How about personal guarantees for company debt?

Is the guarantee still required today?

More than ever, the banks and lenders today require personal guarantees from entrepreneurs, and even from CEO’s of angel or some VC funded businesses. Starting and running a small or growing business can be a challenge to the most confident and optimistic entrepreneur.  And the process of borrowing money or financing asset purchases can be an eye-opener for those who are not used to today’s lender and seller aversion to grant easy credit.

Start with a bank card – still with a guarantee

Most any entrepreneur with a clean credit record can obtain a bank card with a $50,000 limit, if s/he is willing to give a personal guarantee and has enough assets to back the promise it contains.  As the amounts get higher or as banks get into the picture, the negotiation around a personal guarantee becomes more of an issue with the lender and the entrepreneur.  As a rule of thumb, a company with a majority owner in control will be required to provide such a guarantee for most any borrowing of significant size in relation to assets.

Then what happens when there are investors?

But what happens when the entrepreneur has taken investments from one or more outside investors and may not even own a simple majority of the company’s stock?  To most lenders, the guarantee is still a requirement, putting the entrepreneur in a position of additional risk that is not spread among the shareholders.

There are a number of venture debt lenders, however, that will waive the guarantee in return for warrants to purchase stock if the VC backing the company is recognized and has a relationship with the lender.

A novel reward for the entrepreneur from the board

One of my company boards offered the founder with a 20% remaining interest after several rounds a reward for signing two large personal guarantees necessary to grow the business – in the form of a warrant to purchase common shares at today’s common share price.  A win-win for the investor and entrepreneur assuming the company does grow and have a liquidity event someday.

All entrepreneurs assume risk when starting and growing a business.  It is only smart to consider ways to mitigate risks when opportunities to do arise.

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Warning: Contractors must really be independent!

Our challenge is getting more difficult

How many of us have “hired” independent contractors over the years, a bit worried over the gray area between employee and contractor as defined by the IRS?  Or separately the State of California?  I’ve experienced the results of a wrong decision, and the IRS and state agencies are not forgiving in their pursuit of penalties, interest and most damaging, assessing a company with the on both employer and employee taxes when reclassifying the person as an employee.

IRS penalties for getting it wrong

Yes, that’s right. The company must pay the employee’s portion of the taxes (and penalties on these) as well as paying those they would have paid if the person were an employee.  That’s even more serious for today’s gig workers in California being attacked by the government requiring them to be reclassified as employees.

The newest IRS test

And the IRS has raised the bar on its test as to whether an independent contractor is not in reality an employee.   So, it is important – no really it is urgent – that we review some of the twenty – yes twenty – tests the IRS now uses to determine if a person is an independent contractor.

Here are the ten IRS tests

[Email readers, continue here…]

  1. Contract for service: An independent contractor should work under a written contract with the company, defining the end result expected, time to achieve, lump sum or unit cost, ownership of intellectual property created and more.
  2. Direction: The contractor directs itself, rather than being managed as an employee. And just as important, a contractor does not supervise any of the company’s employees directly. This is tricky when a contracted CFO assumes a position of directing an accounting department.  Usually, in acceptable cases such as this, the contracted executive comes from a recognized agency with a history of paying its own employee taxes, health insurance, and other benefits.   Without this protection, a contracted executive is suspect, even if working with more than one company at a time.
  3. Integration: A contractor provides services which are not an integral part of the core business of the employer. This one is tricky. Is a contracted CFO an employee because the CFO job is integral?   How about a contractor CEO?   The person must pass all the other tests when one of them, such as this, crossed into the very gray zone.
  4. Individual on the job: A contractor may hire a substitute without the company’s permission – although the company should then be able to terminate the contract with the contractor if the substitute is not acceptable.
  5. Term: A contractor is hired for a specific project, usually tied to a time term. An undefined period of time favors the ruling as employee.
  6. Reporting: Here is a surprise. The IRS wants to test that a contractor is NOT required to submit regular reports. Yet, most of us would want to have such documentation of progress other than an invoice.
  7. Tools and materials: The contractor must supply his or her own tools. This is tricky when a contractor sits at your desk using your computer and your phone system all day.
  8. Physical facility: The contractor must have its own “home office” even if in a bedroom, from which primary work is performed.
  9. Works for more than one company: If such a person works only for a single company for any period of time, that person will probably be determined to be an employee. A contractor must make services available to the general public.
  10. Termination: A contractor works under a contract – which means that an independent contractor cannot be “fired,” as long as results are satisfactory as defined within the contract of service.

