Can you be liked while being tough?

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.  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.

Stories of the selfish entrepreneur

I have had numerous experiences during my business career where businesspeople 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.)

My unscientific conclusion

[Email readers, continue here…]    And I have come to conclude 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.

Images created with MS Designer using prompt: A realistic photo image of a casually dressed female businessperson standing as her six direct reports applaud her recent action. White background, No text.

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Startup intoxication!

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.

The intoxication of a new beginning

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.

Do you ignore the warnings of experts?

[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.

Write your own Hollywood script

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.

Images for this post created using DALL-e, MS Designer, with prompt:  Create a lifelike color image of a young entrepreneur standing in a small, bare office for the first time looking excited as he starts his journey in business. Make image transparent and ragged edges.

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Find your rock in Ensenada!

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.

My self-confrontation

My moment of self-confrontation came many years ago when deciding whether to leave behind the relative comfort of a good income from my one-person operation or hire my first employee which would allow me to spend my time in sales and in growing the business.  It was perhaps the most difficult decision of my young life.  Just out of college, managing a business that had paid my way through college and several years beyond, the cost of expansion would cut my take-home income enough to impact my life style and perhaps, if not quickly successful, cause me to put off my pending marriage.

Not a small decision. 

So, I got in my car with a small overnight bag, pointed toward Mexico, and headed to Ensenada, a place I had been to a number of times before, to find solitude for a short weekend just to think about the future.

[Email readers, continue here…]   Checking into an inn I had visited before, which was located right on the beach, I walked out to the shore and found a large, smooth rock, perfect for a long, hopefully productive sit.  And I sat.  I sat for five hours that night, thinking about the alternatives and what I really wanted for myself over time.

The momentous decision

After that evening of isolated, quiet thought, it was clear to me that I wanted to take the risks, to go for it, to attempt to build a big business, to leave my comfort zone.

Executing the plan

The next morning, I returned to the rock and sat.  Planning ‘how,’ now that I was comfortable with the ‘what and when.’  And after a few more hours, I had devised my personal plan.  I would hire one full time employee and one independent contractor for a start.  I’d take no bank loans or ask for any outside investment.  This would be entirely my risk to take unaided.  Satisfied, I left that rock, checked out of the seaside inn, and drove home excited and ready to execute my plan.

The result

The story is true. The outcome was excellent.  I grew that company to over fifty employees, even taking it public after a number of years, and later selling my interest in that first company to get into the computer software business, just at the right time to take advantage of its amazingly rapid growth.

But it all started with the decision on that rock.  If you have a life-changing decision to make, where do you retreat to think?

Images created with DALL-e, Microsoft Designer, using prompt: “A realistic 3D image of a smooth rock large enough for a person to sit upon, located at the shoreline of a beach cove, in the afternoon sun. A young, casually dressed man is sitting on the rock, contemplating his future.”

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Ever receive worthless advice?

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. Some of you can guess that name of the group. It was thrilling for these angels to find a young entrepreneur with an idea for a business that seemed so destined for greatness that the angels invested over $1 million on the condition that the group receive two board seats and one observer seat on the start-up’s board.  The young, eager entrepreneur immediately agreed, and the business was launched, well- funded and anticipating great profits.

Good intentions sometimes lead to…

As the business expanded into a second city and then planned expansion into a third, there was a rift that became evident between these angel board members, played out in front of the CEO.  The angels argued about whether the expansion was too quick, requiring additional money, or should be slower and bootstrapped with profits from the first city’s success.  Finally agreeing upon expansion at speed, the angels raised more money and encouraged the CEO to accelerate the expansion, which the CEO did with enthusiasm.  It did not take long for the company to again run out of money, and for the board to split over the next moves (since the first city continued to be profitable).

The consequences of not thinking ahead:

[Email readers, continue here…]    The angel investors could not raise the next, larger round to finance the shortfall and further expansion, putting the fragile young company at risk for following the advice of its board.  In the end, the company had to turn to a wealthy individual investor who took control of the corporation as his price for saving the company.  Look ahead only a short time, and the new major shareholder ran into trouble overleveraged with his real estate investments and defaulted on his funding promises.  But I digress.  Painfully.

What went wrong?

Had the angel board members been able to agree upon a financeable strategy for growth, the company might have been immensely successful.   To put an ending to this story, the entrepreneur followed the suggestions of the new investor just as he had followed the angels, and accelerated quickly into more cities, again running out of cash.  And now you know that the wealthy investor in the meantime, could not make good on his promise to further fund the company, which found itself unable to meet its obligations and ultimately was shut down, causing a complete loss for all.  Bad advice taken by an enthusiastic and compliant young CEO was the root of the cause, compounded by circumstance.

