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John Tukey, coiner of the word ‘bit’ to describe a single switch of digital micro-data made this provocative statement. Tukey was a statistician; one you would expect to describe events in terms reeking with precision. Where’s the precision in that? Instead, Tukey of asking for precision as we’d expect, he implored us to think in terms of relevancy, cause and comparisons to known events.
This argument is getting trite for those of us who’ve been around for a few years. We’re always asked the question, and almost always have the same answer. Let me explain it to those newer to the game or curious about our attitudes. Early-stage investors have been arguing over this for years. Do they bet on the entrepreneur (jockey) or the business idea and plan (the horse)?
Think you don’t use negotiation most every day of your life? From the time we learn to manipulate our parents from the crib to today, we learn to negotiate to obtain our wants and needs. As we grow, we negotiate constantly with our parents, then with our peers. As we enter the business world, we negotiate with our bosses and our subordinates. We negotiate with our suppliers, customers, investors, and even our auditors.
Last week we introduced the subject of non-compete agreements. Let’s dive a little deeper and present some “gray area” scenarios to consider. First the obvious case in point What if you are the seller of a previous business or shares amounting to more than an insignificant percentage of a previous business? Certainly, the buyer’s asset purchase documents included a non-compete clause, usually valid for two years from the date of the closing.
Entrepreneurs tend to remain in the business niche they know best. Usually that means one they once or recently spent time as an employee or manager within a company where they had little or no ownership. Are you one of those? Some of these entrepreneurs starting a new company are alumni from companies that would be a competitor to the enterprise being created or joined.
Here’s a question that should strike close to home. Professional investors like to quote this mantra to anyone who will listen. “Fail fast,” they say. But what if you believe so strongly in your budding enterprise that this seems to be the most ill-advised directive you’ve ever heard? So here are some rules that might make it clearer for you and for those who so easily quote the mantra.
You’re building a company from your vision and a passion, and lots of people are going to tell you that you have this or that wrong, and that it just won’t work. Business plans rarely survive market contact The truth is that very, very few early business plans survive in a form completely recognizable when looking back a few years. But even with massive changes, the vision and passion usually don’t diminish in the process of morphing a business plan into a profitable business.
Eighty percent of all businesses purchased by another company or by a new investor-operator fail to meet the stated expectations of the buyer after one year. As with the fifty percent rule discussed last week (fifty percent of startups fail within two years), this rule is hard to find an author willing to be quoted as the source. But it is within the range of experience by many of us professional investors, and with those who have acted as brokers, serial purchasers or consultants for acquisiti
Fifty percent of all businesses formed will fail within the first two years. There are many variations of this number since there are a number of ways to measure failure. But the number is a startling reminder that creating a business is not easy, nor is it any assurance of success. How to define “success” for a startup? After speaking with many entrepreneurs over the years, each defines success in his or her unique way.
Too many business leaders fail to point their troops in a single direction where the goal is known and the process to achieve it clear. Some work to achieve good deeds and hope that their efforts will result in financial success over time. Others aim for financial success during the growth of their business and at the liquidity event or sale of the business – someday.
You may have never thought of it like this before, but to make your work or company a success you will need to address the three Ps, performance, planning and profit. Let’s take a minute to demonstrate why. Performance, the first “P” You are part of a team, no matter how small. The success of the team depends upon everyone carrying their own weight.
Too many startup businesses, especially in the technology world, are built upon brand new concepts that have not yet been proven in the field against products from other companies that already have revenues flowing. As a rule, creating a product that does not fit into an existing space, cannot be defined against one or more competitors, or which needs a long description to understand, will require considerably more marketing capital and entail much more risk than one that follows an existing tre
People argue over whether an entrepreneur with a sense of fairness, a desire for collegiality, a want to share the profits can succeed in the long run within a business world full of lions and tigers that eat timid entrepreneurs for lunch. Does a “good heart” diminish the chances of success? First, let’s separate the “good heart” from the issue of whether an entrepreneur is driven to succeed.
Many of us have someone who reports directly to us and who supervises others in return. Well, this one is for you. And it is one of the most important lessons you can learn as a manager, board member, or advisor of a company or even a non-profit enterprise. Where did this statement come from? I first heard this in a governance seminar for a non-profit higher educational board upon which I sit, over 25 years ago.
Give one percent equity to each outside board member vesting over two to four years of service. Many early-stage CEOs and board members have asked for some guidance regarding pay and time commitments for board members. Here is my best advice, based upon many boards and many years. Pay early-stage board members of companies that are not lifestyle businesses one percent of the fully diluted equity in the form of an option that vests over two to four years of service.
