Watch out for the gray areas in non-competes.
by Dave Berkus on Jan.27, 2012, under Depending upon others, Ignition! Starting up, Protecting the business
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. And because there was consideration paid to you in the sale, that clause is binding upon you and is effective almost everywhere.
Well, what if the buyer is now bankrupt? That does nothing to regain your right to its purchased information. The estate of the bankrupt company retains and can resell those rights into the infinite future. (Patents expire after 14 or 20 years – depending upon type – and publicly disclosed patent information is no longer subject to the agreements after that expiration, as long as you use only the publicly disclosed information as filed within the patents themselves.)
[Email readers, continue here...] What if the buyer abandons your previous product? That does not change their purchased rights to it. What if you invent a substantial enhancement or change to the product? As long as you did not use patented processes or trade secret material from you previous company, you should be protected, but you might be prepared for a fight.
How about after the two year limitation in your agreement? Separate confidentiality from non-compete, and obey the confidentiality clauses. The non-compete agreement does expire when stated. But watch it. Some clever buyers try to slip in an unlimited non-compete, and some courts have upheld this. And there are gray areas for former key employees who signed a non-compete with a limited life as part of the sale, but remained on for some time thereafter employed by the buyer. Does the non-compete start anew upon the employee’s departure? Courts tend to apply only the reasonableness standard to these gray area cases, looking to see how much the person now competing gained from the original sale.
The safest advice is to avoid using any materials from the previous company, and compete only after the expiration of any written agreements or clauses signed with the buyer.
What about previous company non-competes?
by Dave Berkus on Jan.20, 2012, under Depending upon others, Protecting the business, Surrounding yourself with talent
Entrepreneurs tend to remain in the business arena they came from. Some are alumni from companies that would be a competitor to the enterprise being created or joined. And some are former selling shareholders of just those businesses. What is the rule about those pesky non-compete agreements signed upon discharge or sale of the previous company?
The good news is that if you were not a significant (usually 5% or more) selling shareholder of a previous company, many states specifically exempt non-compete agreements signed between companies and their employees or minority shareholders. In that case, you must worry only about information and trade secrets taken from the previous company which are both certainly subject to protection by almost all laws and courts.
So, to everyone: do not take customer lists, design documents or any document considered a trade secret from any previous employer or previous consulting customer. Yes, some companies were sloppy and did not have you sign a confidentiality agreement, but that procedural slip does not protect you from their legal wrath. Further, there is no expiration on these documents. You cannot complain that the document or information in question is more than five years or two employers old.
Fail fast!
by Dave Berkus on Jan.12, 2012, under Finding your ideal niche, Ignition! Starting up
Professional investors want to live by this rule. With the first round of funding, there should be milestones to be achieved. If they are not achieved within the expected time, the reasons must be analyzed and acted upon to avoid loss of capital beyond plan or expectation.
And if the vision of the entrepreneur is flawed, or the product impossible to create within cost and time expectations, or the demand impossible to quantify, or revenues never close to plan, then it is time to rethink the plan and product. An excellent management team is perhaps the greatest asset for any company because it is just this team that has historically been able to make a drastic alteration of the plan, ultimately making a failing vision into a wildly successful one.
But if neither great management nor the entrepreneur’s vision for the product shows real signs of success in the market, it is the hope of professional investors that the company fails fast, reducing further expenditures of remaining capital and protecting the assets purchased with the original investment.
[Email readers, continue here...] My favorite story of a fast failure was of a technology incubator started in the year 2000 with optimistic money from a number of angel investments, including mine. Within a month after the tech crash, the founder of the incubator (who remains a close friend) decided that it made no sense to incubate companies that were not likely to receive new investments soon following incubation in the winter-of-cash that followed the tech crash. He volunteered to close the incubator and returned 96% of our investments to all of the angel investors. (That return proved to be the best investment return any of us saw in the several years that followed.)
