Should you be optimistic about your corporate growth?

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.

But… Do we still plan for growth in our infrastructure?

Signing a lease for space enough to handle the growth called for in the business plan, is a predictable group behavior I’ve come to label “The tyranny of the new office.”  The company plans a move to a new facility with plenty of space that is probably built out but not planned for use until the company grows to the next stage of need.  Office employees expected to work in the office regularly move into their new cubicles and offices, spread out far more than in the previous facility.  The excitement and noise of working in too close proximity to cohorts suddenly becomes an unexpected near silence, as everyone notices that they do not have to raise their voices any more to be heard above the din of noise.

And the result of this empty space before the growth spurt?

[Email readers, continue here…]    The exciting sounds of an office filled to capacity functioning in a growth environment are exhilarating to most that have experienced it. The distractions are dealt with using earphones with their smartphones, concentration and tolerance; but they are dealt with by all.  The change to a near silent environment is so startling that, many times, employees express a bit of resentment or even depression, masked by the common statement that “it is so much easier to get work done without the noise.”  It is the excitement of activity that generates more and better output for most, not the isolation of silence.

But back to “the tyranny of the new office.”

Two predictable outcomes almost always follow a move into an office much larger than today’s needs. First, you’ll find subtle moves by employees into the unused, reserved space.  After all, it is there and unneeded for now.  Why not make use of the space until needed?

And second, management sees the open space and often finds it easier to justify acceleration of one or more new hires since the facility is available and infrastructure complete.  Unconsciously longing for a bit more of the excitement from the noise of the previous office, managers often make subtle unrecognized moves to fill the void with new hires earlier than planned.  That’s why the label, “tyranny” even if the word seems out of context.

If and when asked, I always recommend more frequent moves as opposed to longer-term leases.  It seems from experience that both the company and the employees gain from such staggered moves.

Next week: It is time to examine the CEO’s relationships with con-temporaries, coaches, good board members and great resources in the community and industry.

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If you must lease an office, make it a short one!

 Avoid long-term commitments!

It is statistically true that at least half of the young companies funded by angel or venture investors will not survive three years from funding to demise, and more than that percentage will die with two years if not well financed.  The greatest burden of either a growing company or one needing to retract and reduce expenses is the office lease – especially in these years after COVID and remote work.  Although payroll is almost always the greatest cost, companies have flexibility as to how to handle both rapid growth and rapid decline in the personnel arena.

Rapid growth?  Home workers? Business contraction?

The most difficult thing to deal with in any of these events – now or future – is the office lease.  A five-year lease may be cheaper per month than a three-year lease and may provide for more free rent and tenant improvements.  Those benefits pale in comparison to the high cost of retaining or buying out a longer-term lease when growing or reducing in size or misjudging number of at-the-office employees – which is most of the time for early-stage companies.

What is flexibility worth in higher cost?

[Email readers, continue here…]   From personal experience with many companies in my portfolio and from many board experiences over the years, young companies are unpredictably unstable in their facilities requirements. Flexibility is worth a few percentage points of fixed cost when companies are in high growth mode or are at early stages of proof of market.

Yes, it’s a hassle to move offices.

It is a hassle to move, requiring time and planning.  It is much worse to worry overpaying for two leases each month and tying up two large deposits.  Or honoring a personal guarantee if the company cannot pay.

Then there is the dread of “The tyranny of the new office” to worry about. But that is a story for next week’s insight…

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What’s your answer? Are remote workers productive?

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.  She organized morning conference calls, had each employee tweet the others in their department when starting work and ending the day, creating the feel of closeness with employee contests, and rewarded her best salespeople by assigning them the best leads, creating an environment where the best excel and those unable to cut it in a virtual environment fall out on their own accord for lack of revenue.

