So, do you have that entrepreneurial DNA?

My immediate family members were entrepreneurs from as far back as I can trace.  Dad was a jeweler, then a furniture store owner.  Mom wrote books and articles from her college days until she could no longer see the keyboard.  One grandfather owned and maintained his apartment houses.  The other was a grocer, then a jeweler.

My entrepreneurial start

So, it seemed perfectly natural that my brother and I find our separate callings as entrepreneurs from the very start.  I took pictures of neighbor children, developing them in my bedroom closet, selling the prints to those neighborhood families. I was twelve.  The prints were not very good.

The first “real” business

At fifteen, I started a recording business that would pay my way through college, a business that I’d take public in a limited IPO years after, before getting into the computer software business in its infancy.  My brother, who had an artist streak where no-one could identify its roots, drew pictures that were extraordinary, and became one of the world’s one hundred most noted architects.

Our two important drivers of innovation

[Email readers, continue here…]   What drove my brother and me to perform, to risk so much, to skirt bankruptcy, to press on again and again?  For us, I believe it was two important things.  First, our family DNA made us comfortable talking about risk and self-discovery in running a business, even without formal training.

Second, and more importantly, my brother and I watched our dad run his business in the most conservative manner possible, refusing to expand or take risks, comfortable with a steady income and no prospects of building wealth through building business equity.  Both of us reacted in different ways, but in common was the urge to take much more risk, to push the boundaries, to succeed spectacularly or fail and start again.  We reacted to our view of dad’s conservatism.

Dad’s story of risk avoidance

We tell the story that dad was offered the general store franchise in the brand-new park in Anaheim soon to be built by – you guessed it – Walt Disney.  The price for the franchise in 1953 was $50,000.   Dad turned it down, stating that there was no chance of success for a park so far from downtown Los Angeles.  His two sons observed, and perhaps reacted in later years by pushing to take the chance for themselves equal to that declined by dad.

Now, how about you?

Are you a DNA-based entrepreneur? Or are you starting out to build the next Cisco Systems because you know how your employer has failed to do so? Or do you want freedom from the senseless bureaucracy you face daily in your present job?  Have you found the cure for cancer and need to bring it to the world?  Or is your reason for risk more basic – that you found an easy opportunity to fill a need and you have the skill and desire to take that chance.

Think for a minute about your real reasons for taking this ride. It will help you to make better decisions about future risk, about your tolerance for it, and about your inner self.

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Posted in Ignition! Starting up | Leave a comment

Entrepreneurs do not easily retire.

So, you’ve successfully sold your business and have received enough money from the sale to become financially independent, no longer having to work for a living.   That is a comfortable place to be, and it is one experienced by more and more people, especially in technology-based businesses.

And what’s next?

Most successful sales of businesses, again especially in the technology arena, enrich younger entrepreneurs and stock-option holders who are under fifty years of age.  Having interviewed many of these newly rich alumni, I have found that most want to take time off for an indefinite time to think out their next move, which is not a bad idea.  Some immediately start to plan their next venture.  And some tell me that they will just retire, finding travel, coaching, teaching and a life of leisure their most attractive alternative.

A second act?

I followed many of these stated retirees, and very few if any retiring entrepreneurs stay that way for long.  Their lifestyles may change, sometimes dramatically, but for a driven entrepreneur, a full stop is difficult over time.

Just saying…

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Shareholders and founders: The muted thrill of the deal closing.

Now you have worked for months to get this deal to the closing, anticipating the wire transfers to the shareholders that will come any minute.   This could change your lifestyle and give you that much needed pause in your life you have been looking forward to.

How it happens today

All the documents were signed in a rolling series of emailed scanned or DocuSign signature pages during the past week or more, with each party signing their own set, never having to be in the same room to sign the single signature page for each agreement.  And in the end, the deal that means so much to you closes with a whisper.  You check your bank account every half hour to see if the wire has been posted.

And if you are a major shareholder:

Finally, it arrives, and you see the balance in your account jump to a number you’ve never seen there before.  You pause for a minute to savor the victory.  And you go back to what you were doing right before that moment.  Or not.  But the closing was such a non-event that you wonder why people even call it a “closing.”

Congratulations.  You have joined an exclusive club and have earned your membership.

Memories of how it used to be

[Email readers, continue here…]   It used to be thrilling to participate in a real “live” closing.  The date and time of the closing would be published for all interested parties.  The lawyers for both buyer and seller would meet the day before to go over a “trial closing” to be sure all documents were ready to sign.  And on the appointed morning, often at 10 AM, all attorneys, the investment bankers, you and your buyer’s CEO would all gather in a large conference room with documents already spread around the conference table.