California’s “ABC Test” for gig employees

In California, there are still suits pending as of this writing as to whether app-based gig employees (think Door Dash, Lyft, Uber and many more) are really employees.  The state developed an “ABC Test” which has passed a State Supreme Court challenge:

A: Companies must prove they don’t control the work performed. Gig employers don’t want to look like they control their contractors. An example is Uber where the Company does not want to look like it controls driver schedules.

B: The killer. The contractor cannot work for the core concept of the business.  Uber drivers state that they are doing just that, while the Company claims it is just a platform connecting drivers to riders.

C:  The contractor must establish an independent business.  That is hard for a Lyft driver who works only as a driver for that one company, or even one working for Uber and Lyft as some do.  This is one of the challenges courts will sort out.

Some ways around this for companies

There are more tests, but these are the ones most often used by the IRS.  States add a few of their own; so, beware.   Pay contractors using account payable systems, not payroll services.  Pay only upon receipt of invoices, not with regularly triggered checks or transfers of uniform amounts without invoice documents to back up the payments.

Small companies want to cut cash drains

Many small or early stage company CEOs look for opportunities to cut cash drains, knowing that payroll is usually the greatest cash drain of all. The temptation to reduce that by fourteen percent or more by classifying a gray area employee as a contractor is very high.  And that includes self-payments to a founder.

How about founders?

Founders working for a company are employees if they take regular payments, subscribe to company benefits, attend regular company meetings, or fail any of the tests above.  The temptation to just draw cash and call it a loan or document a year’s withdrawals with a 1099 is great, but highly risky.

The danger of an IRS tax bill reaching back years

There is nothing worse than a large tax bill and threats of a government agency seizing a cash account when a company cannot or does not respond with proper documentation or payment.  And even a single year’s worth of transgressions, when added into a single tax bill with penalties and interest, can appear daunting to small and young companies.

Management discipline and liability

Like payment of payroll taxes by incremental impound each pay period, as opposed to waiting until the last minute and making manual tax payments, it is a proper discipline of management to “take the hit” incrementally to protect the business from a catastrophic failure to pay a governmental agency any form of tax when and as due.   Need we emphasize the personal liability of management AND the board of directors attached to tax payments?

Good management takes discipline and enough knowledge to prevent these possibly crippling errors in judgment that stem from decisions made to avoid or put off tax payments when accrued or due.

 

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Posted in Depending upon others, General, Protecting the business | 5 Comments

Some thoughts about office politics

Where’s the threat?

It is hard to separate this kind of advice from economic lessons in running a business, when office politics can threaten a business in ways that are subtle, but sometimes just as devastating as economic shocks or continuing poor management.

Examining the petri dish

Most any office with more than one level of management (more than ten employees) can become a Petri dish for office politics.  It may be human nature to attempt to gain the good graces of one’s superior in the work place.  But it is a perverse form of human nature to do so at the expense of others.  Some employees disrupt a business intentionally in order to gain attention and an advantage over fellow employees.

Personal agendas in the workplace?

Other times, people with personal agendas or personal dislikes of other individuals will disrupt the harmony of an office environment with negative statements, rumors, and damning comments.  We’ve all seen this unhealthy form of human activity in an office environment at one time or another.

Advice to management

[Email readers, continue here… ]   So, here’s the advice:  Never repeat, encourage, or even listen to the personal attacks by one individual against another within the organization.  The first time you join in the conversation instead of stopping it, the first time you nod in agreement, the first time you take a side as a manager –is the last time you rule over an office-politics-free organization.

The power of being a manager

A boss has power that person doesn’t often realize s/he has, when viewed from the lens of a subordinate.  That power becomes perverse when a boss takes a side in any disagreement that is personal as opposed to business-problem oriented.  The result is almost always hurt, frustration and anger from the party on the wrong end of such manager reinforcement, and a loss of work time and certainly good will toward the organization and toward management itself.

How to handle it

To set the example by stopping the personal attack, refocusing the parties on productive work and moving on is to state by your words and actions that you will not tolerate such behavior in the workplace.  To ignore such action when observed is to allow one person or a small group to undermine the organization in subtle steps that can only increase in size and effect.