The obvious benefit:

But most important, the unpredicted benefit of having very low infrastructure overhead may be the one most important element in saving the company during the strongest and longest downturn in recruiting industry memory because of COVID and the “great resignation” that resulted. Much larger recruiting companies were in trouble, with high fixed costs for facilities that could be shed quickly.  This CEO’s decision to try to retain an excellent, motivated staff in a virtual environment paid off in every way.  The employees were more satisfied, working more hours in a day even if spread over a longer period, and uniformly claimed a better lifestyle as a result of the move.

Why the past tense?

[Email readers, continue here…]    The CEO successfully sold her recruiting company at a good profit and co-wrote a best-selling business book about remote work along with a fellow CEO who did the same – and who sold his company at a profit.

So, what does it take to be a successful remote manager?

As you see from the story above, it does take more creative management to make this work. It is a management skill that was not taught nor learned until recent times. A creative CEO will find ways to motivate and compensate for the lone nature of working alone, but using social networking tools to make office workers and home workers feel and behave as a unit.   After all, with this generation of texting, tweeting, IM-based workforce, you’ll find as much of this kind of communication from adjacent cubicles as from distant home offices.

Home worker dress code?

Let’s pause for a word about dress code and formal accountability for the home office worker.  Employees working at home must dress for work, even if casual, and find a schedule for the start of each workday that is to be counted upon by fellow workers.  It’s already happening with Teams, Zoom, Webex, Slack and all the other methods of live video communication.  Home workers routinely drop the backgrounds and show their living spaces without shame, worry or fear of “being discovered.”  You’ll notice that those broadcasting from their bedrooms now routinely make their beds before opening their cameras.

Someone who “comes to work each day” even if to the computer in a separate part of an apartment, is putting on the business hat in a much more formal way that one who drifts to a computer in the room beside a blaring TV, dressed in pajamas and arriving whenever convenient.

How about the employee unable to self-motivate in a home environment?

With the proper measurements of productivity, it will soon become obvious to both the employee and manager that such an opportunity is not right for that person.

Ask any CEO who has tried letting employees work from home, whether for a day a week or remotely for most every week – with occasional office visits (if there is still an office.).  You’ll find stories of emails time stamped well into the night, work performed at unusual hours and productivity increases.  You’ll also hear a bit of pride in the telling.  A CEO that encourages this once-risky venture and is rewarded with increased performance, is a person fulfilled and willing to tell anyone who’ll listen.

 

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Would you commit to an office lease today?

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.  Even after discouraging him from this backwards method of infrastructure-building, he kept bringing up the subject in subsequent months as new senior managers and salespeople were hired, each starting with an orientation week at the Asian headquarters then returning to work from home.

Everything has changed of course.

With audio and video conferencing and all the tools for communication and collaboration available today, each of these four new employees felt empowered, connected and enthused to work from home for the first time.  The CEO was still talking about finding an office when the natural progression of growth made it obvious that two of the four needed to be replaced.  These two worked from homes in widely scattered cities.  Had the office been located to accommodate either one, the company would have had to find replacements in the same geographical area as the office.  Without that restriction, outstanding replacements could be located based upon skill and experience, not location.

We know that the best employees may elect home, hybrid, or walking out.

Most businesses, especially start-ups, benefit from the establishment of a virtual environment. The flexibility in hiring decisions, reduced fixed costs, forced highly specific communications and better definition of job responsibilities that most often result from need, almost always give a virtual company the edge financially and flexibly.

Would you renew your existing office lease today?

[ Email readers, continue here…]   More mature companies are saddled with sometimes expensive facilities, often poorly used by a minority of employees.  Five-year leases that seemed a bargain before COVID are most often albatrosses today.

And when does senior management show the flag at the office?  Most want the same flexibility as those they manage.  So, one of the advantages of new or young employees – having visibility and time with their managers – cannot easily be realized, frustrating the employee who made the extra effort to come into the office.

The bottom line for most companies is that the need may still be there, but the size of the space can be drastically reduced and should be.  Landlords know this, and at renewal time are more flexible now, willing to divide spaces to retain tenants with the negotiation power shifting from landlord to tenant.

Yes, every company is different.