Half of all professionally managed venture capital or angel investments fail. There should be no shame to the entrepreneur in admitting such a failure. Some angel and VC investors will give special credit to those entrepreneurs who have experienced failures when investing in their next effort. The lessons learned are difficult to teach and are great assets in the next effort.
Entrepreneurs: Do it your way.
by Dave Berkus on Jan.05, 2012, under Depending upon others, Finding your ideal niche, Growth!, Ignition! Starting up
Yes, this is a takeoff from Frank Sinatra’s song, where he did it his way and got away with it. 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.
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.
Investors will invariably try to tell you that they know much more about the “how to” than you do, and that you should listen to them. And because you need their money, the temptation is to listen a bit too well, and take all of the advice thrown at you during your presentations and during due diligence and finally from the vantage point of a board seat. A good entrepreneur-turned-CEO listens, takes it all in, responds with reason, and stands up for what s/he believes for the parts that matter most. It is good to listen. And it is better to assimilate the best suggestions into your cake as you bake it.
[Email readers, continue here...] But there is a limit, a point where your gut is more important than your ear. If you reach that point with suggestions from these people trying to help, think carefully about how to respond, whether with facts, instinct or support from others. Make your case for staying the course. Remember the same passion you demonstrated when you first attracted these well-meaning helpers. And push back. Some investors may drop out if you are in the pre-funding stage. But they are not the ones whose support you would later want. Some board members may show dismay. But most often, a good case made with passion wins the day and unites the group to move forward.
I was chairman of an excellent company where I had led the deal, attracting angel investors through several rounds as the company grew to a breakeven with over four million dollars of gross revenues. We then sought and received a venture investment from a top tier Silicon Valley VC firm, whose partner came onto the board. After several months on the board, he spoke up. “I don’t like the niche we’re in. It will never grow enough to make this a valuable company. Forget this niche and turn the battleship. Let’s go after the Fortune 50.” “But that’s walking away from an industry where we are #2, growing nicely and already becoming profitable,” the CEO responded.
“Don’t worry. We’ll be there in six months when you run out of money with your new R&D focus”, the VC board member replied. The rest of the board, including myself, went along with this because, as I’ve stated often, the last money in has the first say.
Can you guess the end to the story? Six months later, the company ran out of cash, as planned, when ceasing to focus on the original niche. And the VC firm’s partners voted not to fund the restarted venture. A good company, in a fine industry, ended up being dismantled just to repay the bank loan. No investors received anything. And the rest of us just shook our collective heads. No one stood up to the VC board member, even though all of us heard but ignored our respective gut responses pushing back, as we remained silent.
It is years later, and the memory of that failure to push back remains fresh for me and surely for the rest of the former board members. As chairman, I should have pushed back. Certainly the CEO-founder had a duty to push back. Another VC from a smaller company should have pushed back. In retrospect, we were intimidated by the first tier VC, and half wanted to believe that he knew something we did not.
He did not. Now, with that lesson firmly behind, I often remind members of a board when in a situation where someone on the board pushes to change the plan that the vision of the founder ignited us to bring us together. If we believe we have a better idea, we should convince the founder and the rest of the board that we have strong beliefs that dispute the current plan. But we should not be so loud as to drown out those other voices – you know – the ones from the gut and that of the founder’s dream.
The Eighty Percent Acquisition Rule
by Dave Berkus on Dec.30, 2011, under Growth!, Protecting the 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, 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 who have acted as brokers, serial purchasers or consultants for acquisitions.
With this rate of disappointment, why would anyone or any company purchase another? The answer is that the most sophisticated buyers have experience in integrating an acquisition successfully into an enterprise and those successes are the most visible models for others to follow. As we move down the chain of experienced buyers, the problems of underestimation of capital, customers who drifted away from the acquired company, key employees who found the new enterprise a culture too different to endure and left, and other difficult-to-plan-for events overwhelm the majority of acquired companies, resulting in less revenue, less profit, and far less growth than forecast during the buyer’s due diligence.
