Depending upon others
By JJ Richa
Dave’s note: Our guest insight this week is from JJ Richa. JJ is a successful entrepreneur and technologist giving back to the entrepreneurial
community in many ways, including his weekly Internet TV program on entrepreneurism, and participation in several mentoring programs.
Business partnerships have their advantages and disadvantages. Taking on a business partner is like a entering into a marriage. In general, partnerships are easy to get into and difficult to get out of. Certain guidelines should be taken into consideration along with a path to follow – from dating to prenup to marriage – all of which can be applied to a business partnership.
Taking on a business partner can be an excellent strategic decision in helping move the business forward. It should be well thought out for all parties involved. The relationship needs to be synergistic financially, emotionally, and operationally. All parties need to perform due diligence to ensure that the assumptions are correct, that neither partner has financial issues which could affect the partnership, and that the opposite partner has the skills to contribute to the partnership.
[Email readers, continue here...] Most of the important benefits for partnering include:
- Combining of complimentary skill sets
- Access to new markets
- Addition of new services or product lines
- Addition of essential expertise and knowledge to propel the business forward
- Open doors to new distribution channels
- Access to new technologies
- Access to capital unavailable to either partner singly
Certain steps should be taken before entering into a partnership.
1. Personal assessment and getting to know one another:
- Work together on 2-3 projects before an agreement is consummated
- Determine the commitment of the potential partners. Is the potential partner in for the long haul?
- Identify each of the partner’s unique contribution. Does the potential partner bring specialized knowledge, skills, leadership, or experience that compliments others?
- Understand each person’s personal goals. Are each set of goals consistent with the other’s including for example personal wealth, business success, and autonomy?
- Determine trust and Values. Is there trust between the parties? Do the proposed partners share a set of common values? Core values are none negotiable. Be ready to walk away when others are willing to negotiate their own values or try to negotiate others.
2. Determine personal and business goals:
- Contribution: What will the new partner contribute? Example: cash, assets, equipment, connections… Regardless of what it is, a partner’s contribution needs to increase the value of the business.
- Compensation: What are compensation expectations? Example: salary, equity, joint venture, etc… Can the business afford it?
- Control: What type of control is the new partner looking for? Example: percent of ownership, officer/operational, director/board member… What are the parties willing to give up in return for the prospect of business success?
- Brand and Success: Is the new partner dedicated to ensuring brand continuity and contribute to the success, or just to ride on what has been established by the other?
3. Create roles and guidelines in the potential partnership:
- What role and responsibility will each of the partners have including operation, financial, sales, marketing, etc..?
- How will decisions be made and by whom? Is it by committee?
- Will each have certain level of decision making authority? Will the new process impair quick decision making?
- Will authority limits be defined, and processes and procedures put in place?
- What is the understanding if one of the partners wants out or wants more? What is the understanding if things go downhill/uphill?
4. Perform preliminary due diligence:
- Review the business plan including marketing, sales strategies and financial needs
- Review long term company debt, goals, objectives and financial projections
- Review financial statements – up to 3 years if available
- Review tax returns – up to 3 years if available
- Research and talk to existing and past customers
5. Create partnership agreement basic terms:
- Define Key Performance Indicators (KPIs.) How will the success of the business be measured?
- Clarify decision making and dispute resolution processes
- Define each partner’s title and position
- Define management responsibilities and job descriptions
- Detail authority limits for each partner
- Clarify operation responsibilities and metrics used to measure performance
- Define vacations and time off policies such as with partners vacationing at the same time
- Determine compensation for each partner
- Exit strategy planning, including determining what happens when one partner leaves, if closing the business, if selling the business, creating a mutual buy/sell agreement, and more.
Depending on the legal structure of the business, different types of formal agreements may be required.
Partnership agreement should never be 50/50 regardless of the perception of compatibility at the time of execution. There must be some method of resolving a tie that is predetermined in the agreement.
Potential partners should follow and apply these guidelines independently. This should be followed by a joint meeting to determine commonalities, synergies, and conflicts. If necessary, this is the time to bring in an impartial third party to facilitate any possible conflicts and resolutions.