After pleasantries, you and your opposite CEO would pick up your (fountain) pens and start moving around the table, signing agreements in the appointed spots until your fingers were weak from the effort.  The lawyers would follow and check, then finally all nod that the work was done.  A handshake, applause, a promise to meet the next day, and a celebration closing meal either immediately following or at a future time sealed the deal for all.

Those were the days.  The smell of the newly copied papers, the smudges from the fountain pen ink, the tension followed by smiles all around, all contributed to the feeling that something grand was happening.

And my favorite closing memory…

My favorite closing followed this pattern with a twist.  There must have been 25 of us that arrived for a 4:00 PM closing after the day-before trial closing by the attorneys.  We all expected to be finished and out of there for a late dinner.  At five the next morning, after an all-night session with revisions, midnight calls to the buyer’s parent CEO in New York and more, we finally signed the papers, all completely worn out from the many anxious moments and long, long night.  All the parties vowed to go home and get some sleep.  I went home, took a shower, and went to work as if a typical day, working now as CEO of a subsidiary of a parent company.  And yes, I checked the bank account every half hour for the wire transfer.  Some things do not change.

For those of you who ever experience the muted thrill of today’s electronic closing, you can give a nod to those days when the sometimes-smoke-filled rooms were real and the tension palatable, when a closing was a face to face event.

 

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Posted in General, The liquidity event and beyond | 4 Comments

What use is an investment banker?

Many CEOs have asked me if I felt an investment banker adds value if the buyer has already been identified.

How investment bankers behave

Investment bankers sometimes slow the process by requiring a cloud-based “data room” and  “deal book” to be prepared containing considerable information about a company to help a buyer.  Deal books are expensive to create.  If you have a data room already, all the better.

Other investment bankers insist that the company create competition for a deal, even if the buyer has already submitted a letter of interest to the seller.    Competition opens the deal to more public access, slows the deal and could give competitors wind of an otherwise confidential process.  And yet, it is almost universally acknowledged that without competition for a deal, the price will be lower, sometimes much lower.

Then there is the question of fees.

For small deals, an investment banker will ask as much as ten percent, although the average is slightly above half that.  For larger deals, expect the fee to start at five percent and scale downward with size.  And expect the investment banker to ask for an advance against expenses of at least $20,000 or much more with larger deals, with any unexpended funds not to be refunded.  If a buyer is already in hand, many will work for far less in percentage fees, and even in advances, because much of their work is done at that point.

An unexplained conflict of interest

[Email readers, continue here…]   And there is the question of whether an investment banker has a personal agenda to get a deal done in minimum time, even if the proceeds to the seller are less than could have been expected.  Is there any conflict of interest?  Is this not a parallel to the question of a real estate agent who cares little about that last five or ten percent of the purchase price, if it would kill a deal or slow its close, since the agent’s  commission amount is only a fraction of that difference?

How about the corporate attorney guiding a deal?

And finally, could not the corporate attorney do just as good a job of negotiating a great deal for the seller, and do it for hourly rates instead of a percent of the transaction?

In my experience, the answer is…

My experience is that good investment bankers do add significant value to a deal in most cases, easily earning multiples of their fee by increasing competition, upping the price, and finding areas for extra value that the seller did not think of.   Good investment bankers work with your attorney to structure the deal, help the seller to see more of the value hidden in the candidate seller, and increase the sense of urgency to close the deal among all parties.

Insulating the CEO and team as negotiations get tough

Perhaps most of all, a good investment banker will insulate the seller CEO against the anger and ire of the buyer during the process that always accompanies stressful negotiations or issues revolving around the seller CEO’s continuing employment contract.  Imagine you’re fighting with the buyer CEO about your expected salary and benefits during a transition period to follow, expecting to work harmoniously with that CEO after all the tension and conflicts during the negotiation of the deal.

And imagine having that buffer in the form of the investment banker arguing on your behalf while you sit silently, giving up little or no good will during the maelstrom around you.

Your next steps

Presented with these mental pictures and the recommendations from so many of us that have done deals with and without investment bankers, you may lean toward interviewing a group of your industry’s best for the size of your deal, and being convinced that creating such a team is a good investment.

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Posted in The liquidity event and beyond | 4 Comments

What’s a “data room” and how do you use it?

First, what’s a “deal book?”

Maybe you have not heard the term, “deal book.”  That’s a comprehensive piece on a company for use by a buyer in determining fit.   A “deal room” is a cloud-based or physical space dedicated to storing the massive amounts of data to be used in due diligence by a buyer, lender or by an investor.

