Why most founders can’t start without OPM Equity
Having an idea isn’t an issue for most entrepreneurs. But having the money to match it? That’s a different story. The gap between the vision and the capital required to execute it is where most businesses stall before they even start.
It’s also where one of the most powerful wealth-creation tools available to founders comes into play:
OPM equity.
In the context of capital stacks, OPM equity typically refers to debt and leases; financing that funds business investment without requiring founders to deploy their own capital. But there's a second form of OPM that doesn't get nearly enough attention (and it happens to be the one that’s helped build some of the largest personal fortunes in America.
The Scrub Daddy origin story
Aaron Krause built a New Jersey-based company manufacturing buffer pads, which he sold to 3M in 2008. When he did, he retained ownership of one product: a small polymer sponge he'd developed for tough cleaning jobs. 3M already had sponges in their lineup and saw no need for it. (Which, fortunately for Aaron and unfortunately for 3M, turned out to be one of the more expensive oversights in consumer products history.) Aaron's insight was deceptively simple. He made the sponge circular with jagged edges on one half, then added two eyes and a mouth – functional features that also made it immediately recognizable.
Aaron was definitely onto something, but like most entrepreneurs (even most successful ones), he quickly recognized he didn't have enough money or experience to scale it alone.
Shark Tank math
In October 2012, Aaron secured a spot on Shark Tank and sold a 25% stake to QVC maven Lori Greiner for $200,000, implying a total company valuation of $800,000 for a business that had almost no revenue at the time. The day after closing, Lori and Aaron sold 42,000 sponges on QVC.
Over the next five years, the company sold roughly two million sponges through QVC alone, eventually achieving cumulative sales approaching $300 million with a presence in leading retailers across America. But the more instructive story is the equity math underneath it all.
Let’s assume Scrub Daddy's model showed the promise of generating a current pre-tax equity return of 80%. Assuming Lori, as an outside investor, would be satisfied with a 20% current return, the company would carry an equity valuation multiplier of 4 TIMES its creation cost.
Aaron, having contributed the technology, the idea, and the founding team, but absolutely no cash, retained 75% of a company worth 4X what it cost to build with a personal rate of return that is, mathematically, infinite. He invested nothing. He owns three quarters of something worth four times its creation cost.
THAT, in a nutshell, is what makes OPM equity critical for most founders.
Sweetening the deal (and giving up less)
Aaron’s story represents an important refinement to this that most founders overlook: OPM equity doesn't have to be priced on current results alone. Rather than offering an investor a percentage of the company based on what the business is generating today, a founder can negotiate against forward cash flow expectations. For example, a second restaurant to be built with the added equity, or a third funded through a bank credit facility.
By anchoring the valuation to where the business is going rather than where it is, it's possible to raise the equity valuation multiplier from around 4.25 times to more than 6 times and give away less than 8% of the business for 50% of the contributed cash equity.
That difference in terms, driven entirely by how the conversation about future value is framed, can be worth millions to a founder over the life of the business. None of this assumes perfection.
Real businesses, particularly in service industries with high staffing requirements and constant customer interaction, encounter speed bumps that financial models don't predict. But a business model with genuine margin for error (and one where the fundamentals are sound and the returns are real), gives a founder the credibility to have that conversation and the buffer to absorb what goes wrong along the way.
OPM equity comes in different forms
As I’ve already alluded to, not all OPM equity is structured the same way, and understanding the variations matters before you start raising. The simplest form is a straightforward minority stake. An investor puts in capital, receives an ownership percentage, and takes on the same risks and relative voting rights as the founding equity. This is essentially what Lori Greiner received in Scrub Daddy.
But when a founder has little or no personal capital to contribute, outside investors will often seek some form of protection.
They want to participate in the upside, but they're not willing to absorb the same level of personal investment risk as someone who conceived and built the business. The common solution is a preferred rate of return (often called a "perf") which gives OPM equity investors a priority claim on cash flow before any distributions reach the founding shareholders. In practice, preferred rates of pre-tax return tend to fall in the 7% to 10% range, though investor expectations shift with market conditions and available alternatives.
The mechanics work through what's called a cash flow waterfall: OPM equity investors receive their preferred return first, the founding shareholders receive their return on their ownership percentage second, and any remaining cash flow is split between both parties according to their respective ownership stakes. This structure protects outside investors while still leaving founders with meaningful upside, provided the business model is strong enough to clear the waterfall and generate returns above the preferred threshold.
3 things to get right when raising OPM equity
Beyond the structure of the raise itself, there are three practical considerations that tend to separate founders who retain control and flexibility from those who gradually lose both. The first is building in a buy-sell arrangement from the start. If an OPM equity investor is targeting a 20% pre-tax return, a written agreement to buy them out at 5X cash flow – which equates to that same 20% yield – gives the founder a clear and predictable path to full ownership at a defined price.
OPM equity investors tend to be receptive to this kind of arrangement because minority investors are naturally focused on exit strategies. Having one written into the agreement from day one adds significantly to a founder's long-term flexibility.
The second is keeping the corporate organization chart simple. It sounds administrative, but it has financial consequences. Founders who place each business location into a separate entity with separate ownership structures often find themselves in months of complex negotiations with multiple OPM equity holders when they eventually seek bank financing or prepare for a sale.
Lenders need financial statements that are clear and comprehensive the same way that buyers need a clean structure they can acquire. Complexity that accumulates during the growth phase becomes an expensive problem to unwind later.
The third, and most important, is maintaining majority ownership. As my long-time business partner Mort Fleischer puts it: “Owning 51% of a company is almost as good as owning 100%,” because you are indisputably in charge. That principle is reflected in the more than 200 public companies that have adopted multiple share classes to preserve founder control, from Berkshire Hathaway and Alphabet to Meta, and going back as far as Ford Motor Company, which created its Class B shares in 1935 specifically to maintain family voting control. Maintaining that control isn’t an ego thing. It gives you the ability to make the long-term decisions that create value without needing permission from investors whose time horizons, risk tolerances, and priorities may not align with yours.
Why the sequence matters
There's a smarter way to approach OPM equity than simply showing up with an idea and asking for money. Start by building out the business model first.
Establish what The Value Equation variables look like, demonstrate the economic logic of the opportunity, and show what the predicted returns are before raising outside capital. That preparation makes you much more credible and helps you determine how much of the company you have to give up to get the capital you need.
When I launched my last company, I spent $15,000 on presentations and travel costs, secured a large commitment from a major private equity firm alongside a state pension fund, and built a business that would eventually reach an equity valuation approaching $10 billion. My own stake was comparatively small…but the model was designed to deliver returns that made the entire structure work.
That's the whole point of OPM equity. It shouldn’t be treated as a compromise for founders who can't self-fund, because it happens to be the mechanism through which most of the world's significant business wealth has been built. The goal, always, is to give up as little of the company as possible at the highest possible valuation multiplier, on terms that preserve your control and your flexibility.
My YouTube channel and book both explore exactly how that math works, and what it means for the value of what you keep, so make sure you’re following along to learn more.
