Coco Chanel Only Owned 10% of Her Business – Intelligent or Stupid?

I am going to start reading several biographies of Coco Chanel before long, so I made a run to a department store today to pick up some Chanel products (I have a habit of wanting tangible representations of whatever I’m studying around the office, which is why we need “investing cabinets”, which contain things like miniature Hershey Chocolate trucks and replicas of Wal-Mart Supercenters from whenever we were buying shares in those companies years ago … it is a way I make the money “real”).

Turns out, Coco Chanel only owned 10% of her business! She was backed by financier Pierre Wertheimer, who was in-law to the famous Lazard family of bankers.  An unknown seamstress, Coco needed Wertheimer’s expertise, American business connections, and capital so the Chanel company partnership equity was owned 70% by Wertheimer, 10% by Chanel herself, and 20% by Chanel’s friend, Théophile Bader.

Today, the business remains privately owned and firmly in the hands of Alain Wertheimer and Gerard Wertheimer, the great-grandsons of Pierre Wertheimer.  Both are listed on the Forbes 400 list of global billionaires.

Should Coco Chanel Have Given Up 90% of Her Stock?

It is easy to criticize Chanel for giving up so much of the equity in her firm, but at the same time:

• She maintained exclusive creative control, which was what mattered to her.
• Without the Wertheimer money and network, it is likely she would have died in obscurity, the name Chanel never coming into the lexicon as the embodiment of haute couture.
• She also ended up wealthy herself, and got to do what she loved.

Diamonds vs. Rhinestones

Sometimes, it is better to own 10% of a diamond than 100% of a rhinestone, as Buffett has said.

My father once worked for a sporting goods company that, I know for a fact had they given him equity, he would have focused on building for the rest of his life.  When the existing owners didn’t, he quit and started his own firm.  The cash that flows through his business now would have been part of the sporting goods store and everyone would have benefited and grown very rich.

Instead, because they didn’t want to grant him a 1/3 of the business ownership, he went off on his own with my mom and they now own 100% of their own corporation.  In that case, the owners of the sporting goods store would have been better off diluting their equity stake but they didn’t.

That single decision has cost the sporting goods store owners millions upon millions of dollars over the past ten years (and I don’t even want to speculate about the next 10 years!).

On the other hand, Rockefeller, Gates, Buffett, Ford, Carnegie, and others grow obscenely rich because they wouldn’t part with shares under any condition during the early years of the business.

What, exactly, is an entrepreneur to do?

I say the general rule is: Keep as much equity as you can.  Fight for every percentage point.  But be smart enough to know when to bring the right people on board because a business is the people who run it.  Management is the ultimate talent.  Your company will only be as successful as the people who are behind the wheel making the decisions about where to drive and what to avoid.

In this case, I think Coco Chanel was probably doing the right thing.  She achieved everything she desired and lived the life about which she dreamed, getting very rich in the progress.  Should she really be concerned someone else got richer by helping her?  Envy just doesn’t make sense.

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