Your data room and its contents

Data rooms contain access to or copies of all significant contracts with suppliers, customers, consultants, and others.  All corporate governance documents, from incorporation articles to minutes of all meetings of the board are maintained in the deal room.   Up-to-date insurance policies, leases, financial documents and schedules such as fixed assets are copied here.   Copies of intellectual property filings such as patents, copyrights and trademarks, all owned URL addresses, and even copies of source code, may be resident in the deal room, dependent upon the type of buyer.  Current documents relating to any lawsuits by or against the company are maintained there as well. 

Who will use it and when?

In this day of electronic record-keeping, access to the deal room is available remotely by a buyer with appropriate access, saving the long and expensive personal visits by lawyers, accountants and others to the seller’s facility.   Well-maintained deal rooms enhance a company’s image with a buyer, quicken the pace of the deal, help maintain secrecy from employees while due diligence is in process, and lower the stress levels of all parties during the process.

When to start a data room?

[Email readers, continue here…]   But maintaining such an electronic or physical facility is time-consuming and costly.  The question is whether to start this exhausting process early in the life of a corporation, or rush to complete it when a deal is identified or the run to a sale is imminent.

Because deal rooms have multiple applications, the best advice is to begin the process right after incorporation and make keeping it current a continuing job of your financial senior management.  Whether it means copying physical printouts and creating volumes in three-ring binders or scanning documents and creating electronic folders, incremental additions are much easier to make than an all-out run at the finish.

The payoff

Bankers, investors, strategic partners, and ultimately your buyer or even attorneys providing opinions for an IPO, will all be most impressed by your thoughtful early management decision to make their lives easier and their job more productive.

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Posted in The liquidity event and beyond | 4 Comments

A million things can kill the deal.

So, you’ve found the buyer, received a letter of interest, signed it, and exclusively tied your company up for a period to complete the deal.  Everyone on the board is anxious to close this.  You’ve committed time to do whatever is needed.  You’ve informed your top management of the pending but still secret deal and they know they will be impacted and are a bit skittish.

Worrying over a public announcement?

You wonder if you should make a public announcement to your troops, worrying over loss of focus, people thinking of jumping ship, competitors finding morsels of weakness to exploit.

Welcome to the club.  If you’re seeing this movie for the first time from the top, you need to ask many questions and be led by your outside team, whether legal, financial, accounting, or networking – or all.  The months between the LOI and the closing are as stressful as any you will experience as a CEO, and there are few ways to reduce the stress.

Keep the deal a secret even as the buyer leans in?

[Email readers, continue here…]   First, should you inform your employees of the deal?  You know that the buyer will be crawling the offices with legal and accounting personnel, reviewing contracts, financials, governance documentation, intellectual property, leases, and much more.  How do you explain this if not by making a general announcement?

When to make an internal announcement

Let’s back up to the headline.  “A million things can kill the deal” is a statement from an experienced professional, and worth listening to.  During the due diligence period, before the signing of the definitive documents and establishing the closing date, it is not wise to make a general announcement, and certainly not wise to make a press release.  Public companies are forced to release this information in most cases after the LOI is signed, and this may impact you if being purchased by a public entity.

What can kill the deal after the LOI is signed?

What could happen to kill the deal that looks so good to all now?  For starters, as the due diligence and documentation period drags on, you’ll have to keep your company’s eyes on the ball to continue the increasing revenues and profit momentum.  A bad quarter in the middle of the process will certainly lead to the buyer either withdrawing the offer or more likely reducing the price, sometimes to a point that is unacceptable to you.

How can you derail a deal?

Few companies are squeaky clean.  And in this age of Dodge-Cox and Sarbanes-Oxley regulation, public companies are thrown by any hint of activities that might have seemed all right in the past world of private enterprise, but don’t fit with the regulations on public corporations today.  Paying commissions to undisclosed third parties in order to obtain deals, hiding or entering misleading financial data, associating with anyone with a past SEC suspension, and many more “gotcha” events, qualify as strong deterrents to a good closing.

What about events you can’t control?

Events that you cannot control such as changes in the buyer’s circumstance, a drop in the market price of the buyer’s stock, a bad quarter at the buyer’s shop, all can contribute to abandonment of a good deal.

Both sides have to work to get a deal closed.  Professional advice before and during the process is necessary.  No one can do this alone, especially a CEO who is involved and too close to see many of these issues.

