Remember the FAIRNESS doctrine

Reduce the emotion; reduce the threat of lawsuit.

You’ve certainly experienced the angry outburst from an associate or employee who has just learned of an event that the person took as “unfair,” no matter how rational the explanation by the decision maker.

Most emotional responses to decisions in business are generated not because the person making the response feels the decision was unwise, but rather unfair.

Part of the cultural fabric of your business

So, enter the “Fairness Doctrine,” as a stated element in the cultural fabric of business. Simply stated, a decision or action that affects an individual must be made with consideration of the affected individual’s view of the fairness of that decision. This doctrine is a variant of “do unto others” but with a twist. The recipient of the decision in this case usually has little opportunity to respond in kind (“as you would have them do unto you”). It is this frustration coupled with the simple outcry of “That’s not fair!” – that can affect the culture of a company in ways never considered by the original decision-maker.

Why do many people sue?

People sue others and their companies usually because they feel emotionally that they have been treated unfairly, not just because they were affected financially.

Some examples of “unfair treatment”

[Email readers, continue here…]   Firing a person considered a key associate without any advance warnings or public revelation for the reason, such as the need to consolidate or downsize, is a good example of setting up such a groundswell of accusations of unfair treatment. Public dressing down of an employee in front of associates is inhumane and often generates a negative response from all who witness or hear of the action. Closing a highly effective department, shutting down a marginal company, canceling a promising project all are good examples of management setting up a visceral response of “unfair” among those affected.

Preserving the dignity of the individual

I have often addressed the issue of maintaining the dignity of the individual in a business environment. The two are linked: the fairness doctrine and treatment of an individual with dignity, no matter how distasteful the decision implemented.

A solution to the problem

So, my advice is to take the time to establish the reasons for pending actions – if not in an emergency environment. Speak privately to employees who are in danger of being fired, documenting the discussion to the employee’s file. Open up to the general group with facts that might later affect them, even at the risk of losing one or more to a hunt for a new job. Most employees and associates, treated with respect and dignity, will respond with understanding and lose the emotion that might have accompanied receiving the later news of a negative event.

In fact, many times over the years, I have seen whole companies rise to new levels of efficiency, creativity, and sense of urgency when informed of the alternatives being considered by a board or management.

Sharing the dilemmas of management

At the risk of losing talent not targeted, it is only fair to treat people as intelligent beings capable of understanding the dilemmas faced by management, and sometimes able to find solutions to problems not seen by those in control.

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

Reduce five risks: Increase your valuation

Why five risks?

In the creation of a young company, there are five principal risks to be addressed by the entrepreneur.  Professional investors will probe these five risk areas and make the decision to invest based upon comfort with each.  So, it is important for the entrepreneur to identify, address and mitigate each of these in order to increase valuation and decrease the risk of ultimate loss of the business.

First:  Product risk. 

Is the product or service possible to produce at all, let alone economically enough to

compete in the marketplace?  One way to mitigate this is by using early money to create a prototype, to perform market research, to complete the first generation of the product, or to deliver the service to a satisfied customer.

Second: Market risk. 

Are you ahead or behind the market with your product or service?  Will the public respond in numbers to buy, license or rent your offering?  This risk can be mitigated by finding a customer willing to purchase as soon as a proven model is completed, and willing to state this in writing.  Another is to gain the support of a core vendor who is willing to offer special extended terms to the company as its investment in creating the product in a finished state.  A third demonstration of overcoming market risk is by holding controlled focus groups and gathering information from unbiased potential customers supporting the acceptance of the product or service.

Third: Management risk. 

[Email readers, continue here…]   A great idea often fails from the inexperience or inability of management to bring the idea to market.  Similarly, great management often can manipulate an original idea or business plan into one much more attuned to the market, adding tremendous value that might have been lost sticking to the original plan.  This is sometimes labeled “execution risk” addressing whether management can create and run the company producing the product acceptable to the marketplace.

Fourth: Financial risk.  

Any new enterprise is at risk if there are not enough resources to get the company to breakeven, which is a proxy for stability.  If a company truly needs five million dollars to get to breakeven, investors that provide the first million are greatly at risk of the company failing to raise the remaining capital or of subsequent investors valuing the company at a lower price than the first investors, causing a “down round” in which the early investors are punished for taking the first risk.

And fifth: Competitive risk. 

If there are high barriers to entry with such protections as patents, long development time already spent or contracts with the major potential customers, then the risk of a competitor with more resources jumping into the frothy pool and taking advantage of the demand created by the company is minimized.

Reduction or elimination of one or more of these risks increases the valuation of the company and certainly improves its chances of survival and growth.