During COVID, we sometimes called these “must be in the office” or on-the-floor employees “essential.”  The extra burden of travel cost and time was theirs to bear without extra compensation compared to their peers.  Which leads to the question: “Would you pay more for those who you insist on or who must come to the place of work?  These are complex questions, but when couched in this way – in terms of higher employee cost as well as higher infrastructure cost, become easier for management.  You must decide between hybrid, virtual or forced in-the-office balancing economics with productivity and ability to retain and attract the best employees.

The world has changed, and you must not just “remember how it used to be.”

So, can a company of any size exist for a reasonably long time as a virtual company? 

As recently as 2019, there was a stigma that prevented many CEO’s from thinking it possible.  Today, virtual offices are accepted at all levels of many organizations of all sizes.

 

 

 

 

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How to make a small problem into a big one.

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.  You can just reject the components, especially if coming from an outside supplier, or you can get to the root of the problem by examining the cause and reengineering the process or product quickly, saving you and perhaps your supplier time and cost.  Such a culture of quality engineering has an additional benefit in creating a higher bar for all to see, making the public statement that quality is a top priority.

Is this just your problem?

[Email readers, continue here…]   The same careful management applies to virtually every person and process in the organization.  If there are ways to measure successful output or execution, find them and use them regularly.

If one person or department is not pulling its weight, others notice and if no action is taken, often others are discouraged because of the lack of management interest and control.  The variant of “one bad apple” holds true in corporate cultures that to a degree entrepreneurial managers and young CEOs rarely credit – until a late correction is made and a collective sigh of relief can be heard company-wide.

 

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Do employees value their options as ownership?

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 tax write-off for corporations and even a way to slowly transfer ownership of a company from the founders to the employees.  These plans are not as popular today because of their complexity and difficulty to manage, lost in favor of simple stock option plans.

How to leverage an option program:

Each month, at the monthly company lunch for all at the main office, I’d greet everyone with “Hello shareholders”, and proceed to show the assembled throng slides of high-level financial statements, pointing out progress against plan.

Show everyone financials?

[Email readers, continue here…]    That form of open book management surprises many, but if the employees are stakeholders with a taste of equity, why not underscore the value of that equity by treating them as cohorts?

Yes, sometimes the news is not good.  

They should know this, and from you not from the rumor mill. Your fear that the confidential information may get out to the industry competitors should be tempered by the fact that you are not giving out the secret sauce, just the results of the past period’s performance.

After all, for some it is a requirement.

All public companies, including your public competitors, must do this in greater detail each quarter, and it rarely damages their ability to sell into the marketplace.  Would bad news drive your best employees out the door?  Perhaps. But it is my experience with many companies that empowered employees, treated with respect and shared knowledge, will go far beyond expectation in remaining loyal to their associates and their employer.

And think of the time saved around the virtual water cooler if there are far fewer rumors to pass among your employees.

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Stock options or more cash?

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 an example we’ve heard before:

Cohen sets up an example where a senior position job candidate is stuck on a salary twice as high as the CEO is willing to pay, leading to a standoff between the two.  Cohen goes on to point to twenty-five non-cash items that the CEO could have used to narrow and eliminate the gap, many of them untaxed perks worth more than face value because of the employee’s tax savings.  They include an expense account, company car, profit sharing, 401k contributions, medical coverage for dependents, free life insurance, educational payments, extra vacation, relocation expenses, paid trips to industry association meetings, or a small override on revenue from new products developed under the candidate’s watch.

…and stock options as a perk?

[Email readers, continue here…]    One of the items on Cohen’s list of twenty-five was stock options.  That of course jumps to the top of the list for young, fast-growing technology companies.  Many skilled, experienced executives have jumped from mature companies to more risky positions in smaller, fast-growing enterprises primarily for the options.  In a previous insight, we explored the common percentage of a company’s fully diluted stock that is often granted in the form of options for new employees.

Then again, there are those seductive unicorn opportunities.