It is highly recommended that legal document are created and/or reviewed by a business transaction attorney. All agreements should be in writing and signed by all parties involved. Regardless of what method is taken to reach an agreement among partners, avoid some of the common mistakes. These include premature rejection of ideas by the other partner, prematurely judging others, one-sided financial consideration, and not sticking to core values.
My dad was a smart businessman, even if not formally trained. He occasionally gave me advice that turned out to be more than wise, looking back at subsequent experience and events. His personal teaching event was a typical experience, as I reflect now upon the tens of partnerships I have counseled over the years. Most often, one partner remained active as another partner drifted away from the business, no longer carrying the weight anticipated at start-up.
It’s just one – the most prevalent – of the many things that can happen to well-meaning partners after time changes plans, and after the business passes through phases of growth or contraction.
I recall one very personal situation when I was very young, that reinforces Dad’s advice. Through my college years, I managed a phonograph record production and manufacturing business that I created as a senior in high school, using independent contractors in local venues to record and edit the original tapes from recording musicals and performances from schools, colleges, churches and organizations throughout the USA and Canada – and then to sell the records to the appropriate audiences.
[Email readers, continue here...] It grew to significant size during my college years, and I associated myself with a “strategic partner” throughout those years, ceding to him all recording and editing of work throughout the large home territory, and any national jobs we received. The agreement was that he would retain all of the revenues generated from those activities. We called ourselves “partners” and received lots of press, even nationally, as we managed our teenage business.
A year after graduation from college, I left for six months to serve my active duty obligation in the US Navy, while others took care of accounting and customer relations. And my “partner” left the company without notice and set up a competing company in my absence, never saying a word to any of us. I was bitter, but unable to do anything about it, since there was no partnership agreement. Luckily, after my return from active duty, my company flourished and his remained a small, one person operation for the rest of its existence. But, as they say, everything he learned, he learned from me. Dad was right, even if I learned the lesson years later.
By David S. Rose
Described by BusinessWeek as a “world conquering
entrepreneur” and by Forbes as “New York’s Archangel”, David is a former Inc.
500 CEO, serial entrepreneur and the founder of New York Angels. He is the
founder and CEO of Gust, the angel financing platform used by over 50,000
accredited investors in 1,000 angel groups and venture capital funds to
collaborate with over 250,000 entrepreneurs in 95 countries.
Since Bill Hewlett joined with Dave Packard in 1939 to create what is today one of the world’s largest computer companies, there has been an evergreen debate as to who is more important in starting a tech company: the techie or the business guy? Steve Jobs or Steve Wozniak? Bill Gates or Steve Ballmer? Jim Clark or Marc Andreessen?
I propose that it is time to reject the notion of the business man or business woman entirely. The underlying problem is that there are really three different components here, and like the classic three-legged school, they are all essential for success, albeit with differing relative economic values. What confuses us is that the components can all reside in one person, or multiple people. And what upsets people is that there are different quantities of those components available in the economic marketplace; and the law of supply and demand is pretty good about consequently assigning a value to them.
Perhaps surprisingly, the components are NOT the traditional coding/business pieces; nor are they even coding /user interface / business / sales, or whatever. Rather, here is the way I see it, from the perspective of a serial entrepreneur turned serial investor, listed in order of decreasing availability:
[Email readers, continue here...] 1) THE CONCEPT: A business starts with an idea, and while the idea may (and likely will) change over time; it has to be good at some basic level for it to be able to succeed in the long run. How excited am I likely to be when I see a plan for a new generation of buggy whip, or another me-too social network? The basic concept has to make some kind of sense given the technical, market and competitive environment, otherwise nothing else matters. BUT good ideas are NOT hard to find. There are millions of them out there. The key to making one of them into a home-run success brings us to:
2) EXECUTION SKILLS: It is into this one bucket that ALL of the ‘traditional’ pieces fall. This is where you find the superb Rails coder, and the world-class information architect, and the consummate sales guy, and the persuasive business development person, and the brilliant CFO. Each of the functions is crucial, and each is required to bring the good idea to fruition. In our fluid, capitalistic, free-market society, the marketplace is generally very efficient about assigning relative economic value to each of these functional roles, based upon both the direct result of their contribution to the enterprise and their scarcity (or lack thereof) in the job market.