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Posted in The liquidity event and beyond | 2 Comments

Decoding and learning from a business failure

Have you experienced a business failure? Are you currently at risk due to events you cannot control?

Not all companies are successful. Your end game could be a failure of the business.  In fact, many angel investors or venture capitalists look for and respect the lessons learned by entrepreneurs that have survived a failed business.  The key question is: Why did an entrepreneur fail? And then: What lessons were learned from that failure?

You will have “seen the movie before”

One VC I know calls this entrepreneur someone who “has seen the movie before” and even if it was the investor’s money lost as well, he spends time questioning the entrepreneur on lessons learned, often praising the person for having figured out the issues leading to the failure.  Investors learn too, and often invest in a failed entrepreneur a second time if believing that those lessons have been well learned,

Success can teach lessons too

Yes, it works both ways.  A successful entrepreneur who has seen the movie before is even more valued.  But in these days of fast failures, of COVID-based markets drying up, and with the knowledge that 50% of all startups fail anyway within a few years of formation, there is a lot of learning to be had out there.

What questions should you ask?

[Email readers, continue here…]   Questions you should ask include: “What were the major factors contributing to the failure?” “How quickly did you and your team change the plan when faced with the first signs?” “Did you miss the chance to pivot based upon rapid market changes?” “Did you seek outside guidance?” “Was this a failed idea from the start?”

Blaming failure on undercapitalization or…

Most failed entrepreneurs blame undercapitalization for the cause of the failed business. Investors do not like to hear this excuse, even if true. Any business can use more money.  It is up to management to scale development, marketing and production based upon resources available.  Including cash.

The economic environment changing downward

Add the economic environment to the mix of reasons for failure, including jolts such as the Great Recession of 2007-8 or COVID’s devastation to travel, retail and other personal experience-based businesses.  Sometimes a failure is out of a business leader’s control, such as mandated stay-home orders from city, county or state authorities during the COVID crisis.

But sometimes, a failure comes from the investor side

Occasionally the investor does not fulfill those promises, even if in documents optimistically created at the start. This risk is especially dire when relying upon individual investors experiencing their own problems during a recession.  There are lessons to be learned about reliance upon outside investors, including your too-early use of investment funds, or your irregular communication with investors until needing money, all to be gleaned from such experiences.

Failure as an opportunity?

So, consider a failure as an opportunity. Some entrepreneurs will flee to safety and seek a stable job in the wake of a failure. Others, often serial entrepreneurs, will carefully think out the experience and vow not to repeat it, creating an intellectual advantage over others making their run in the establishment of a new venture.

How about you?

Have you experienced a business failure, or are feeling like your boat is being controlled by the tide no mater what you do or did?  If this is a current risk, can you pivot?  If in your past, can you analyze and learn to explain the reasons for the failure?

What about next time?  Now, that’s a question for anyone experiencing or having experienced a negative outcome.  We are mostly a bunch of optimists.  Let’s rely upon that to drive us all forward, no matter what the course to be navigated.

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Posted in Hedging against downturns, Protecting the business | Leave a comment

What’s your personal-business end game?

Remembering our original vision

When we start a business, we are optimistic that we will succeed and dream of riches to follow when the company is sold or even getting all the way to an IPO.   Some of us build our businesses to be lifestyle creations, destined to provide for our families but not necessarily as creators of great equity upon an eventual sale.  But most of us dream of selling the business someday for lots of money and building our wealth upon that event.

Envision your end game when you start

So, it is important to envision that end game even at the outset, especially when planning to take in money from others as investors, all of whom will seek a payoff someday in a sale or IPO.

An important exercise with your board and advisors

  An effective way to do this is to make a list of up to ten possible future buyers of the business, and to spend time defining what those buyers would want when purchasing your business.  Would it be your intellectual property?  Your skilled employees?  Your brand and market recognition? Your distribution channel relationships?  Whatever you envision that value to be, you should work to build that portion of your business by paying special attention to it as you work to build the operation.

[Email readers, continue here…] 

Focus your decisions and resources to build value

Step by step as you make decisions to allocate your scarce human and financial resources, you should remember where the ultimate value should be at the end game.  It will help you to explain the value of your business to potential investors and certainly help focus your efforts as you advance toward that goal of a liquidity event in your future.

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Posted in General, The liquidity event and beyond | 1 Comment

What would happen to the business if you die, leave or are disabled?

Yes, we’re invincible when young

When we are young and early in our business lives, we feel infallible to the degree that we do not think of what might happen if we die while in office or decide to leave the company for any reason.  Such thoughts just do not occur to most of us until the business is substantially far enough along in its growth to have multiple layers of management and enough employees and stakeholders that there is a board of directors and calls for key man insurance and succession planning.

