compose a plan B. Now you are smarter and your iterations are way shorter. And you completed an iteration B (according to your plan B). And then iteration C and D. But still no significant result. How long will you be able to continue? How many iterations would you promise to your partner to partake?

If you think that these questions are not applicable to you because you have got a brilliant business idea… Oh well! Please try to prove your point in practice. And I will keep my fingers crossed for you. Unfortunately, statistics is at my side: in 99% of cases you will have to come back and re-read this article…

Question VI: Money Expectations.

For a first attempt, what is your money expectations? It is not very important question, but knowing that will help you to understand your partner better and even to predict his or her future actions as soon as you get first results.

Question VII: How you are going to spend profits?

What are you going to do with profits: to blow the money or to reinvest into business? You and your partner should be on the same page. Otherwise, one of you reinvests money and develops future growth while another one just enjoys higher profits without equal participation. This may become a very valid background to part.

Question VIII: How to split?

What if you loose interest to work, say, 2 years from now? What we are going to do? How to decide how to split the business in such circumstances and so on. I faced such a situation and, fortunately, I didn’t have any problems in handling it, but potentially could: I missed to ask this right from the very beginning. It is a very uncomfortable topic (since it looks like you suspect that your partner is a potential schlepp), but you have to ask all this. Be gentle and very polite, say “one of us” rather than “you” when discussing. But woe is you if you feel too embarassed to ask…

Question IX: Other conditions for a partner to exit

The previous question tackles just one foremost case of a partner exiting a startup. There is a bunch of others: upon disability, upon death, upon sale etc. You don’t want to get a sudden message from your partner like “I decided to partnership2_exit-signquickly sell my share of our business. If you don’t buy within one week, I’m going to sell to other people…”

To mitigate such risks and to avoid such difficulties you should apply to an experienced lawyer. Expensive? Yes! But in many cases when you part with people (especially when you already have what to share), you will face conflicts about what was not discussed. Maybe today it is too expensive and does not make any sense, but as soon as the assets of your company reach a certain threshold, you should compose an appropriate buy-sell agreement.

Question X: How to measure the performance?

How to divide business if partnership is not fair enough. An example from real life: you ask your partner to complete a task which is crucially important and takes an hour. Your partner disregards your request for two weeks. This repeats over and over again till the last straw breaks the camel’s back. And in response to the rebuke he or she says: “Oh, I never thought that it is so important to you!” Here I will omit what you think and say in return, it is obvious that such partnership cannot last long.

In order to deal with the situation like this effectively, you should have discussed how to measure the performance of each partner. What is an acceptable response time. What to do next in such a situation – either shut down the company or buy-sell shares. All this must be discussed right at the very beginning.

Question XI: Ask about previous failures

If your potential partner has failed in the past, ask why. If his answers do not satisfy you, better avoid partnership. For example, if his answer is about bad market conditions or incorrect people, highly likely his infantilism will ruin your mutual business. But even if you are satisfied with the answers, this does not guarantee success.

Question XII: Compare notes about future.

Compare thoughts about growth of business, scaling, delegating, management etc. A consensus here is nice to have, and issues here should not stop you. You will have a lot of time to reconcile these thoughts down the road. But if you disregard all these items, they can potentially slow down your business and may beget lots of smaller problems.

Bad news, even though you and your partner are on the same page about everything, this does not guarantee any success. It is like two artists who belong to the same school and have similar technique and so on. This doesn’t mean that these two artists will be able to create a masterpiece together…

Question XIII: Big goals vs trifles.

Everybody dreams about big goals. But ask yourself and your partner if you are ready to make smaller, way less heroic deeds day in day out to reach those big goals. If the answer is no, your business is doomed to fail. A partner who doesn’t want to squander his gifts on trifles will become a huge dragging chute for your business. I’m not a great fan of bombastic quotes, but this one suits here:

Success is the sum of small efforts – repeated day in and day out. (Robert Collier)

So, if you believe that Robert Collier was right, steer clear of such “big dreamers” who don’t want to start with what they have. In my opinion, this is just a mask of procrastination.