And the result for the entrepreneur for taking this advice?

By not putting up any argument and being completely compliant, the CEO ceded control of the company to outsiders who gave bad advice.

The lesson for any CEO or for any of us for that matter is to filter all advice through the strainer of good reason, taking that which seems reasonable and rejecting that which is wrong for ourselves or for the immediate time.  And, as I have learned from experience, if you perceive advice to be in error or against better judgement, form your arguments after a little thought and make your case with information to back it up if necessary.  Most of the time, the person on the other side of the table will see your side, feel your passion, and either agree or withdraw any objection.  Remember, passion and reason almost always win the day in these cases, even when facing a superior in the food chain.

Now you can tell your story…

Images for this block created using DALL-e, Microsoft Designer, with prompt: A group of diverse standing adults surrounding a single young businessman, all casually dressed, with all staking at once. Photo-realistic image with ragged edges and transparent background.

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Posted in Depending upon others, Protecting the business | 2 Comments

Should you find a business coach?

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 committee that cannot be resolved amicably.  Having an experienced coach, usually acting informally and not for any kind of pay, is a safety valve that cannot be understated when in times of great stress.

Some possible coaches in your present sphere…

[Email readers, continue here…]     Sometimes that coach is a member of the board willing to listen and make suggestions off the record.  And often that is good enough.  In my experience, there are times when a CEO needs a completely neutral third party or a roundtable of fellow CEO’s to help guide him through a difficult maze.

Here’s a suggestion:

Develop relationships with fellow CEO’s in non-competing businesses for a start. Perhaps even formalize the relationship with regular lunch meetings or meetings in groups of CEO’s to discuss personal issues without fear of the discussion leaking outside closed doors.

Image created with Microsoft Designer (OpenAI) using prompt: A photorealistic image of a male CEO sitting at an office desk, looking lonely and alone. Image should have soft edges. Desk should be loaded high with papers in the inbox tray.
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I’ve been sued as a board member.

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. Employees reaching out to anyone above to redress grievances.  In one case, an aggressive lawyer found all the members of an LLC, and sued every member found.  Whew!

So, what’s the chance this could happen?

Whenever there are outside shareholders or noteholders, or unhappy employees, and when there is a product in release, there is a chance, no matter how slight, of a lawsuit against members of the board as well as against the corporation itself.  Even if such a suit is completely without merit, the cost of defense and the risk of a negative outcome both hang over the company and the director.

What is D&O insurance?

[Email readers, continue here…]   Directors and Officers insurance (D&O) is meant to reduce that risk and provide for the legal defense of any such suit at the expense of the insurance company.  In that regard, even the lowest amount of D&O insurance available, $1 million, provides for legal defense costs to be covered.  The usual cost for such insurance is $4 to $6 thousand a year, with an extra $2 thousand for an additional million dollars of coverage.

Consider completing the package.

Recently, insurance companies have added employee practice liability insurance (EPLI) to the package to address specifically the risk of employees suing for redress.  Given the increasing number of suits for sexual, racial, gender and other discrimination, this now seems logical and necessary.  So, add another $3 to $4 thousand to the policy cost.  Ouch!

Is the required?

More important than the cost is the provision of investment documents from sophisticated investors like VC’s and sophisticated angels requiring D&O insurance for the company at the time of funding.

I am one of those.

Over the many years of board service, before insisting upon this insurance requirement before service, I had been sued as a director several times, in no case covered under the umbrella of a D&O policy.

Although I won all but one of these rather spurious suits (and settled that one outlier to keep my unaffiliated wife out of this swamp), the cost of defense in some of the cases was not reimbursed, and the time spent in helping the attorney prepare for the defense and in one case through to a several-day adjudication event, was not small.  As a result, I now insist upon D&O insurance for every board upon which I sit.  The backgrounds of these suits make for good stories – but for another time.

Images created using DALL-e, prompt: A realistic image of a man serving papers representing a lawsuit upon another younger man and his board of directors, all in business attire without neckties. Use clear background and ragged edges to picture.

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Posted in Protecting the business, Surrounding yourself with talent | 2 Comments

Are you expecting too much from your board?

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.  Early-stage boards usually meet once a month for two to a maximum of four hours, enough to ruin the rest of a day for those who travel even short distances.  In addition, most board members freely receive phone calls and emails from the CEO during the month, all considered part of board service.  And with the advent of Teams and Zoom, board members travel far less frequently to meetings.

