Should You Use Project-Based Accounting? Five Thoughts

Situation: A company has been using the accrual method of accounting. As they approach the fourth quarter of the year, they are looking at project-based accounting to reduce year-end cash reserves and taxable income. How do you create and manage a project-based accounting system?

Advice from the CEOs:

  • The PeopleSoft Division of Oracle offers a project-based accounting package. There are a several issues that accompany a shift to project-based accounting: do employees work on more than one project, how do you plan to account for shared services such as administration and Human Resources, and do you plan to share revenue and costs across projects? These can entail a fundamental change in how the company is organized and behaves. If your primary motive is tax avoidance rather than organizational change, why would you pursue this level of change in the organization?
  • Looking at hundreds of companies with which the CEOs in the group have worked, nobody has seen any that utilize project-based accounting.
  • The company’s objective is to better understand the various projects that the company manages, and to have revenue travel with cost. A far simpler option from an accounting standpoint is to look for ways to pre-pay future expenses and thus reduce year-end cash reserves.
  • Another option is a hybrid between cash and accrual accounting.
  • If you have a strategic reason to pursue project-based accounting, look at firms that serve the construction and entertainment industries. These industries have similar challenges to those faced by the company.

Do You Give Equity to Board Members? Four Considerations

Situation: An early-stage company has a key advisor who is helping them to build a 3-5 year vision and plan. The company can’t afford to pay the advisor full-time but he’s interested in working one day a week or becoming a Board member. Should they give him equity as a Board member and under what conditions?

Advice from the CEOs:

  • Adding Board members increases complexity, especially when it comes to big decisions. Once an early stage company transitions from their start-up Board to a more formal Board with non-founder members, particularly when a significant number of the new members have strong corporate experience, the Board will take on a certain level of independence in corporate and compensation decisions. Be aware of this, as a larger more independent Board may make decisions that the founders would not make.
  • It is not irregular for Board Members to receive equity or options. If you want to grant options, you must undertake an initial company valuation exercise, followed by annual valuations. It is common to grant options with 4 year vesting on a monthly basis. Vested shares can be purchased at Day 0 price, with some period to exercise options following departure from company.
  • Seek an expert in Board operation and compensation. There are a number of advisors with deep experience in this area who can advise the company on standard practices for Board operation and compensation.
  • If the company decides that they are not yet ready for an expanded Board of Directors, another alternative is a Board of Advisors.

How Do You Attract a High Powered Individual? Three Thoughts

Situation: An early-stage company is in discussions with a high-powered individual who could invest, join their Board, or help them more directly as an executive. They want to involve him enough so that he is interested in working with them. How do you attract a high powered individual?

Advice from the CEOs:

  • You are still in fact finding mode. Get an NDA ASAP! Backdate the NDA to your first conversations.

o    This individual needs to meet face to face with your current team. See how the dynamics work; be very sensitive to conflicts and jealousies. These can wreck an early stage company.

o    You need to see how the new individual interacts with your current team to check chemistry before you go too far.

o    Be gingerly with your co-founders about adding another “founder.”

  • Create a high level straw man for this person’s roles and responsibilities.

o    Ask the individual what he sees as the potential for the company and how he foresees being able to contribute.

o    Develop a business plan for this individual – with the appropriate title. Spell out roles and expectations.

  • If you offer an equity position, be sure that shares are on a vesting schedule and that you have a shareholder’s agreement.

o    Be creative in your vesting. Rather than vesting on time, consider vesting on individual and company performance against milestones. If the company doesn’t hit the milestones what is the value of the shares? Make the milestones consistent with the individual’s objectives – bringing dollars into the company based on investment or revenue hurdles.

o    If this individual wants to come in as a “founder” insist on some investment to demonstrate commitment – you and your co-founders have funded the company to date.

How Do You Develop Products with a Foreign Firm? Five Ideas

Situation: A company has been approached by a foreign company that is interested in their expertise. The foreign firm says that they are only interested in their own domestic market, and want the company’s help developing new products for their existing domestic clients. How do you develop products with a foreign firm?

