The 18-month rule and a harrowing tale

It can take 18 months from initial concern about a critical employee to getting a replacement up to speed.

Of course, I’ll tell another harrowing story here. But first. an old friend, Dick Tanaka, gets credit for the 18-month rule.  He observed that the process we follow to be humane in our handling of under-performing employees, manage the risk of future lawsuit, finally then move to separate the employee, define the open position, recruit the candidate, train the new hire and count the new hire as up to speed in the job can take all of eighteen months.

The costs for a failed hire and underperformance

That is a shock in so many ways. First, the costs for under-performance are both tangible and intangible, with lost revenues, lost opportunities, lost savings and loss of productivity from low employee morale difficult to estimate.  There are those in the recruiting industry that have attempted to do so and depending upon the size of the company and the position replaced, seeming to settle upon astronomical lost costs that overwhelm most of our ability to understand.  All of us will admit that, looking back at a failed employee hire, the costs were well beyond the payroll cost for the individual.

How about senior managers no longer at speed?

Perhaps this is a good time to speak about senior managers that are well-entrenched in the organization but are under-performers because the organization has passed their ability or span of control.  It is important to note the trauma of separating an old friend or close associate, or even a family member.  There are few good rules for conduct in these instances, other than honesty in pointing out the problems, and doing everything possible to preserve the individual’s dignity.

A personal story illustrates the point too well

[Email readers, continue here…]   Early in the rapid growth phase of my computer software company, I hired an excellent, IBM-trained vice president of sales to further growth and begin our international expansion.  He did so with gusto, and for several years was directly responsible for our growth into a total of 29 countries, including establishment of six foreign subsidiaries.  Annual growth in revenues was between 50% and 100%, amazing and exhilarating.

But he had a habit of bellowing out at underperformers, bullying others to get his way, and doing so in ways that rubbed all other managers the wrong way as he dominated meetings, and made it difficult for others to contribute.  Surely a result more of his urban New York upbringing, I put up with these character traits as the cost for his amazing performance.  And you might guess that, as his superior, I did not experience any of the threats to my job or dignity that apparently all others did.

The confrontation that came out of nowhere

I received a call one day from one of my country managers, stating that he and all my senior managers would be at a meeting room in a nearby hotel the next evening at 7.00 PM, and that the vice president of sales, presently in the air traveling to the very country where the manager was to meet him, was not to be present.  I was shocked and disoriented, a CEO with no idea of the urgency of the situation that was developing, since there had been no warning.  Fourteen people, including the country managers and all the vice presidents, were to be there.

I immediately called an industrial psychologist I knew, asking him to be at my side during the meeting to listen and interpret the mood of the meeting.  (I have an industrial psychology educational background but could not count upon myself to be completely objective here, of course.)

Then the meeting no CEO would want to attend

We walked into the meeting at the appointed time.  Apparently, the meeting had been going for some hours.  Everyone but the sales VP was present as anticipated.  As the psychologist and I listened to one after another of these, my most senior talent minus one, describe the assaults to their very souls, the affronts to their self-respect, the hobbling of their ability to perform, I was overwhelmed.  There had been comments from some of these individuals in the past, but never voiced as an orchestra, and never with evidence so overwhelming and irrefutable.  As the presentations of each concluded, my senior-most VP stood and stated calmly that if I would not remove the affronting individual, each and every one of the people present had agreed to resign.  Now that’s an act of desperation or defiance rare, perhaps unique.

An industrial psychologist helps (me) the CEO

I asked for a few minutes to confer with my associate, the industrial psychologist.  You might guess that it took less than that few minutes.  As we returned to the room, I turned to the psychologist, the only third party in the room, and asked him to give the group his candid response to what he had heard.  As I recall, he stated quite clearly that in many instances he is hired to repair relationships at senior levels in companies with such problems, paying special attention to coaching and training the offender, sensitizing him or her to the traits probably not noticed in self.  But, he stated, as I recall, “This one is for the books.”  He had no advice other than to just do it and now.  Of course, I had come to the same conclusion, even though at least in the short term, sales growth would suffer.