Special circumstances often appear by surprise.

There are times when board members are called upon to give extraordinary time to the corporation, such as interviewing candidates, strategic planning, recovery from a cash flow crisis or other urgent issues.  Most often these are freely given by board members.

Crossing that line…

[Email readers, continue here…]   CEOs: You will probably cross a line if you ask a member of the board to consult to the company, spending considerable time with other employees regarding issues that might be handled by others than from a board.  Depending upon the board member, it is appropriate for you to offer a consulting fee for this time spent above the call of board duty.  Any such informal contracting of service should always be preceded with an agreement between the CEO and board member as to the amount to charge and estimate of time to be spent before further agreement is necessary.

Do you expect your board members to be more involved that this? 

Have you discussed this during a board meeting?  And would you want more from your chairperson?   How about asking a board member to spend time with one of your VP’s or directors?  All of these are great questions to clarify with your board.

So, now we’ve discussed the expectations that are the norms.  It’s your turn to make expectations clear and be sure there is agreement about these expectations.  Good luck!

Images created with DALL-e from prompts for this blog post.

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How do you pay an early-stage board?

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.  You do not pay professional investors who are serving on behalf of an investment company or VC and paid by that company.

How do you set the option price?

The option price should be set by appraisal under IRS rule 409a, and certainly should be low enough to recognize that common stock options are not worth as much as preferred stock, given the many preferences of the latter.  If you have only one class of stock, the price is the same as the last investment price per share if no 409a appraisal.

Special clauses for board members and senior executives?

Further, the option should contain a special clause for board members and those executives who may not be brought forward to an acquiring company – that accelerates vesting to 100% upon a change of control in the corporation, which aligns the board member with the best interests of the corporation itself. Otherwise, you might picture an event in which the sale of a company to be consummated a few months before full vesting could cause a board member to find ways to vote for delays or even against a sale of the company, awaiting full vesting of his or her options.

How about companies without intent to sell or IPO in future?

[Email readers, continue here…]   For lifestyle companies or later stage companies, board members should be paid on a per-meeting basis in cash. Typically, this payment amounts to $1,000 per meeting of the board, adjusted upward for public corporations to $3,000 per meeting on average, with special pay for committee chairs and special meetings.  These payments recognize that board members are not working for equity but for the equivalent of consulting fees plus the attendant risks of board membership.

Clarifying who receives options

To be clear, venture investors with investments from their funds are not typically ever offered pay for board service, which is expected as part of the investment.  Inside board members, CEO and any other paid employees are not paid for board service in either stock options or cash.

Expenses for travel are often reimbursed by the corporation. 

VC board members sometimes request this, other times do not. It should not be offered to the VC members unless requested.

Next week, we’ll cover what should be expected of a board member in the way of time allocated to the company.

Images produced with Midjourney: Prompt for first: “Four diverse adults sitting around a conference table examining a document for each.  Realistic human images. “

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No surprises! Good advice for all of us.

First, keep your manager or board informed regularly.

Most all leaders new to their position underestimate this time requirement.  It is good for the company when you share concerns, threats and opportunities with your superiors or your board.  The rule of “no surprises” works well for your longevity.  But there are always surprises. The rule is: communicate with individuals or a committee of the whole as soon as possible when important issues or threats to the corporation arise.

Safety, protection, and transparency.

You might be late with a project, sense a possible safety issue, see something or someone breaking the law, or just uncomfortable with a condition or trend. Think of the whistleblowers at Boeing and other very visible corporations.  In the name of safety, they took the chance to step forward.

Involving the board or investors

And sometimes you or your CEO want to obtain concurrence from investors or the board for issues of urgency or importance.  It is not bad form to lobby individual members in the form of a briefing of the issue and give time for the investors or board to debate the issue, sometimes requesting an “executive session” of just the outside directors.

For your senior management or board, this could be time-consuming. 

[ Email readers, continue here…]   Gathering facts may take time but certainly be worth the effort to make the case and reinforce the sense of urgency. The CEO is also responsible for preparing information for investors and for the board, the board briefing package before regular board meetings.  It’s a time-consuming task if done correctly.

What happens to urgent issues when brought to the board?

Especially when there are urgent issues such as surprises to reveal and dissect, the board meeting package should contain the issues to be discussed with backup materials for the board to understand the issues.

Limiting the discussion to those important issues and decisions.