Worse yet, to take a side in a personal dispute is to reduce your authority and alienate one person or group and reinforce bad behavior.

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Posted in Depending upon others, General, Protecting the business, Surrounding yourself with talent | 5 Comments

Where’s your sense of urgency?

It is human nature to start in a new position with enthusiasm, lofty goals, new ideas, and a heightened awareness of those around us and their ideas for the business.

After time in our job positions

And it is an unfortunate truism that most of us become a bit stale in our jobs after some time, even if we are most successful at it and appreciated by all who work for or with us.

The signs of complacency

It is equally human for anyone to become complacent to some degree after an initial flurry of effort, ideas, reorganizations, brilliant decisions, and early successes.  But complacency is relative.  There is no direct measure to determine when you as manager, even CEO, have run out of new ideas and that sense of heightened awareness.

The good side of this

Usually complacency in your work environment is masked by having a better grip on the real drivers of the business, being able to quickly see when things are not going right or people not performing to their peak.

Think back in time

[Email readers, continue here…]   But think back to those first days on the job.  You were ready and willing to effect change, to listen to anyone, to take in ideas, and share yours with your peers.  You spent extra hours more often in creative efforts, encouraged discourse, and delved into new ideas and projects with enthusiasm.

You exhibited a sense of urgency that charged your direct reports, made you want to come to work every day refreshed, and demonstrated to all that something special was happening in their world.

Now how about “your today?”

Can you honestly state that your sense of urgency remains today at the same level as when you first started at this position?  Few of us could, and that is the reason why investors often feel that turnover in executive ranks is not so bad after all.  The average life of a CEO in that position is shorter today than ever before, partly because investors expect continual acceleration, and partly because a person seems to have only so much new material to offer.

If each of us could maintain that same sense of urgency that drove us to succeed early on, our peers, direct reports, investors, and stakeholders would all notice and respond accordingly.

How to regain that sense of urgency

Challenging your peers and reports to come up with new ideas, solutions, projects, and improvement in processes – all are signs that you are still in control of your sense of urgency.  It is hard for those around you to slack off with such a whirlwind adjacent.

The story of an “urgent CEO”

I have previously told the story of the successful CEO who drove to work each Monday morning asking himself, “What if this were my first day on the job as CEO?  What would I do?”  He kept his company and his peers always thinking ahead, if nothing else to prevent his surprising them with ideas and solutions to problems that should have been uncovered and acted upon earlier.

Reinvent yourself as if tomorrow will be your first day

It is not an easy task – reinventing yourself to be that person you were on the first day, but with the knowledge and experience you’ve since gained.  But it is an important part of being a great manager and retaining the focus upon excellence that certainly drove you to succeed in the first place.

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Why document your company’s tribal knowledge?

The processes you and your subordinates follow

It is not common for the CEO of a rapidly growing company to think of slowing down the furious pace enough to have each manager (including the CEO) document the job process managed, as well as see to the documentation for each process managed below.

Examples of documentation by key employees

And it is even more of a challenge to consider documenting the tribal knowledge of a company’s key employees.  Examples include forcing the entire sales and customer support team to use a single database such as Salesforce or Sugar or Act to document the interactions with prospects and customers or using “REM” statements liberally inside software code to notify future coders of critical information contained and reasons for making code branches, assigning variables with unusual names or more.

We leaders are not invincible

Have you made a list of your critical chain of advisors, including bankers, accountants, industry advisors, and more?  Do you have a “secret spot” for critical information someone might need if you were incapacitated or worse?  Especially when we are young, we feel invincible, and documenting tribal knowledge seems a chore with no reward.

The inevitable “walk out the door” of one may be too late for all

Then inevitably a key employee gives notice and we begin to worry over what knowledge we will watch walk out that door, wonder how we will recover in the short term and grow out of the problem in the long term.  We worry that asking our subordinates to document their processes will look like the first step in removing them from their job. And we worry over lost productivity during this effort.

Start at the top

[Email readers, continue here…]   But if we make this a part of the culture of the corporation starting at the top and from an early point in the life of the organization, this process becomes an accepted way in which managers learn and leave behind, able to move up the chain with minor disruption both in the job left behind and the job assumed.  It makes for a smoother process for seeking outside hires by providing a model for the job specification to be written.