[Email readers continue here...] There are great lessons to learn from Cisco and other companies that have grown wonderfully by acquisition, understanding the need to maintain elements of the acquired company’s culture, while offering the employees retained new and attractive reasons to stay and build the combined enterprise.
So this insight is simple. Study the literature about companies that have succeeded in their acquisitions, finding how and why such successes rose to the top twenty percent of all acquisitions when measured by the acquiring company CEO satisfaction ratings after a year. Emulate the actions that are appropriate. Plan for surprises by keeping enough capital available to restart or re- align the acquired company after an initial problem period.
Over all, know the eighty percent rule and act carefully to protect both the acquirer and the entity acquired against failed expectations.
The Fifty Percent Startup Rule
by Dave Berkus on Dec.23, 2011, under Ignition! Starting up
Fifty percent of all businesses formed 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.
After speaking with many entrepreneurs over the years, each defines success in his or her unique way. To some, it is independence from the dictates of a boss who doesn’t appreciate that person’s talent, foresight, or abilities. To some it is financial security, building a base of wealth created from the increased value of the enterprise at the end point of sale or at an IPO. To others, it is simply a way to express a talent for art, cooking, consulting, management, development or more.
[Email readers, continue here...] Everyone has a vision when starting a business. And few think of the risks that increase over time as initial capital is expended. We all see the examples of well-known successful entrepreneurs, many in our chosen field, who achieve success by anyone’s measure, and we optimistically expect to emulate these role models with at least some level of success.
The best advice to anyone considering this course of action is to measure one’s ability to take the risk. That ability varies with economic status, age, responsibility to family, and more. If there is enough freedom to make that leap, then the journey can more safely begin. If not, there are alternatives, such as raising initial capital from friends and family, before leaving the life boat of a present job.
Some say that taking the leap, burning the bridges, the life boats – or whatever security is left behind – forces the entrepreneur to focus like never before and succeed because there is no alternative. Although investors may respect that bold a move, it is so dangerously risky as to be a bit insane. Then again, with the fifty percent rule, aren’t all entrepreneurs a bit insane to start?
Is success a goal or a byproduct?
by Dave Berkus on Dec.15, 2011, under Finding your ideal niche, Growth!
Look this up sometime in your browser: “Success is a byproduct, not a goal.” You will find it attributed to tens of originators. I first heard this in an episode of Friday Night Lights, when sage Coach Taylor began a locker room speech with those words.
And yet, when I facilitate strategic planning sessions, I often lead executives to create a goal for their enterprise, one which can be reached by successfully accomplishing a series of strategic actions, each of which is braced with a series of tactics to accomplish in its support. The goal is often stated in revenues, such as “Become a twenty million dollar company in three years.”
Achieving such a goal is a direct measure of the success of the company’s strategies and tactics. But in this case, the goal is success, which is counter to the locker room speech by the good coach.
It is most important to focus everyone in the organization on a goal. And when that goal is achieved, another should be set, then another. Achievement of the goal is a byproduct of the successful accomplishment of each of those strategic and tactical actions called for in a good plan.
The point to remember is that you, as leader, must set and broadcast a clear goal, one that rallies your troops to succeed. Don’t let the goal be achieved merely by the accident of good work and practice. Make it tangible, obvious, attainable with effort, and worthwhile for the players on your team. In that sense, success is a goal, contrary to the locker room encouragement by the coach.
The trend is your friend.
by Dave Berkus on Dec.13, 2011, under Finding your ideal niche, Growth!
Too many startup businesses, especially in the technology world, are built upon brand new concepts that have not yet been proven in the field with products from other companies that 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 trend, even if an emerging one.
I’ve often used the analogy of “flying against the prevailing winds” to prove this point. A pilot flying with the wind behind is helped by the speed of the wind and uses less fuel and less time to make it to the destination. One flying into the wind uses double the difference in both fuel (money) and time. For example, a 100 knot plane flying into a 50 knot headwind and using 8 gallons of fuel per hour uses double the fuel, (16 gallons) and takes twice as long to the destination as with no wind. If flying with the winds behind, the flight takes 66% of the fuel and gets to the destination is two thirds of the time as if with no winds.