Many an executive has made much more than any cash compensation from exercise of “in the money” options after taking the leap to a smaller, fast-growing company, attracted by just this form of incentive compensation.  When used in combination with several of the twenty-five additional non-cash forms suggested by Cohen, salary alone does not seem to be the barrier most people believe it to be.

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Would you pay a high achiever more than yourself?

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.  Upon reflection, he stated that revenues could double the following year, and that the company’s reputation among larger customers would be so greatly enhanced that the company could become the leader in its niche.  My obvious retort: “Then why not offer this candidate the moon if he can achieve this?”  The offer was sent and the CEO was much happier, dreaming of the possibilities, not the incremental cost.

Have you experienced this in your business?

I love to point out that my top several salespeople were making more than anyone else in the company, including their boss.  These outstanding achievers worked for salaries below those of their engineering peers and had to put it all on the line every day to earn their keep, let alone excel.

How to align your goals with those of your managers.

[Email readers, continue here…]   The best way to encourage alignment between your managers and the company’s goals is to create a bonus plan for each, with its payments made based upon the key performance indicators established for them and for their areas of responsibility, all in turn based upon the tactics and strategies contained in the company’s strategic plan.

Exceeding expectations…

It is amazing how few company CEOs grasp the concept that executives and managers should be compensated not just for doing their named job, but for exceeding expectations while advancing the corporate goals.  To align everyone in the organization in exactly the same direction is a task, one that is a powerful driver for growth.  People should be compensated well for such outstanding contributions.

What is the general rule for such a bonus plan?

Provide no more than five key performance indicators derived from the strategic plan and fitted to the specific job of the manager.  Set time-based goals for each.  Provide bonus opportunities that add to approximately 50% of the base salary if all are achieved within the year.  Meet and measure progress truthfully each quarter.  Perhaps pay a portion of the bonus upon completion of these meetings.  Do not make the usual mistake of ignoring or passing on the progress of any of these items by just paying a part of the bonus at yearend because no-one carefully reviewed progress, or because circumstances changed, and the bonus item could not be completed as written.

Incentives are powerful tools when used well and reviewed often.  They are a major part of a good manager’s work and should be treated as such by the CEO and all senior managers.

 

 

 

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Be careful about equity and options!

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.  Equity is divided between the founders and the business begun.  Although this insight does not address this point of ignition, we should note in passing that things always change over time, and formerly strong founder-contributors can become a drag upon a business or lose interest if the enterprise is not quickly successful.

How to protect against founder role changes over time:

To protect against this, there must be some document in place from the beginning that clearly states the expectation of each founder as to contribution of time and resources to the enterprise.  The document should also contain clear buy-sell clauses, forcing any sale of shares to first be offered to the corporate treasury, then to the other founders in proportion to their holdings, and then if there is no interest, to outside investors.  It should contain a mandatory sale clause in the event of separation of a founder, so that a major owner who is passive in the enterprise cannot easily vote against measures other active founders endorse.

Some rules about stock options and phantom stock:

[Email readers, continue here…]   The real insight here is that stock options or phantom stock are the tools of early-stage businesses used to attract great talent when there is not enough cash to pay market rates.  Here are some rules.  First you must create a stock option plan using your attorney, which must be registered in many states as a security offering. (The fee for registration is well under $100, so this is not an issue.)  Options are usually best with “C” corporations but granting options for either LLC’s or “S” corporations are not a real problem.

How to give away too much too soon:

Most early-stage companies make the mistake of making option grants to new hires at all levels that are too aggressive and distort the capital structure of the company to a degree that damages future professional investment.

Let me try to advance a few rules of thumb to help guide you here. 

An option plan should carve out an addition of about 15% of the “fully diluted” shares.  If there are 85,000 shares issued to the founders, then a plan calling for 15,000 shares in a pool reserved for future hires is appropriate, making the fully diluted shares 100,000.  The board must approve the plan including this number of shares in the plan, and shareholders must approve the plan as well.

It is important to note that each grant to new or existing employees must be approved by the board before issue.