How a difficult executive separation payed out

The rest of this story, if I took the time to tell it, would deal with the humanity of this next step, and retention of the dignity of a superior performer in all ways but one in his management abilities and in dealing with contemporaries and subordinates.  I recalled him immediately back to corporate headquarters from his landing in Asia, and fired him after discussing the reasons with care, negotiating a reasonable separation package.

The culture of the company thrived, and I could feel a collective sigh of relief from people even far below the level of senior management.  Although we had little contact after all the years, I remained friends with this superior performer to the day of his death years later.  He understood, acknowledged the personality trait that failed him as one that had haunted him in his past, and became part of the solution once he and I had all the facts on the table.

It is a story that is extreme, relies upon one fatal character trait, but in other ways probably could match one or more of your own stories to tell or someday to experience.

Posted in Depending upon others, Growth!, Protecting the business | 3 Comments

Entrepreneurs: Employment law is not on your side!

Small companies most often scrape by with borrowed or invested funds, doing everything possible to grow and prosper with limited resources.  So, it is like a punch in the gut when an employee makes a claim against the company for a perceived or actual but unintentional violation of a law or regulation.  Or when a former employee strikes out with a suit claiming discrimination for one of a thousand causes.

One story just keeps reverberating through my mind after several years of hearing it from a fellow CEO.  In brief, an employee with an alcohol problem that he took to work was fired after several warnings. He sued for age discrimination and was awarded $500,000 for his efforts.  Small company; outrageous outcome.

Almost all laws dealing with employment are designed to protect the employee, not the company. Minimum wage laws, workplace safety, independent contractor tests, minimum hours required for benefits, overtime rules, discrimination protections, worker compensation insurance requirements and more are examples of such laws.

[Email readers, continue here…] Notice that every poster that is required to be displayed in a company public area (usually the lunch room) is posted for the benefit of the employee to inform him or her of rights granted by law.  To most entrepreneurs, this often leads to an event whose resolution by a governmental agency or even a court seems unfair and illogical.  Issues that seem clearly based upon ineptitude morph into age or gender-related epic battles that most always end poorly.

So, my advice is simple.  Recognize the realities of the times; and do all possible to protect the company by documenting behavioral or skill related problems to the employee file.  Hold regular reviews for all your employees right to the top. (The chairman reviews the CEO, and if there is no separate chairperson, then the CEO should ask an outside board member to do so.)   Encourage reviewers to be accurate, not just polite, in documenting areas of concern.

This is not to counter my previous advice: “Fire fast, not last”, since every CEO should shoot for “A” class employees and not tolerate underperformers over time.  It is a balancing act, protecting the company while making sure all those who work there are “A” or “B” level contributors.

Posted in Protecting the business | Leave a comment

Insurance is always too expensive – until it’s needed.

I expect that you have a story about how insurance saved you lots of money in your past. As usual, I have a story to make your hair stand on end.

But first: here’s a fact. Business insurance is one of the more poorly managed mitigation of risk in small and many medium sized corporations, often because of failure to assign the responsibility to an individual or department, and sometimes just from the willingness to bet against the event and save cash.

Business package policies

Business package policies are inexpensive and comprehensive tools that should be contracted by all companies with any assets to measure and protect.  A typical beginning package for a small company costs about $4 thousand a year and covers several forms of liability for both premises and product as well as employee use of self-owned cars for work, theft, employee dishonesty and more.  There is usually a small amount of business interruption insurance in the standard package, and more protection can be added at a cost.

Here’s how to be truly scared

Reading the list of protections covered by a typical policy is frightening, since most of us never think of such risks. It is overwhelming to have them pointed out in one reading.  But watch out. The list of excluded protections is equally frightening for the same reason.  Perhaps that is why using a good agent is important. We do not think of these exclusions unless someone with experience points them out.

My story about an event that changed business insurance

I believe my former software firm was responsible for one such exclusion that used to be a standard part of such policies. (Sorry about that.)  With almost 250 employees, 26 of whom were application programmers, it was important to back up the work of these programmers each night, and an employee was tasked with just this each evening after midnight.

Each night’s backup would be carefully marked and the rotated between offsite and on-site locations in a series of steps so that backups of a day, two days, a week and a month were all available both on site and off site.