Expect a board member to give a meeting a month, emails and phone calls between. Urgent issues require more of all. Of course this is a tricky question. You might expect the answer to be “as much as necessary” or “more during emergencies” or “usually just at scheduled meetings.” But board members are usually busy people, often running other companies or serving on multiple boards.
I’ve been sued as a board member too many times over the past twenty-five years of board service. Five times. Does that shock you? It does me. What’s the exposure? Here are some examples: Entrepreneurs blaming their board for failures of a fragile, early- stage company. Shareholders unhappy over the same loss, reaching out to sue every name available.
Does this resonate with you? The CEO position can be a lonely place, especially when you find yourself in a position of not being able to bring an issue directly to the board and not wanting to explore solutions with associates within the company. Sign of weakness? This sometimes happens when a person is unwilling to admit a weakness in an area that is critical, such as analysis of financial statements, or when unhappy with the actions of your board or with pay offers by the board’s compensation
Ever get bad advice? Sure. We all have in our past. Ever take that advice without question because the person giving it was an investor, a superior in rank, the chairperson of your board? I’ll bet you have at least one story of bad advice taken and being bitten as a result. Reaching back for an important lesson As one illustration among many I can recall, let me tell you the story of the first investment made by a newly organized formal group of angel investors.
Have you found your special place to think strategically without interruption? I found mine on a rock in Ensenada, Mexico years ago… But I am ahead of myself… Every entrepreneur has that moment of truth – the one that marks the decision to take the path to entrepreneurship or the path to job security with a larger employer. And down the road a bit, most of us face another when deciding whether or not to go for growth, requiring new investment and increased risks.
There is nothing quite as thrilling in business as igniting a startup and watching it blossom. Especially when starting a company with personal savings or money from relatives and friends, early signs of success are intoxicating. Each new customer, each mention in the press or online adds to the feeling of early accomplishment. And it is more satisfying because it is yours, from idea to execution.
No board member should be grandfathered, guaranteed a board seat forever. Practically speaking, this is an impossible goal. We have investigated the restrictions imposed by investment documents and the obvious need to keep continuity on the board with the retention of the CEO position at the very least. But it would be the best of form to require in the bylaws of a corporation that all seats are re-elected annually.
Picking up where we left off… In my last insight, I described the CEO who stacked the board with two friends, making a majority for control purposes and relegating the investor representatives to insignificance. There were no outside board members with industry experience, no members the CEO trusted with governance backgrounds, no scientists to evaluate the technology that is the core asset of the corporation.
Start-ups with one founder rarely have or need a board of directors. In fact, such a board would seem out of place in a one-person company. As soon as any outside money is ingested into the corporation, others have a vested and legal interest in the behavior of officers entrusted with the best use of funds. Money from friends and family usually is offered in a casual manner with much less restriction than professional investors, so that a formal board is a logical step but not often created
All other board functions are secondary. Even venture capitalists who sit on boards where they have significant investments often forget this point. They write in their investment documents that they will occupy a seat on the board for as long as they are invested in the company, thinking of this as a protection for their investment and tool for them to influence growth.
The ideal use of consultants… At one time or another, most all businesses use consultants to fill the gaps in knowledge or to provide guidance for management. Consultants are good in that you can sample their work with short projects, change to other consultants quickly, and stop using them when a project is completed. A personal story of ignorance of good advice.
When do you cross the line between honesty and dishonesty in tax planning? Is it ethical to allocate income between periods to take advantage of tax breaks? Can expenses be put off until the next period to increase income, or accelerated into this period by prepayment to decrease net income? Where do you draw the line, assuming no intent to defraud?
First, let’s be sure we define our terms. Accountants are trained, certified and usually quite experienced in financial analysis, both creating and reviewing data. Bookkeepers are often trained on the job although sometimes more formally and handle the physical work of accounting for the transactions. To expect a bookkeeper to provide analytical planning is to ask for something they often cannot provide, except in a cursory way.
Let’s talk about lawyers… Over the years in business and as a member of over forty boards, I have received good advice from corporate attorneys and on occasion bad advice as well. There is a line that should be drawn in a relationship between corporate attorney and CEO or board. Attorneys are paid to protect the corporation, not to give business advice.
Has this happened to you? Many of us belong to industry associations and find ourselves at conferences and trade shows with time to spend with competitors. Some of these are old friends, some even former associates. It is natural to want to associate with these people for many reasons, certainly socially. Most CEOs want to obtain information about their competitors in the most subtle and non-obvious ways.