[Email readers, continue here...] That’s a valuable lesson. If others have created awareness of the market, you need only compare yourself favorably to those companies. If the market is moving quickly toward your class of product or service, you may be able to gain a piece just by being there at the right time with the right product or service.
Either way, very few startups can afford to forge new markets or create a product that does not fit into an existing class of increasing demand.
I have often told the story of a company I financed and helped to found, back in the days of analog cell phones. People could not easily or cheaply carry their analog cell phones from city to city, often having no service or having to pay a dollar a minute for roaming service. Our company developed a unique product for hotels that allowed a guest to use a local cell phone provided by the hotel and make calls as if in the room even while traveling through the city, and to remotely receive calls made to the room phone in the hotel.
The problem was that our company did not see far enough ahead to know that digital cell phones and roaming plans were right around the corner. When they arrived, our expensive phone switches and analog phones were almost immediately obsoleted, as travelers quickly bought digital cell phones with roaming plans. The company had to take back all of its equipment at the end of each hotel’s lease, and went out of business as a result. The question to ask: Didn’t anyone know or have a friend who knew of the development and subsequent release of digital cell phones in the two years before they became a reality? Certainly there were resources available to point the company toward the information. The market was moving in the opposite direction from the company, and the company paid the ultimate price.
Fly with, not against the prevailing winds of change. The trend is your friend.
Good hearts finish first.
by Dave Berkus on Dec.03, 2011, under Ignition! Starting up
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.
First, let’s separate the “good heart” from the issue of whether an entrepreneur is driven to succeed. A sense of values that allows for sharing and fairness is not at odds with a ‘type A’ entrepreneur driven for success.
What is important is that stakeholders (people working for and with the entrepreneur) accept the entrepreneur for his or her good intentions, sense of fairness and willingness to listen.
[Email readres, continue here...] I have had numerous experiences during my business career where business people I dealt with took advantage of the moment selfishly because they could, not because they should. I recall an executive who kept a large deposit but canceled a contract, refusing to negotiate, because the next payment due was a few days late. Or another who sued over a gray area issue, refusing to listen or negotiate. (He lost the suit and paid both sides’ fees.)
And I have come to the conclusion that “good guys” (men and women) do finish first. There is no scientific proof, no metric to measure the full meaning of “good.” and no special acknowledgement from any “good-watching” organization. Even without these, I am sure of this.
Surely the ruthless more often win in the short run. But early successes, built upon the broken backs of adversaries, are rarely followed by long- term wins for the tyrant or for the tyrant’s company.
Be of good heart. You will enjoy your entrepreneurial or managerial ride much more, and your stakeholders will follow you through the flames as well as cheer your successes.
The thrill of the adventure!
by Dave Berkus on Nov.26, 2011, under Ignition! Starting up
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.
But the excitement begins much earlier. With newfound freedom to make independent decisions about finding a company name, where to locate the company, whether to lease an office or start from home, how to engage talent, even whether to provide free coffee to employees, the newly minted entrepreneur can only think of positive thoughts and great outcomes.
[Email readers, continue here...] This moment is not to be spoiled by such mundane warnings from advisors or consultants to plan carefully, research the market and competition, and execute the plan with tenacity and enthusiasm. This moment is to be enjoyed for what it is: the ignition point in which the dream becomes a reality and anything is possible.
This moment is to celebrate every action, including shopping for supplies, furniture and technology to support the newly minted enterprise. There is never again going to be such a pristine, simple, problem-free time in the life of this business. Relish the experience of creation. Celebrate each important “first,” including the first customer order, the first day in a new office, the first new employee hired, the first earned dollar actually deposited into the bank account.
Because it is yours to write alone, there is no Hollywood script more thrilling than the one you create during those first days when everything is so very new.
Sign up for Dave's weekly emails.