Did I fail to mention that for more than a year we never tested whether the backups contained good data?  It seems that a change in the operating system on the server we used for development was made that changed the way backups were cued, and our backup person was unaware of the procedural change needed to accommodate this.

The head crash heard round the world

Fast forward to the inevitable day of the massive head crash. I quickly heard of the problem and the fact that all 26 programmers were standing by waiting for the backup to be restored, expecting to lose the partial day’s work.

And the first backup from the night before was blank.  As was each subsequent backup, on-site and offsite.  Big OUCH!  It took weeks for the team to assemble code from various sources such as customer sites, beta test locations and demo machines.  (For you with programming knowledge: Lucky for us that it was interpretive not compiled code.) Then it took another several weeks for the programmers to come back up to speed rewriting patches and programs in a frustrating re-creation of weeks and more worth of previous work.

Turning to insurance to cover the expense

I tasked our accounting department with collecting and calculating the costs of the labor lost, which was the only real claim for business interruption to be made as customers were unaffected by the problem.  The cost came to well over $100,000, and a claim was filed with the business package insurer.

After a short negotiation and quick audit, the insurance company paid $108,000 to settle the claim.  The year was 1987.  So, that would make that insurance payout $232,000 today, accounting for inflation.

The Insurance company reacts

In the following year’s renewal policy, I noticed a new page in the exclusions section, excluding for the first-time data losses from failed backups, no matter what the cause or where the fault.

Either we were the first to make a significant claim under this previously covered portion of the policy or one of several that did so in that year. Either way, you have me to blame for one more of those exclusion pages that overwhelm such policies today.

And that is why insurance policies seem to add more exclusions each year.  Sorry about what may have been my contribution to list…

Posted in General, Protecting the business | 1 Comment

Any advice can be worthless, or worse.

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.

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.

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).

[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.

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.

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…

Posted in Depending upon others, Protecting the business, Surrounding yourself with talent | 3 Comments

I won’t serve on a board without D&O insurance!

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.  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 finding all the members of an LLC, and suing every member found.  Whew!

Whenever there are outside shareholders or note holders, 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.

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.

[Email readers, continue here…]  Recently, insurance companies have added employment practice liability insurance (EPLI) to the package to address specifically the recently-increasing 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!

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.

Additionally, I have always insisted that a company CEO sign an indemnification agreement, which indemnifies the director in any event of a lawsuit using the full financial resources and staff capabilities of the company.  This may sound harsh, but in reality, the insurance obtained does this.  However if a policy lapses and is not renewed, and if the directors are not informed, this agreement forms an underlying defense backed by the corporation.  Unfortunately, there are times when early stage companies just run out of money and cannot renew their policies and therefore have little resources to pay lawyers for defense of claims.  And unfortunately, it is often during these stressful times that shareholders are angered by perceived or actual under-performance by founders and boards.

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 each of these rather spurious suits, 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 – for another time.

Posted in Protecting the business | 6 Comments

How about your board members’ time commitments?

Expect a board member to give a meeting a month, emails and phone calls between.  Urgent issues require more of all.

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 all board members freely receive phone calls and emails from the CEO during the month, all considered part of service.

There are times when board members are called upon to give extra-ordinary 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.

You would 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.

[Email readers, continue here…] 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!


Posted in Surrounding yourself with talent | Leave a comment

How do you pay an early stage board?

Give one percent equity to each outside board member vesting over 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 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.

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.  Further, the option should contain a special clause 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.

[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.

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.

Posted in Depending upon others, Surrounding yourself with talent | 3 Comments

Please learn this: “Noses in; fingers out!”

Many of us have someone who reports directly to us and who supervises others in return. If that fits, well then, this one is for you. And it is one of the most important lessons you can learn as a manager or board member of a company or a non-profit enterprise.

I first heard this expression in a governance seminar for a non-profit higher educational board upon which I sit, years ago.  It made an impact and stuck with me through the years.  I have repeated it often to boards deliberating action, to individual board members seeking to get their hands dirty inside the corporation by giving advice and helping at levels beneath the CEO, and to senior executives or managers as well.

The problem this addresses cannot be overstated. Once a person of higher authority reaches beyond their direct report in an organization, especially without the approval of that direct report, incurable damage will have been done to that person’s ability to manage.  Even if not the intent, there is an instant change in dynamic once this line has been crossed.  Sound overstated? It is not, and that is the lesson here.