Other important gains from doing this

And it allows everyone to better appreciate the organization, understanding the limits of each position and the duties performed, avoiding conflicts between managers when in the future changes are made in the organization and in personnel during periods of growth or even downsizing.

Tribal knowledge is an asset of the corporation, to be protected as much as cash in the bank.

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Special edition: Building semi pro audio video studio

Like to make professional videos for a small cost? Postings to on-line sites? Dave takes you through the process, shows the results, and gives you the costs.

There’s lots more information you will find as you experiment and may need when selecting and learning  the tools Dave lists.  But you’ll be well on your way to making great videos that will set you apart from all the many podcasters and influencers using just their smartphone camera.

Watch this video.  Take notes if applicable to you.  Remember to add a suitable length mic cable if selecting a low impedance (not USB) microphone.  Most mics will come with a small desk stand. Consider a $15 desktop boom stand as shown in the video. In any case, you’ll use your desktop computer and a supplied USB cable for both audio and video into the computer.

Why list the more expensive microphone, the EDGE go? You will hear some of the special reasons for this option. In the video I forgot to mention that this mic can alter its patters to include cardiod for podcast or influencer speakers and single singers, bi-directional for two-person interviews or dual singers, and Omni directional for multiple speakers or singers, and which can include audience or room sounds if needed…

Have fun pasting in scenes or video clips to put you in an environment that illustrates your blog or posting to YouTube, LinkedIn, Facebook, Twitter or other media outlets.  Save the cost of professional vidiographers.

And let me know if this occasional deviation from the norm to teach about tools and procedures works for you.

-Dave

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Does your company culture encourage employee curiosity?

It’s more common than you think

Some of the world’s best companies to work for are those that encourage employees to spend time following their own paths of curiosity toward development of new products or services.  Google, 3M, Facebook, and Microsoft all allow their employees to take time to explore new ideas they conceive and attempt to develop.

The result can be surprisingly impactful

Famously, the post-it note is an example of such a product coming from employees of 3M where looking for quite another market for their newest light adhesive product.  And many free products and services have been spawned by Google employees working during their one-day-a-week personal curiosity time.

As usual, culture comes from the top

It is an opportunity that is open to any CEO to encourage creative thinking, problem solving, product creation, efficiency-creation among the troops.  Rewards don’t have to be financial, but certainly, when the gains are measured in dollars, that seems appropriate when the new development is not just a part of the job specification for a creative employee with a great idea.

Revealing employee hidden talents

Every company has hidden talent, creative thinkers that are not in a position to demonstrate their talents.  CEO’s often focus employees on the company’s goals, without allowing time to explore the edges to create alternative solutions, or to think ahead toward new possibilities.

A challenge aimed at you

[Email readers, continue here…]   What if you encouraged  each of your associates to spend ten percent of their time working alone or with others on cost-saving or efficiency improvements, sketching new ideas for products or changes to products that they may not be directly involved in creating?  What if that refreshing opportunity were to make each person return to the assigned job with a fresh new look and appreciation for the creative time spent?  It could happen, but only if you as manager develop the culture of curiosity that makes such creativity a part of your company DNA.

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The dangerous game: Hiring from a competitor

Sometimes it is the first thought you or your managers have when in need of skilled talent, especially for sales or product development.  It is not hard to find and observe the best employees of a good competitor at work, skillfully moving the competitor forward in a visible way.

Two slices of the pie for one price

And it is a tempting slice of pie – two slices for one price – to take a critically needed employee from a competitor, damaging that firm while building yours.

The negative aspects of the process

The problem is that a visible hire that “cuts” the competitor makes the competitor’s management bleed.   And you’ve heard of blood revenge.  That’s the worst kind, because it results in emotionally lashing out at the offender (you) with a response that is greater than the action that precipitated it.  In many cases, your firm can withstand the response.

Legal issues

[Email readers, continue here…]   In a particularly acrimonious case, the competitor’s management may threaten to sue, based upon the exiting employee’s knowledge of trade secrets or accusing the employee of removing confidential information.  To protect yourself, first it is important that the target new hire either have already quit the job from the competitor, or has approached his or her senior manager with a request to exit and work for your company.  Yes, this flies in the face of a “grab the best employee” hire, but blunts most of the energy from the opposite side.   If you are willing to accept the risk of legal action, then the next issue rises to the top…

The danger of a salary contest

In some cases, though, cross-raiding of employees by offering unsustainable salaries or perks you cannot offer to all because of your size and financial position will leave you in a position to pay grandly for your action.