That is why it is not uncommon to see big enterprise sales people making high six figure – or even seven figure – salaries or commissions, while a neophyte coder might be in the low five figure range. Similarly, a crackerjack CTO might be in the mid six figures, but a kid performing inside sales may start at the opposite end of the spectrum. Coding, design, production, sales, finance, operations, marketing, and the like are all execution skills; and without great execution, success will be very hard to come by.
But, as noted, each of these skills is available at a price, and given enough money it is clearly possible to assemble an all-star team in each of the above areas to execute any good idea. That, however, will not be enough. Why? Because it is missing the last, vital leg of the stool, and the one that ultimately–when success does come–will reap the lion’s share of the benefits:
3) THE ENTREPRENEUR: Entrepreneurship is at the core of starting a company, whether tech-based or otherwise. It is not any one of the functional skills above, but rather the combination of vision, passion, leadership, commitment, communication skills, hypomania, fundability, and, above all, willingness to take risks, that brings together all of the forgoing pieces – and creates from them an enterprise that fills a value-producing role in our economy. And because it is this function which is the scarcest of all, it is this function that (adjusting for the cost of capital) ends up with the lion’s share of the money from a successful venture.
It is crucial to note that the entrepreneurial function can be combined into the same package as a techie (Bill Gates), a sales guy (Mark Cuban), a user interface maven (Steve Jobs), or a financial guy (Michael Bloomberg). And that it is the critical piece which ultimately (if things work out) gets the big bucks.
The moral of the story is that, for a successful company, we need to bring together all of the above pieces, realize that whatever functional skill set the entrepreneur starts out with can be augmented with the others, and understand that the lion’s share of the rewards will (after adjusting for the cost of capital), go to the entrepreneurial role, as has happened for hundreds of years.
When you were a kid, surely at one time or another, Mom or someone reminded you to “play nice” when you got a bit rambunctious with your friends. I was reminded about this by Mark Wayman, a friend and reader, who applied this statement to his recruiting environment. He called out those people who focus upon executives who burned bridges with threats and lawsuits, instead of just picking up their toys and moving on after a bad business breakup.
Over the years, I have reminded departing employees in their exit interview that we should always, always both take the high ground and speak well of each other, since we never know when we will meet again under entirely different circumstances. And indeed, former employees (not necessarily disaffected or threatening in their departure) have shown up regularly as suppliers and customers in various companies in subsequent months and years.
There is no immediate gain in threats to an employee or by an employee. But there certainly is an immediate loss of respect and the start of a series of events that sometimes cannot be stopped. A threat of a lawsuit results in that person being immediately isolated and sometimes removed – if the employer believes there is enough evidence of misconduct or poor performance in the file to justify immediate termination.
[Email readers, continue here...] Short of threats, bad-mouthing a former employer or employee is the worst possible behavior when considering the effect upon the corporate culture if the offender is the employer, and upon the person making the claim if by a former employee. The point is that no one wins in this kind of word war. And if it ever gets to a lawsuit, both parties lose a second time as the lawyers take control and costs escalate out of control.
Mom’s advice is almost always right – for business as well as for personal relationships. Never strike out at anyone before first cooling off and thinking about the relative worth of the effort against the long term gain or loss. The resulting effort will be surely muted and couched in a way that you’ll avoid retribution.
It is hard to separate this kind of advice from economic lessons in running a business, when office politics can threaten a business in ways that are subtle, but sometimes just as devastating as economic shocks or continuing poor management.
Most any office with more than one level of management (more than ten employees) can become a Petri dish for office politics. It may be human nature to attempt to gain the good graces of one’s superior in the work place. But it is a perverse form of human nature to do so at the expense of others. Some employees disrupt a business intentionally in order to gain attention and an advantage over fellow employees.
