Four Reasons Why it’s Better to Own a Larger Share of a Smaller Business

Four Reasons it’s Better to Own a Larger Share of a Smaller Business

Is it better to control a significant share of a small business or hold a minority stake in a larger company?

This question is one that many business owners face at some point. While owning a smaller slice of a big company has worked for high-profile entrepreneurs like Elon Musk and Jeff Bezos—both of whom have maintained minority stakes in their companies—there are several key considerations that come with selling large portions of your business. Although recent share market success has amplified their wealth, selling part of your business introduces challenges you should weigh carefully.

Here are four reasons why owning a larger portion of a smaller business may ultimately serve you better.

1. Retain Operational Control

One of the clearest advantages of holding on to more equity in your business is the ability to maintain full operational control. Without outside investors, you retain the freedom to set your own strategy, make key decisions, and determine the direction of your business. You decide which products to develop, which markets to pursue, and how to run your company day-to-day. Ultimately, you stay in control of the business you built.

2. Less Pressure to Exit

Tim Ferriss, author of The 4-Hour Workweek, has highlighted the importance of understanding your long-term exit plan before making business investments. Accepting outside capital means you will eventually need to deliver a return to shareholders, which typically requires selling your business, or at least a portion of it.

Keeping more equity allows you to avoid the constant pressure to think about an exit. You can focus on running your business for the long term, without the urgency of finding ways to make your investors’ money liquid.

3. Avoid Dilution of Your Ownership

When raising outside capital, it’s common for investors to demand preferred returns, which can dilute your equity and reduce your final share of the proceeds from a sale. For example, Ana Chaud, founder of Garden Bar, learned this hard lesson after expanding her business and taking on outside investment.

Chaud raised two rounds of capital, including one from convertible noteholders, unaware of a clause that guaranteed her investors 2.5 times their investment in the event of a sale. When she eventually sold her business to Evergreens, nearly all her equity was wiped out due to this clause. In hindsight, avoiding this dilution could have preserved more of her business’s value.

4. Protect Your Long-term Value

One of the most significant benefits of retaining a larger share of your business is the ability to protect the long-term value of your equity. In the early stages, it can be tempting to offer equity to attract key talent or raise capital, but this can lead to costly dilution down the line.

Greg Alexander, founder of Sales Benchmark Index (SBI), learned this firsthand after offering two employees a combined 50% of his business early on. Years later, when he sold SBI for $162 million, he realised that his generosity had resulted in what he called an “$80 million mistake.” Retaining a larger stake from the beginning could have led to a significantly higher payout.

Although the temptation to raise capital through equity sales is understandable—especially when looking to fuel growth—there are clear advantages to owning a larger slice of a smaller company, including more control, less pressure from external investors, and protection from long-term dilution.