Considerations to contemplate before doing this

Consider the relative size of the competitor, the visibility of the target employee, and your ability to withstand a backlash before exercising the two-slice tactic.

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Posted in Protecting the business, Surrounding yourself with talent | 1 Comment

Can your employees recruit from a customer or supplier?

The recruitment traps

It has happened to all of us who have been leaders in business long enough.  One of your employees is approached by an employee of a customer or of a supplier, stating that “It sure would be great to work in your company.”  And without a policy or sometimes without thinking, your employee responds with a “Let me help,” or worse yet, “I have a position open.”

State your policy clearly

You should be clear from the start that no one at your company may offer a job to any current employee of a stakeholder – a customer, a partner in development or in distribution, or of a supplier. The rule should be one that includes only one “out”: if a person resigns from the position with the stake-holding company, then you will be happy to talk about a position.  No winking, sending signals, or quiet promises.

The exception

There are instances where such an existing stakeholder employee offers to go to his or her boss and ask permission to speak with you, and the boss not only concurs but agrees to call you (not just to take your call).  In that case alone, it is proper to continue as far as the offer and beyond.

My story of an employee over the line

[ Email readers, continue here…]   Let me tell you the story from one of my companies where I was chairman that recently learned about the recruiting rules that should have been in place – the hard way.  The CEO of my company checked into a hotel that was a customer for its enterprise management system, and through a few innocent questions found that the owner of that hotel and other hotels was about to purchase several new systems for his new projects.  The front desk clerk cheerfully gave my CEO the hotel owner’s contact information.

The blow-back from the other side

So, the CEO called the hotel owner that day.  “I will never deal with your company again!” was the short reply from the hotel owner to the CEO, shocking the CEO looking for a closer relationship and future sales.  It turns out that another manager from my CEO’s company had recently approached that very same cheerful hotel clerk, hinting that a job would be available if she’d like to apply.   The clerk told the owner, and the rest is history.

Backing your way out of a bad situation

Properly, my CEO begged the hotel owner for forgiveness, immediately sent an email to all our company’s managers reinforcing the existing policy of not hiring a stakeholder’s employee and spoke to our employee making the offer in a non-threatening tone, again reinforcing the policy.  During the phone conversation with the hotel owner, our CEO carefully set the stage for a later call to mend fences and check on progress with the existing system already installed.  He made all the right moves given the situation.

But wouldn’t it have been easier to avoid this kind of sticky and dangerous event in the first place?

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Do you empower others?

So, we’ve previously discussed why it is important for you to build consensus in an organization in most every major decision.  To do that, you must be able to relinquish some degree of power, overriding decisions made by consensus only with some thought and certainly with an explanation to those involved.

Never fear empowering others

If you’re secure in your position, you should never fear empowering direct reports to make decisions that fall within the resources allocated to them and within the budget agreed to with them.

Why not to be a micro-manager

A micro-manager cannot cede that kind of authority, even within pre-arranged limits, and as a result meddles with decisions made by direct reports, removing authority from each whenever one of those moves are made, and rendering the individual one degree more impotent in the eyes of that person’s reports.

Helping your direct reports empower others

On the other hand, a great CEO or manager not only empowers his or her direct reports, s/he directs those people to do the same with their reports down the line.  Of course you do this within limits that should seem obvious: financial impact has been provided for within the plan; and no other individuals or departments are affected negatively by such an empowered action without notice and involvement.

Helping your direct reports grow in their positions

[Email readers, continue here…]  The more power you cede, the more you become a teacher and the more your direct reports grow in their positions.  Further, the more you share your decisions, the more you prepare those below to assume your position if ever necessary or appropriate.

Doing it right to help your organization scale and grow

If you cannot or will not empower your direct reports, you must ask yourself: what’s the deal?  If it is insecurity that is the root cause, then the best course of action is to share the power even more quickly, as you’ll look and feel more like the group is supportive of you and your position.  If you are a micro-manager and are unwilling to allow those below to fail, even with more minor decisions, then you are restricting their growth in their positions, certainly causing dissatisfaction in their ranks, and missing the most important opportunities to enable scaling your organization to a much larger size.

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