Enough questions. Test!

There are mockingbirds who will be able to answer what you expect to hear. Moreover, there are some people who are able to deceive even themselves. And you will automatically be deceived by them. So, do not expect too much from such an interview. But there is an ultimate way of checking. Before starting any significant business, test your partner in a smaller and less significant affair. This will give way more information. This may unveil a lot of secrets. And keep your eyes open to see any discrepancies between the answers and  his (her) real actions.

Instead of a summary

It is hard to sum up the article which is already a summarization itself. But the key points are:

  • Don’t be delusional
  • Trust but check
  • Test your partner on a minor, but real affair

And the last but the least, if you can afford, better use the services of an experienced facilitator – such a help can be priceless.

This was the Part 2 of Partnership in business series of articles. The first one is Partnership In Business. Part 1 – Your Chances.

Partnership in business. Part 1 – Your chances.

Partnership in business. Part 1 – Your chances.

We all know that business is not a proper place for an one-aloner. But we automatically make conclusion that a partnership in business is a magic wand to solve all our problems. We tend to think that it is always rather positive thing, and then may feel very disappointed when this setting of our world-view collides with the reality!

This article is the first one in the series of articles regarding partnership in business: myths, legends, misconceptions and the cold truth… It is based on my own experience combined with the bitter pills taken by other people from who I learned a lot. This article will be about:

  • Good vs No-good partnerships
  • Your chances of getting a business partner

Good vs No-Good Partnerships

Having a partner in business potentially (you may even read: allegedly) has a lot of perks: it is way easier to stay focused and energetical when you are surrounded by like-minded people; we always feel safer in the group; you will definitely help each other to overcome the downturns in your mood; you will have more ideas and creativity (some say: 1 + 1 equals 11); the group of people secures higher level of adequateness. And so on. Not surprising that venture capitalists would prefer to invest into teams rather than individuals.

So why did I say “allegedly” then? Because it is truth, but with bunch of niggles and caveats. And the list of exceptions sometimes is that long that it completely downplays the rule! In order not to be proofless, I will bring couple of examples.

Example 1: Tandem bike. Please imagine a tandem bike which you share with a partner, who sits behind you. You are pedaling  as hard as you can, but after some time you start noticing that your partner tends to save strengths too much. In fact, you are pedaling singlehandedly, say, 70% of time. Carrying double weight, of course. Do you still think that such a partnership is beneficial for you?

I brought this analogy because I saw couple of startups like that. By the way, I’m not the author of this parallel. It was made up by my wife, Natalia, who also witnessed such distribution of the efforts in the aforementioned startups.

Example 2: Throwing fingers. Remember rock-paper-scissors? Please form a group of three. Your task is to throw fingers simultaneously, without any preparation and preliminary agreement. Goal: your group must get exactly 7 fingers in total. You may change this number if you want.

The purpose of this exercise is to demonstrate that even such a primitive interaction in group of three can be a problem. By the way, I tried this exercise couple of times with different groups of people. And it never worked from the first attempt.

Moral of these examples: not all partnerships will be beneficial for you, and in many cases an interaction between people leaves much to be desired. In further articles we are going to formulate the criteria of good partners/partnerships in business. Moreover, we will try to cover the measures how to fix, mitigate or eliminate the above mentioned and other potential problems .


Your chances

The idea of partnership is based on mutual benefits: you must amplify good qualities of each other and mutually compensate bad qualities of each other. It must be a win-win situation. Otherwise it turns into parasitizing. I will rephrase Lope de Vega: “Partnership prefers equality”. You don’t have to exactly same, but you must be comparable with your partner in business.

Now let’s talk about your chances of partnership.

When you just started your entrepreneurship and you don’t have any experience under your belt, you have very limited chances for partnership. You can pick up a partner only from the same kind of beginners. Anyone who is more experienced than you (and there is a lot of such people out there), wouldn’t benefit a lot from any partnership with a newbie. Unless, of course, you have $10 mln to invest into business, but we do not take such extremes into account.

Time and experience will make you more covetable business partner. And as you evolve, your chances to find more or less good potential partner will increase. But just to some extent.