Three stories where young CEO’s I knew died in office

I personally observed relatively young CEOs die while in their prime and while in office. Three times.

One had a heart attack while exercising at home.

Another died of an infection immediately upon returning from his honeymoon.

And a third died on the operating table during a heart operation.

Looking for the succession plan.

[Email readers, continue here…]  In each case, from five to hundreds of employees depended upon the continuation of the business and looked to the board of directors for immediate assurance that a plan was in place. And in these three cases, there was none.

The board of directors acts quickly and sometimes effectively

However, in each case there was a board of directors, and each board moved to protect the corporation quickly as people absorbed the shock of loss.  The outcomes were quite different with one board fending off immediate threats of lawsuit by creditors, another coaching a key employee into the CEO job, and the third electing a board member with experience to step in as CEO.

Not an easy conversation- succession planning

This is one sticky conversation for most young executives.  Have you thought of who might succeed you if you are incapacitated or worse?  Have you documented your position so a successor would know not only what you do but enough of how it is done to perform necessary functions early on?  It is rare when either is in place, yet experience has proved that none of us is infallible and planning for succession is a protection for those left behind.

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Posted in Depending upon others, Protecting the business | 1 Comment

Selling your company for less than expected?

How about outside investors?

Sometimes the end game or sale of the company is not a happy event.  Especially when outside investors, venture capitalists, or angels, have put in substantial money and the sales price is less than the value of their investment.  Most all experienced VC and angel investors have found themselves in such a situation, since it is the unfortunate truth that half of their investments fail, on average, within the first several years of the investment.

Dig into investment agreements for those expensive clauses

There are some questions a distressed sale brings to mind.  Does the board declare dividends upon the preferred stock invested in order to increase the amount paid out to the preferred – at the expense of the common – shareholders, which usually includes the founder(s)?  Is there a liquidation preference in place where the preferred investors can take a multiple of their investment, (twice or three times the amount) from a sale before the common shares receive anything?  Is there a participation clause in the investment agreement where, even after the preferred shareholders take their share, their stock also converts into common stock and participates (again) alongside the common shareholders?

Conflicts of interest with preferred investors

I have been on a number of boards where just these decisions are faced, often with the corporate attorney in the room as protection, with the specter of conflict of interest looming over the discussion, as board members who are preferred investors decide how to divide the proceeds of a marginal sale of the company or its assets.

[Email readers, continue here…]   A recent decision by the Delaware Court in favor of the common shareholders in marginal sales sheds light upon this dilemma for boards – at least for boards of Delaware corporations, no matter where they reside.

Can you protect the common shareholders?

The Trados Decision (Delaware Court of Chancery) protects the common and early stage investors even if the late stage investors can claim all from a sale with their liquidation preferences.  Directors can be held liable under certain circumstances for favoring the interests of preferred shareholders over common stockholders.   This raises the bar for venture capitalists in a marginal sale of a business.  It brings forward the question of conflicts of interest between VC investor board members and the shareholders they are legally bound to protect.

Investor notes vs. stock late in the game

And yet, VCs sometimes bravely put in more money near the end of the life of a company to bridge the company to a sale of assets in an attempt to recover some or all of the original investment.  This late money is at much higher risk to the VCs than even the early stage investments that were optimistically made by angels or friends and family.  Most of the time, this late money is advanced in the form of a loan, and all loans are paid out of funds before any investors receive their first dollar of return.  When this is the situation and the proceeds of a sale are too small to cover even the loan, there is no conflict between shareholders and note holders or VCs.

As the amounts recovered from the marginal sale increase, the conflict of interest problem becomes more acute.

A Delaware court decision may protect you

Guided by the Trados Decision, preferred investors should think twice before exercising the full amount of their documented preferences in a marginal sale, volunteering to leave some of the proceeds for common shareholders, perhaps in a negotiated agreement once the amounts are known and absolute.  This is rare today, but with the court decision in place, may become more of an issue in the future.

There is a time for all investors and founders to celebrate

Of course, once the amounts from a sale or IPO exceed all the preferences by a substantial amount, everyone is happier since the preferred shareholders must either take their multiple of investment or convert to common, losing their preferred preferences, and participate ratably (or equally) with all the common shareholders.  These are events to celebrate, since it certainly was the intent of all parties at the point of original investment to witness the day when just such a split of the proceeds would occur.

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Posted in The liquidity event and beyond | 1 Comment