You may recognize these five as a slight variation on the “Berkus Method” which is often published and used by investors when valuing pre-revenue businesses.  Here we expand the definitions a bit to encompass businesses that are still early stage, but perhaps beyond startup.

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Posted in Finding your ideal niche, Growth! | 2 Comments

Does your company have a “dirty cap table?”

How it happens

When you seek professional investors, whether organized angels or venture capitalists, one of the early questions you are asked is “How have you financed the business so far?”  Investors love to see entrepreneurs who have used their own money to ignite their businesses.

But often, entrepreneurs turn to others for initial capital. Describing that capital using the phrase “friends, family and fools,” or “FFF,” has become as common as to be trite.  And now that “crowd sourcing” has been enabled using the Internet – seeking many investors at a small amount per investment.

The legality issues

The problem in taking such money rests in the legality of taking money from non-accredited investors, people who do not meet the SEC standard for making non-public company investments.  Currently that standard requires a minimum of $200,000 in annual income or over one million in net assets, including the value of the investor’s principal residence.

What if some past investors don’t meet that standard?

[Email readers, continue here…]  Since many small investors in a young business do not meet that standard, there is a chance that the company has taken money that it should not have taken, according to SEC rules.  There is an exemption for members of the entrepreneur’s family and in some cases for close friends with intimate knowledge of the entrepreneur and of the plan and, of course, for employees of the company.  It is worth checking with an attorney to see if such investors are truly exempt.

Does issuing a PPM insulate the company?

Some small companies work to create “private placement memorandums,” attempting to protect themselves against this problem, couching the proposed investment in legal language stating the risks involved in making the investment.  The PPM does nothing to mitigate that problem when the investor is not accredited.

Missed filing requirements

To compound the problem, often stock is issued by the entrepreneur without filing any report of such issuance with the state of issue.

So, what is the problem?

The sum of these problems is that a disaffected investor can sue the entrepreneur or the entrepreneur’s company for a rescission of the investment and return of the money invested if the money was taken improperly, especially when the business has failed and the investment lost, putting the entrepreneur at risk for the loss of additional personal assets.

And what is the cure?

The cure for this, when professional investors enter the picture, is for the company to craft a “rescission offering” to those shareholders who invested illegally, offering to repurchase their shares at full value invested.  This is sometimes difficult since it often happens just at the time a company needs new money most and is in the process of seeking that money for growth.  If a previous investor does not accept a rescission offer, there is some insulation provided to the company against a future lawsuit by that investor.

Your future process

So, plan to take money only from qualified investors. Check with your attorney if there is any doubt.  The risks of a problem rise with unmet investor expectations, and fade with success.  But sometimes, such behavior will cause a subsequent angel or venture capitalist to pass on an otherwise good opportunity, and that would be a shame, one that could have been avoided by diligent process in the early investment cycle.

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Posted in Protecting the business | 1 Comment

CoronaVirus and small business: A discussion about economics

By Harley Kaufman, guest author

Note from Dave: Harley is an old friend and avid reader of BERKONOMICS. With a background in management and technology, he gives us something to think about regarding today’s top-of-news subject.

Addressing the issue to small and medium businesses

The CoronaVirus (Covid19) could potentially cause some real disruptions in the US generally and, specifically, to the small and medium sized businesses that probably make up the bulk of your readership.  The Administration has demonstrated absolutely NO talent or capacity to being able to handle such challenges.  Worse, their credibility and trust factors regarding their messages are zero or below!  Appears to be a recipe for disaster.

Advice to managers, entrepreneurs

With a multitude of caveats, then, it might be worthwhile to your followers to heed the following advice:  Anticipate the worst, prepare for it, and hope for the best!  For consumer driven businesses, the actions that are needed to anticipate the worst are simply to borrow NOW at the lowest possible rates in order to have a significant nest egg if the CV scare drives people to stay home and away from any crowds at all.

Which companies are most at risk?

The obvious companies that would suffer the most quickly are mall locations, strip mall locations, theaters, restaurants, and many many more.  Their liquidity nest eggs could well be challenged beyond their capabilities to handle it.  Waiting until it becomes clear that they need additional capital (even short term capital) would put them in competition with the rest of the business world and would be a lot pricier than it would be currently.  Why wait?

A lesson from the recent past

Take a lesson from Ford Motor Company and their prescient CFO and President in 2006 and 2007.  Right before the Great Recession they were the only automaker to go out in the marketplace and beef up their balance sheet with a great infusion of borrowed cash – at low rates.  They then became the ONLY automaker that didn’t have to borrow from the government to get through the rough patch.

 

 

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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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Posted in Finding your ideal niche, Protecting the business | 1 Comment

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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Posted in General | 3 Comments

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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