[Email readers, continue here…]  Here is an example, even where your presence without speaking can do harm.  Once again, it is a personal story where I had to relearn this mantra first hand. As chairman of a company in an industry where I have extensive experience, I elected to attend a regular meeting of the management team with its middle managers on a Monday morning, a practice I had not done in the past.

I found the meeting to be unusually quiet and tame to say the least. The CEO spoke, shared metrics, spoke of issues to be addressed during the coming week, and did a fine job of pointing the assembled troops in the right direction. I could not have been more pleased.  After returning to my office, I received a call from the CEO. ‘Would I please (oh, don’t take this wrong, Dave) not attend these meetings anymore?’

What I took for unusual silence was a complete disruption of the normal give and take of the management group because of my presence.  My chairmanship carried unstated power even if not overtly demonstrated, since the CEO reports to and is accountable to the board, and of course its chair.

I learned from this that there are times when members of the board are appropriately brought into an operating group, and certainly times when the board should hear from vice presidents presenting their issues in a board meeting.  But the position of CEO is absolutely to be reinforced at all costs, never to be undermined by any member or by the board as an entity.

Now insert your position, no matter how low or high in the organization.  How would you feel if a more senior person stepped into your meeting, instructed your direct reports without your permission, or generally took over a process you controlled?  Yup. I thought so.

Sure, it is appropriate for the senior person present to ask the tough questions, request help in understanding issues, seek permission from you interview others.  But that senior person should never react to statements heard by issuing directions or hints of action in return.  It is appropriate to state that you understand much more after the briefing and will better be able to address the problem with others.  It is not appropriate for you to promise any action to anyone beneath that person at the next level.

So, let’s repeat the lesson. Noses in; fingers OUT.

Posted in Depending upon others, Surrounding yourself with talent | 4 Comments

Hire a consultant; ignore the advice.

At one time or another, most all businesses use consultants to fill the gaps in knowledge or to provide guidance for management.  Consultants are good in that you can sample their work with short projects, change to other consultants quickly, and stop using them when a project is completed.

I have a partner in a consulting practice that specializes in the travel industry.  Several years ago, we were hired by one of the largest companies in the industry (yet another Fortune 50) to perform a top-to-bottom audit of their processes across 27 facilities, and recommend measures to increase efficiency, increase income, better the customer experience, and of course, decrease costs while also increasing the quality of service.  We were quite confident that our services would yield great, measurable results.  The work continued for about eight weeks between the two of us as we visited the 27 locations and worked with employees in departments across all disciplines within each location and at central offices that performed services for all locations.

Finally, at the end of the project, we had identified nineteen specific issues, each of which would, if implemented, accomplish one or more of the goals outlined at the start of the project. The sum of the savings and increases in revenue were worth multi-millions annually, well worth the implementation of most or all of the recommendations.

[Email readers, continue here…]  On the final day of our assignment, I was responsible for the “reporting out” to the assembled twenty or so executives in the large conference room of this major corporation.  I started my presentation, which had been carefully documented in handouts and PowerPoint, with this story…

“I want you to all imagine that it is tomorrow morning, looking back upon today’s reporting of these past months of work by your consultants.  Imagine that today I build for you a beautiful sand castle exactly at the water line of the ocean nearby.  Tomorrow, we both will visit that beach and look at the water line, and find not a beautiful castle, but just smooth sand, just as it had been the day before building our beautiful sand castle.  In other words, I would not be surprised if you accept our report today with enthusiasm, but then in the overwhelming rush of daily business, fail to implement few if any of these recommendations that you so enthusiastically received.”

The story is true, and the results were as I predicted.  A few of the recommendations were implemented over time, one with great effect and even a national advertising campaign behind it (that you surely saw on TV).  But most were just ignored.  I imagine that our report sits today on someone’s shelf, filed with others from past and from following months and years.

Unfortunately, it is human nature to enthusiastically ignore to act upon recommendations of third party consultants. There are many, many exceptions, but far more instances of this in the business world.  Not all consultants give advice worth taking, of course. But when they do so, it is only as good as that which you implement.