Pricing your options:

The price per share for option grants is also an important consideration.  IRS rule 409a specifically calls for an appraisal of the value of the corporation’s stock current to within a year of any grants of options, although there is an exclusion for early-stage businesses in which expert members of the organization or board may make such an appraisal if they qualify according to the exemption.  But after the enactment of the Dodd-Frank legislation over a decade ago, there are few if any insiders willing to step forward to provide this expert service from within.

Pricing rules:

If there is only one class of stock, the same as the founders, and the appraisal of the single class of shares yields, say $2.00 a share, then options must be priced at that amount.  In other words, you cannot create bargain options at below “market rates.”

How about multiple classes of stock?

If you have a preferred class of stock with special protections, that class of shares will be valued at a price higher than the founder common shares, allowing stock options to carry a lower price per share than preferred investors may have paid.  This is important because high quality candidates should be induced to consider coming aboard at lower than market salaries using the tool of “cheap” options, properly priced.

What percentage of the total company shares should be reserved for what specific job titles? 

Inducing a new CEO to come aboard usually means creation of a stock option package of 5-8%. That size of grant would take much or most of the option pool.  A vice president, or CxO candidate, typically is offered between 1% and 1.5%.  Director level employees are typically granted ½%.  All other grants usually are much lower, allowing for the typical 15% pool to last for quite a while in most companies.

We will cover board members and advisory board members at a later time.

How about “vesting” shares over time?

Options typically are earned over time, which we call vesting.  If a grant of 10,000 shares is made on January First, typically there is a four-year vesting period in which the employee earns the right to exercise (buy) 1/48th of the shares each month.  Many plans also call for a one year “cliff” in which an employee who is separated from the company before a year is unable to exercise even the shares which would have been vested at that point.

A little sophistication- offering advantages for senior staff:

There is an important consideration that will become an issue with sophisticated candidates for VP and above.  We call these “trigger” provisions, in which selected options negotiated for a select group of senior managers, fully vest to 100% upon any change of control.  This provision allows these select individuals to perhaps profit handsomely in an acquisition by being able to exercise their options in full at the time of sale.  The negative side of this is that the buyer may not want to so enrich these managers that they may not be willing to come aboard the buyer’s organization, even if the existing options are replaced with options from the buyer company.

If all of this seems a bit overwhelming, we have just scratched the surface of option plans and incentive compensation.  This is an area of expertise that a CEO is required to quickly learn and carefully manage with the help of the corporate attorney and the board.

 

 

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Why we should fire fast, not last!

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.

…and the usual second move.

A month or so later, when no apparent change has been noticed, we may move from coaching to a polite warning and maybe even the dreaded note-to-file.  Another month, and the probability of a decision to separate the marginal employee becomes obvious and the move initiated.  Lawyers will tell you that this progressive chain of moves is good for the company, protecting against lawsuits by a disgruntled former employee.

Then there is the ninety-day clock to consider. 

In most states, employees gain rights after the ninetieth day on the job that makes it more difficult to fire an underperforming employee without careful documentation of reasons for concern.

What if we fire an employee before the nineth day?

[Email readers, continue here…]   But – before or after that ninety-day line – surprisingly, in post-exit interviews after emotions have dissipated, most former employees (who were handled respectfully during the separation process) and most managers will agree that the move should have been made sooner.  The former employee will often state that they were at least somewhat unhappy in the job, knowing that the fit was not as good as it should be. The manager will most often admit that they did not move aggressively, following best judgment in coaching the employee toward separation much earlier.

The conclusion?

Firing fast in most every case is best for everyone, as opposed to long, drawn-out sessions and stressful employee periods of waiting for a verdict in between sessions.

It does sound counterintuitive.

But I would believe the post-exit interviews.  Why not conduct your own survey of fellow executives and managers and see what they think.  If they agree, you should recalibrate your expectations and act sooner, with the important caveat that employees must always be treated with respect.  Remember that there are many times when documentation to file is a required protection for the company against possible lawsuits, especially by protected classes of employees.

 

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