Operating statistics in detail and individual departmental issues that do not rise to the level of board discussion should be included only in an appendix for board and investor meetings for deeper reading, but not discussion.  The CEO should discuss the agenda and board package contents with the chairman (if the chair is a different person) since the chair is tasked with setting the agenda and controlling the meeting.

The time you take to prepare for these urgent discussions is well worth the effort.  But if there is a time bomb to reveal, such as a safety issue, then urgency trumps detailed preparation. You have a responsibility, and in many cases, the authority to step up and make issues noticed, sometimes public, and often easily resolved.

Images created with DALL-E AI using the following prompt: “Casually dressed executive informing group of serious issue at the company with five people listening, some with surprise, some with pensive thought. Realistic human images.”

 

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Take this test to predict your success:

Your success must be based upon data that is solid and sometimes flexible enough to pass several critical tests if it is to guide a business enterprise to greatness.  Here in brief are ten tests for your successful vision.  Try these on for size, and test yourself for attractiveness to the marketplace, to investors and to history.

Ten tests for your business success:

  1. Is your market identifiable and accessible? Test yourself as to whether you can identify the size of your market niche, and whether you can overcome the many barriers to access customers within your niche.
  2. Where in industry life cycle? If your vision is for a product or service that fills a need in a mature industry, you may be flying against the prevailing winds as a market shrinks over time, taking your business with it.  Conversely, a fast-growing industry lifts most all good participants, making excellent companies excel even more and grow even faster, like a small plane flying at 150 knots with a 75-knot tailwind.
  3. How large is your total market? If the total market for your niche is under $100 million per year, it is going to be difficult to build a $50 million business, even if not impossible. If the market is ten times that size, there is probably room for competitors to fight for dominance and still succeed if you are not number one.
  4. Can you dominate that market? The dominant player in any niche controls pricing for all those under it, and often sets the risk profile for new entrants into the niche if the dominant player’s products or services fill the needs of customers at reasonable prices and quality.
  5. [ Email readers, continue here…]   Have you created high barriers to entry? If your business is a “me too” entrant into any market niche, even the smallest success will soon attract competitors that will sap some degree of your potential growth. What can you prove as a barrier to entry for competitors?  Is it the advantage of time – years of development ahead of any competitor? A core patent or “thicket” of patents protecting your offering?  A strategic relationship with one or more of the largest customers?
  6. Are margins high enough? Some great ideas just can’t make money and ultimately die for lack of profit potential.  Profit margins are higher for unique products or services early in the life of an industry niche, or for products protected by patents that prevent others from undercutting you simply by releasing a cheaper product.  High profit margins are a sign of high barriers to entry and attract investors and ultimately good buyers for your business.
  7. Can this business grow to above $20MM to $50MM in annual revenues? This is a basic test for investors, separating your business from those with smaller visions.  There is nothing wrong with a vision for a smaller enterprise if not in need of professional investors to make it a reality.
  8. Do you have a world-class management team? The best way to protect against failure is to attract a team with members who have experienced success and failure and can recognize the ways to manage toward success and avoid the pitfalls previously experienced from past failures.  From a professional investor’s perspective, the team should be able to be flexible, coachable and experienced enough to get a business through breakeven and beyond the next level of outside investment, greatly reducing execution risk.
  9. Can you translate an idea into a compelling product? Some great ideas just cannot be made into a product at a reasonable enough price to attract customers.  And some attract early adopters but cannot pass into the mass market.  Sometimes, an idea is just too early for the available technology to make it attractive.  Early cell phones were large bricks that required a large carrying case and cost up to a dollar a minute to use.  As technology caught up, allowing miniaturization and light weight, mass adoption drove the price down and allowed the building of infrastructures everywhere to support the use of inexpensive minutes.  Do anything you can to develop compelling products or early prototypes as proof of ability to reduce your technology risk.
  10. Is there an exit strategy for the investor(s) over time? There are many professional services businesses that make fine lifestyle opportunities for architects, doctors and dentists.   But these types of businesses are not attractive to potential buyers willing to pay a premium for businesses that are worth millions more than their asset value.  Building a great business to create wealth for the entrepreneur at exit, means thinking of the exit strategies from the beginning.  Who or what type of buyer would be attracted to this business if successful?   Great wealth is made from selling great businesses at immense profit for the entrepreneurs and investors who took the journey.

Note: All images created for this blog by Dave using AI prompts with Microsoft Designer (DALL-E).

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Posted in Finding your ideal niche, Positioning | 1 Comment