Posted in Depending upon others, Surrounding yourself with talent | 13 Comments

Bankers: love ’em or hate ’em. They may affect your future.

Let’s get right down to it.  Your banking relationship can be like a great marriage or a bad trip to the DMV.  In most cases it is strictly your choice.  But the results of that choice will reverberate for what could be years.  For a start…

How did you open your first bank account?  Did you just walk into a branch, fill out the forms, take your first ten checks from your newly-opened account and leave?  Do you even remember the name of the bank employee who helped you with that transaction?  Well, that would have been your first mistake.  As I’ve found in numerous companies over the years, the initial visit sets the stage for an entire relationship to follow.

But why bother with a relationship if all you want is a checking account?  Well, it’s time to tell a few true stories to illustrate why you should cultivate a relationship with a banker.  And it is never too late, even if you opened that account years ago.

Here’s an example – an unintentional overdraft in your checking account.  Most of us have suffered this at least once if not more often.  Whether caused by sloppy accounting or bad cash control or by a third party taking money from your account for a recurring charge – or even by a PayPal purchase not recorded in the books, people or companies with marginal checking balances will someday be hit with an overdraft.  Today, many banks charge $35 or so for each check paid with insufficient funds.  One of my companies was recently hit with ten such charges in a single day before they realized the error, resulting in $350 in overdraft charges in a single day.  So? Here are two alternative responses.

[Email readers, continue here…]  Relationship banking: If the CEO or CFO had no relationship with the banker in charge of the account, there is little chance of receiving a waiver and reversal of the charges, even if your history with the bank is flawless.  On the other hand, a good relationship and established history could and would usually result in a call to the banker, a short and rational explanation, followed by your banker’s immediate promise to reverse the charges.  Yes, if this habit becomes routine, all bets are off, sometimes including whether the bank will keep your account open for you in the future.

And there are more important issues.  Most business banks will grant a $50,000 line of credit through a bank-issued credit card, often requiring a personal guarantee.  That is an expensive alternative, with costs for amounts carried over even for a few days beyond the due date running between 8% and 24% when annualized.   With a good banking relationship, your banker can help with a line of credit at reasonable rates, fitted to your needs, and established in a way that will not drain cash each month affecting business health and growth.  Yes, most banks will require a personal guarantee for such lines of credit, and even for equipment, receivables or other secured loans.

There is usually one exception:  Some banks, especially those known as “venture banks,” will recognize the issue of a company with multiple investors, especially with a venture capital company as one of those.  By substituting a small number of warrants to purchase stock in the company at a reasonable price for what would have been a personal guarantee, those banks will eliminate the need for the founder or CEO to sign such a guarantee, trusting instead the relationship with the VC company as of overriding importance.

There are many types of bank loans, including those guaranteed by the Small Business Administration (SBA) in which the bank and SBA share the risk for the loan.  It is worth spending time with your relationship banker to discuss cash management, banking needs, and various opportunities.

But what happens when something goes wrong?  Sometimes you get into a cash bind and cannot make a payment or even need to restructure a loan.  This is the time when your personal relationship with your banker makes or breaks a company.  Sound a bit dramatic?

Ever hear of the “workout” division of your bank?  I hope not. That is the group your banker turns to when your account has shown signs of being too high a risk for the normal banking relationship.  Your banker is removed from the process once that divide is bridged, and you are introduced to a “workout specialist” who dictates your banking future, typically by establishing new rules requiring accelerated repayment, perhaps sale of assets, direct bank collection of receivables to pay down loans, and other mild to draconian efforts to protect the bank and reduce its exposure.

You do not want to be sent to workout.

On the other hand, if you have been communicating your progress both positive and negative to your banker on a regular basis, that person can mitigate the more draconian moves if she or he understands the reasons for a temporary setback, having history and confidence in your abilities to work through the problem.

So, it is all about the relationship you establish when first walking in the door of your bank.  And it is not too late if you failed to do this back then.  You may not know who to call, and a cold call or visit to the local branch is a good start to establish that relationship and begin or reinforce the positive aspects of the banking experience.

It is just one more of the things a good manager does to ensure the ultimate success of an enterprise.

Posted in Depending upon others, Surrounding yourself with talent | 6 Comments