Let’s assume that you continue to grow as an entrepreneur non-stop. After some moment you will find out that now you can find fewer and fewer potential partners. Yes, more and more people would find interaction with you beneficial for them. But not as much for you, right? There will be fewer and fewer people comparable to you.

The chart below illustrates the described trend:

Probability of partnership depending on the skills level
Probability of partnership depending on the skills level


This happens to everybody who surpasses a certain level of skills in business. I will try to use Steve Jobs as an example. I know it is a thankless job because here we refer to rather myths and legends, but nevertheless. Do you think Steve Jobs had really equal partners? I ask about the last couple of decades. Not about the very beginning, when Steve Wozniak was such a partner, but about the Pixar-and-later times. Can you name anybody? I disbelieve that, and the reason being: Steve Jobs became such an utmost entrepreneur, that it was almost impossible for him (and even not needed) to find anybody comparable to him. Moreover, other business gurus, comparable to him, they run their own very successful businesses. In truth, after you reached quite high level of entrepreneurship, it becomes like among the immortals: “There can be only one”.


Summary of Part 1

  • Contrary to common belief partnership may be not necessarily beneficial for you;
  • It can be mutually rewarding on certain conditions;
  • You may face significant difficulties in interaction;
  • Beware of parasites;
  • Your chances to find a good business partner change with your skills level: very low for a beginner, they grow with the skills level till a certain point, after which they start declining more and more.

To be continued in the article Partnership In Business. Part 2 – Right Questions.



Lesson 007 – Investment Risks: Montana!

Lesson 007 – Investment Risks: Montana!

A group of prisoners is bored to death already: they discussed all the topics possible, told all the jokes they knew and played all the card games they knew. They don’t know how to entertain themselves. So, when a newbie enters the cell, they ask: “What card games do you know?” The new guy says: “Well, I know poker, preferans, whist, ombre, montana…” Everybody is curious about this new game, montana, so they say: “Let’s play montana!” The newbie say: “Okay, the game is so simple that you will get the rules down the road. Let’s start!”
So, the deck is shuffled, and each player receives six cards. Our hero gets up, throws his cards on the table and says: “Montana! I won.” And takes all the money. Everybody looks adverse and puzzled, so he explains: “Whoever gets up first, says “Montana” and throws his card on a table, wins. Very simple.”
Everybody grins and offers to play again. The new guy is shuffling the deck again and is handing over 6 cards to each player. While he is doing this, everybody who just got cards, gets up, throws the cards on the table and says: “Montana!” Our hero is the last to take his cards. He waits till the last one throws the cards and says “Montana!” Then he slowly puts his cards on the table, and says: “Trump montana! I won again.” And takes all the money…

(An old-old joke)

In fact many people repeat the same mistake when it comes to investing: they don’t know about trump Montana! In this article we are going to discuss the most remarkable risks you definitely will face investing. First we will list the most important risks. Last and foremost – we will discuss how to mitigate them.

Market Risk

Pretty much everybody knows about this risk. It is the most obvious one: if you invest in stocks or mutual funds, be ready that if the whole market drops, your investment will highly likely drop too.

The most important question here is: how much will the drop of the market affect my investment? The answer for each particular publicly traded company is in its beta. For example, the Beta for MCD at the moment of writing is 0.64768:

It means that if the market drops today by 1%, McDonald’s will drop accordingly by 0.64768%.

Such a risk is called systemic: it affects the whole system, i.e. entire market or financial system. There are also non-systemic risks – they affect particular companies or industries.

Foreign Currency Risk

Let’s assume you bought OGZPY – shares of Gazprom, russian gas giant, back in 2013. All the profits Gazprom makes are in Russian rubles. Because of the sanctions against Russia and other factors, the value of Russian currency has chopped in half. So, even though they can report even some growth, the dividends you are going to receive today will be negatively affected by RUB-to-USD conversion rate.

NOTE: to be more precise, OGZPY are not technically shares of Gazprom itself, it is an ADR.