Other times, people with personal agendas or personal dislikes of other individuals will disrupt the harmony of an office environment with negative statements, rumors, and damning comments. We’ve all seen this unhealthy form of human activity in an office environment at one time or another.
So here’s the advice: Never repeat, encourage, or even listen to the personal attacks by one individual against another within the organization. The first time you join in the conversation instead of stopping it, the first time you nod in agreement, the first time you take a side as a manager –is the last time you rule over an office-politics-free organization.
[Email readers, continue here...] A boss has power that person doesn’t often realize s/he has, when viewed from the lens of a subordinate. That power becomes perverse when a boss takes a side in any disagreement that is personal as opposed to business-problem oriented. The result is almost always hurt, frustration and anger from the party on the wrong end of such manager reinforcement, and a loss of work time and certainly good will toward the organization and toward management itself.
To set the example by stopping the personal attack, refocusing the parties on productive work and moving on is to state by your words and actions that you will not tolerate such behavior in the work place. To ignore such action when observed is to allow one person or a small group to undermine the organization in subtle steps that can only increase in size and effect.
Worse yet, to take a side in a personal dispute is to reduce your authority and alienate one person or group and reinforce bad behavior.
This simple statement is not what it seems at first. I quote this from a frequent family exhortation by parent to child in the Kemp clan, going back several generations. The late Jack Kemp, famous as quarterback for the Buffalo Bills and later as US Secretary of Housing and Urban Development then Vice Presidential candidate, told this story about his mom, as he continued the tradition with Jack’s now-grown family.
“Be a leader!” each would say as they sent their offspring out into the world each morning. As Jack explained it, the call was not for his children to lead in the traditional sense, but to enable others to grow and prosper – the definition of true servant leadership.
This short statement is a reminder of what it means to be a great leader – to focus upon the welfare and growth of one’s peers and subordinates.
[ Email readers, continue here...] Think of what internalizing that and making it true would do in this business world. There would be no office politics, no suspicion of the intent or hidden agenda about management, no wasted time protecting that part of the anatomy we must protect when making many of our decisions in management.
Used in this context, servant leadership turns the leadership pyramid upside down, causing each level nearer the customer to have more empowerment to serve the customer than the level formerly above it. Nordstrom, Zappos, and an increasing number of retail-centric companies practice this religiously. It may not be appropriate for your enterprise at this time or in this niche, but it certainly is always appropriate in your family and social lives.
“Be a leader!”
Some of the world’s best companies to work for are those that encourage employees to spend time following their own paths of curiosity toward development of new products or services. Google, 3M, Facebook, and Microsoft all allow their employees to take time to explore new ideas they conceive and attempt to develop.
Famously, the post-it note is an example of such a product coming from employees of 3M who were looking for quite another market for their newest light adhesive product. And many free products and services have been spawned by Google employees working during their one-day-a-week personal curiosity time.
It is an opportunity that is open to any CEO to encourage creative thinking, problem solving, product creation, efficiency-creation among the troops. Rewards don’t have to be financial, but certainly, when the gains are measured in dollars, that seems appropriate when the new development is not just a part of the job specification for a creative employee with a great idea.
[Email readers, continue here...] Every company has hidden talent, creative thinkers that are not in a position to demonstrate their talents. CEO’s often focus employees on the company’s goals, without allowing time to explore the edges to create alternative solutions, or to think ahead toward new possibilities.
What if you encouraged each of your associates to spend ten percent of their time working alone or with others on cost-saving or efficiency improvements, sketching new ideas for products or changes to products that they may not be directly involved in creating? What if that refreshing opportunity actually were to make each person return to the assigned job with a fresh new look and appreciation for the creative time spent? It could happen, but only if you as manager develop the culture of curiosity that makes such creativity a part of your company DNA.
Sometimes it is the first thought you or your managers have when in need of skilled talent, especially for sales or product development. It is not hard to find and observe the best employees of a good competitor at work, skillfully moving the competitor forward in a visible way.