Forming business relationships at the highest level As you follow these insights from ignition to liquidity event, you’ll detect a continuing theme, emphasizing the need for deep and wide relationships that the CEO and senior staff can call upon for advice and guidance. This is the time to elevate those insights to the level of highest value for the corporation, one that cannot be listed on a balance sheet nor included in an appraisal of corporate worth.
Let’s talk about the reality of taking money from professional investors. It is not the first time we’ve covered this general subject nor the last. But this time, we concentrate upon governance changes. After friends and family… Once a company founder has tapped the funds available from his or her resources and from friends and family, if the company needs more cash for growth, the most obvious next step is to look for money from angel investors and venture capitalists, typically in the $300,00
Have you ever thought of creating an advisory board? As you can guess, that would be an informal group with no legal responsibilities, but one able to be called upon to act as business, industry and scientific advisors to the company or CEO. Why? Usually, you would want to create an advisory board to fill in the critical areas of need not evidenced in the board of directors or within the company itself.
Everyone, even seasoned CEO’s can use a good coach who knows how to bring out the best in a person, is knowledgeable about the business process, and who has an extended list of relationships to call upon to fill needs that become obvious in the coaching process. Business coaches come in all sizes and shapes. Entrepreneurs will have a relative willing to devote time, a school friend with business experience, professionals who charge for the service, investors with a reason to prom
Planning for future space needs after COVID. One of the most obvious observations I make with growing company CEO’s is that planning for a new office is done with an optimistic view of the future, incorporating planned space that compromises only slightly the measured needs for the next three or more years as outlined in the financial forecast. Yes, we can mitigate that with starting with a reduced size given the current remote and hybrid work environment.
We’ve been measuring & disagreeing since COVID. Do home-based employees work with the same dedication and productivity as those in office cubicles next to each other? That depends upon the management as much as the employee. I have a friend who was a CEO of a recruiting firm who “virtualized” her company after a decade of maintaining a fixed office location.
Always true: Rent your first, next, or continuing office with caution. Several years ago and before COVID’s changes, I became involved with a Southeast Asian company looking to expand into the United States. During the discussions with the CEO about hiring North American managers, he made it clear that he wanted us to find a first-class office facility from which to start the search process, and proceeded to name cities that attracted him.
Allowing small problems to escalate into big ones is simple. Just ignore the signs for long enough and the job is done. It takes far more energy to regularly review the key performance indicators you’ve established for each individual and yourself. But a small excursion caught early and corrected saves massive corrective resources later. Here’s an example: Take for example the manufacturing company with a small quality problem in one component, resulting in a test failure rate above the norm.
How about employees all the way down the line and through the corporation? How do we align them to the goals and strategies of the enterprise? Obviously for the appropriate individuals, a bonus program aligned to the department’s goals is appropriate. But how about awarding stock options to all employees? The argument FOR… I discovered the power of ownership early in my management career, establishing an employee stock ownership plan (ESOP), once popular as incentive compensation as well as a t
What if employee candidates ask for the moon? In 1981, Herb Cohen wrote and published “ You Can Negotiate Anything ”, an excellent guide to great negotiating. I’ve read and reread the book a number of times and find myself using the techniques often in many areas of my life. One of his lessons remains clearly on my mind and is a variant of the old “You name the price and I’ll name the terms” challenge that works so well in negotiation.
Here’s a case study for yourself: Recently I was asked to review an offer letter for a senior director of business development. The CEO was concerned that he was offering far too much in the form of incentive compensation, with bonuses that could greatly exceed the base salary if all the bonus items were achieved. The critical question… I asked the CEO to imagine what the company would look like if all those bonus-expensive items were completely achieved in one year.
Here is the warning: The execution of equity allocations and of a good incentive program using equity is often mismanaged, damaging the corporate capitalization structure and even affecting the outcome of subsequent investment into the company. … and here is the usual early-stage trap… First, a brand-new enterprise is often formed from the efforts of several “partners”, each with an expertise valued by the others.
Our first reaction to marginal performance. Here is one that takes a real leap for a younger manager or CEO to believe. After hiring someone with all the attendant enthusiasm followed by the training and learning curve, if an employee shows signs of weakness in the job or problems dealing with contemporaries, it is the natural tendency for most of us to go first into coaching mode and reset the observation clock to see if our excellent coaching does the job.
Aside from visionary management, this is your most important job. Many of us go through the motions of hiring to fill a position, trying to use our intuition and skills to find the best candidate for the job. Sometimes we use consultants or recruiters; often we use internal talent to fill most positions. A science to hiring? And over the years, we students of business success have learned that there is a science to the hiring process that continues through the life of an employee’s tenure with
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