This risk is also known as Foreign Exchange Risk, or FX Risk, or Exchange Rate Risk, or just Currency Risk.

Interest rate risk

What happens if you buy stocks today, and tomorrow FED will increase interest rate?

To answer this question let’s look at what happens in the financial system. If interest rate grows, any financing becomes more expensive (both for people and organizations). So, everyone’s access to “cheap” money decreases. Many companies depend on these financing in their operations. So, less cheap money for them means shrinking of their business. Plus, of course, their clients are now short of money too. Thus, their earnings will go down. Obviously, less profitable business costs less. So, in general, stock market will go down. So do your shares.

At the same time, bank deposits become more attractive: they now will generate more interest.

Corporate bonds and government bonds will react to growing interest rate differently: corporate bonds will go down (the same reason as for stocks), but government-issued bonds will go up (in a way, they will behave same as bank deposits).

IMPORTANT! When you make any investment (stock or bonds purchase, bank deposit etc.) you must be aware of this risk: what happens if interest rate changes. This is another example of systemic risk.
Problem #12: What happens to all above mentioned investments if Fed decreases the interest rate?

And one more thing: bear in mind, that this risk can affect your investments directly (when it affects their market price, as we described above) and indirectly (when you already locked down your money and cannot switch to another, more profitable investment right now).

Industry Risk

The name of the risk speaks for itself: something affects the whole industry as opposed to single companies. Examples: price of gold affects the whole gold mining industry; recent turmoil with oil prices affected several industries related to oil; a disruptive innovation like Square-Up can theoretically affect not just Mastercard or Visa, but the whole credit card processing industry etc.

Business Risk

There is always a possibility that a company will have lower than anticipated profits or even experience an

All eggs in one basket

unexpected loss. This risk is driven by enormous amount of contributing factors like competition, change of input costs, lawsuits against the company, bad entrepreneurship, some unusual circumstances affecting sales (for example, an unusually cold summer affects the sales of soda pops and ice-cream, it also affects the consumption of electricity etc.) and so on.

How to mitigate this risk? Diversify! By the way, this is a non-systemic (or unsystematic, or “diversifiable”) risk.


MMI Risk

MMI stands for “Me, Myself and I”. In many realms your worst enemy is you. Investing is one of such realms. This refers to lack of knowledge, cognitive dissonance (when you continue doing something wrong, because you afraid to admit a mistake), over-excitement (when you buy something just following the hype and frenzy or when you make a stupid speculative decision), lack of patience and so on.

How to fix this? Just learn on your mistakes, be forgiving to yourself, every time explain to yourself what for you are going to do this or that, and refer to other people’s opinion (not necessarily experts or mentors, I ask my wife from time to time).

Call risk

This risk can affect “gentlemen who prefer bonds”. Callable bonds. Or debentures. Say, you bought a debenture which matures in 2049 and has a face value of $100. The price you paid was $115. And you forgot to look at its Call Date (which was, say, in 2014). Now there is a risk that the issuer will redeem them (call) before they mature – at any moment starting Call Date, i.e. even today. If it happens, you will get back just a face value, so, your loss will be $115 – $100 = $15.

And trust me, any issuer of callable bonds or debentures will do that as soon as maintaining them becomes too expensive!

How to avoid that? Look through the prospectus and find this information before making decision to buy.



Though this list of risks is not exhaustive, I tried to compose it from the most interesting and practical gotchas an individual investor can face. The risks here are systemic or related to the particular industry or company.

The most important thought about managing risks is this:

In theory you can protect your investments from any risk (in more details we are going to discuss hedging risks later, in other article). But, almost always, the cost of eliminating 100% of risk will be that high, that it will equally downplay your return. So, you have to accept a certain degree of risk.

And now let’s sum up some measures to minimize the aforementioned risks:

  • Form your portfolio according to your risk tolerance;
  • Don’t be too aggressive;
  • Read prospectus;
  • Know what you are buying and deal with only what you understand;
  • Make sure that the business behind equities is fundamentally strong;
  • Keep an eye on the state of things within industry, not just a company;
  • Diversify;
  • Learn on your mistakes.