And it is a tempting slice of pie – two slices for one price – to take a critically needed employee from a competitor, damaging that firm while building yours.
The problem is that a visible hire that “cuts” the competitor makes the competitor’s management bleed. And you’ve heard of blood revenge. That’s the worst kind, because it results in emotionally lashing out at the offender (you) with a response that is greater than the action that precipitated it. In many cases, your firm can withstand the response. In some though, cross-raiding of employees by offering unsustainable salaries or perks you cannot offer to all because of your size and financial position will leave you in a position to pay grandly for your action.
Consider the relative size of the competitor, the visibility of the target employee, and your ability to withstand a backlash before exercising the two slice tactic.
It has happened to all of us who have been leaders in business long enough. One of your employees is approached by an employee of a customer or of a supplier, stating that “It sure would be great to work in your company.” And without a policy or sometimes without thinking, your employee responds with a “Let me help,” or worse yet, “I have a position open.”
You should be clear from the start that no one at your company may offer a job to any current employee of a stakeholder – a customer, a partner in development or in distribution, or of a supplier. The rule should be one that includes only one “out”: if a person resigns from the position with the stake-holding company, then you will be happy to talk about a position. No winking, sending signals, or quiet promises.
[Email readers, continue here...] There are instances where such an existing stakeholder employee offers to go to his or her boss and ask permission to speak with you, and the boss not only concurs but agrees to call you (not just to take your call). In that case alone, it is proper to continue as far as the offer and beyond.
Let me tell you the story from one of my companies that recently learned about the recruiting boomerang the hard way. The CEO checked into a hotel that was a customer for its enterprise management system, and through a few innocent questions found that the owner was about to purchase several new systems for his new projects. The front desk clerk cheerfully gave the CEO the owner’s contact information.
So the CEO called the owner that day. “I will never deal with your company again!” was the short reply from the owner to the CEO. It turns out that a manager from the CEO’s company had recently thrown the recruiting boomerang at that very same cheerful clerk, hinting that a job would be available if she’d like to apply. The clerk told the owner, and the rest is history.
Properly, the CEO begged the owner for forgiveness, immediately sent an email to all managers reinforcing the existing policy of not hiring a stakeholder, and spoke to the person making the offer in a non-threatening tone, again reinforcing the policy. During the phone conversation with the owner, the CEO carefully set the stage for a later call to mend fences and check on progress with the existing system already installed. He made all the right moves given the situation.
But wouldn’t it have been easier to avoid throwing the recruiting boomerang in the first place?
So, we’ve discussed why it is important to build consensus in an organization in most every major decision. To do so, a CEO must be able to relinquish some degree of power, overriding decisions made by consensus only with some thought and certainly with an explanation to those involved.
A manager secure in the position should never fear empowering direct reports to make decisions that fall within the resources allocated to them and within the budget agreed to with them. A micro-manager cannot cede that kind of authority, even within pre-arranged limits, and as a result meddles with decisions made by direct reports, removing authority from each whenever such moves are made, and rendering the individual more impotent in the eyes of that person’s reports.
On the other hand, a great CEO or manager not only empowers his or her direct reports, s/he directs those people to do the same with their reports down the line. All this is done within limits that should seem obvious: financial impact has been provided for within the plan; and no other individuals or departments are affected negatively by such an empowered action without notice and involvement.
[Email readers, continue here...] The more power you cede, the more you become a teacher and the more your direct reports grow in their positions. Further, the more you share your decisions, the more you prepare those below to assume your position if ever necessary or appropriate.
If you cannot or will not empower your direct reports, you must ask yourself: why? If it is insecurity that is the root cause, then the best course of action is to share the power even more quickly, as you’ll look and feel more like the group is supportive of you and your position. If you are a micro-manager and are unwilling to allow those below to fail, even with more minor decisions, then you are restricting their growth in their positions, certainly causing dissatisfaction in their ranks, and missing the most important opportunities to enable scaling your organization to a much larger size.