Advice from the CEOs:

  • There is great variability between companies in different locales and on different continents. Before proceeding with negotiations, get references from the company and check them carefully. Research the company and its local market.
  • Relationship will be critical. You want to meet with their CEO. This is an important factor working with any company. Watch the commitment level of the CEO and top staff. Take an expert with you – someone knowledgeable about local mannerisms who can read the body language in meetings. Position this individual as someone who is assisting you in the negotiation.
  • If you proceed with negotiations toward an agreement, make your enforcement jurisdiction either the US or a neutral country with a western judicial system. For example, if the company is Chinese, make the enforcement jurisdiction either Hong Kong or Macao.
  • Will intellectual property be a factor? If so, get an IP attorney knowledgeable about both the market of the other company as well as your preferred enforcement jurisdiction.
  • Could this help you to augment or fund your own development? If so, ask for rights to produce and distribute products developed through the collaboration in the US and other markets outside of partner’s domestic market.

How Do You Handle a Side Project? Two Considerations

Situation: An early principal of a company has done a lot of work on a product that no longer fits the company’s business strategy and focus. The CEO wants to reward this individual for past work. An arrangement could include equity plus a big chunk of whatever this individual can make marketing the product that he created. What is the best way to handle this side project?

Advice from the CEOs:

  • There may be benefits to working with this individual as proposed. Letting the individual play in his own sub-market gives you an additional customer and may lead to interesting but yet unknown opportunities. Take care that this does not impact critical timelines for the company’s principal strategy.
  • A set of guidelines for this arrangement may include:

o    No grant of additional stock in the company – the opportunity to pursue the project should be sufficient incentive.

o    Keep this side project as company property.

o    Give the individual a sizable chunk of any revenue that he can gain from the product.

o    Task the individual to manage and solve technical challenges so that this does not impact company priorities.

o    Retain control of timelines and quality sign-off so that this project does not conflict with your higher priorities.

o    Give the individual sufficient support so that he is more likely to succeed.

  • Are there concerns regarding brand risk?

o    Draft an agreement to allow this project to operate cleanly and treat the principal an early small customer. Define the requirements of the project, release timelines, and branding options so that they do not interfere with the company’s larger goals.

How Do You Respond to a Breach in Policy? Five Suggestions

Situation: A company recently terminated their lowest performing sales representative. Prior to surrendering the company computer, the employee sent a goodbye email blast to the company and customer email lists. This action was a breach of company confidentiality policy. How do you respond to a breach in company policy?

Advice from the CEOs:

  • Have the human resources manager send out a company-wide message specifying how this misconduct violated company policy and the potential impact on the company. In the same message, re-emphasize company confidentiality policy and the importance of complying with policy. Follow-up with conversations between managers and employees about the importance of company confidentiality.
  • Consider having all employees sign a new company confidentiality agreement every 6 months. This should be accompanied by explanations of company policy and conversations to reinforce the importance of complying with policy.
  • As a follow-up to this situation, be proactive by informing affected clients that this individual has left the company and let clients know who their new sales representative is.
  • Be aware in your internal communications that this action may have been an honest mistake, not intended to harm the company. If this is the case and your internal response is too strong, this may have a negative impact on other employees.
  • If the individual goes to work for a competitor, send the new employer a copy of the termination agreement signed by the employee and put them on notice that you will prosecute any violations of prior confidentiality agreements.

How Do You Create a Value Proposition? A Three-Round Process

Situation: A company wants to effectively position itself for a recovery. The CEO believes that it is time to sit down with his team and focus on those areas which will help them to emerge during the recovery not only stronger than they were when the recession started, but ahead of their competition. How do you create a value proposition?

Advice from the CEOs:

  • Creating your Value Proposition starts by analyzing and understanding your most important strength. Is it Product Leadership, Operational Excellence, or Customer Intimacy?
  • No company can succeed today trying to be all things to all people. Choosing one discipline as your most important strength is the choice of winners.
  • To set your Value Agenda, ask your team “How do we compete and win in our marketplace?” This is not a single discussion, but requires three rounds – best done as three different sessions.

o  Round 1 focuses on understanding where you stand in your marketplace.

o  Round 2 focuses on understanding what your customers perceive as your “unmatched value.”

o  Round 3 focuses on building an operating model that enhances your unmatched value and helps to consistently communicate this to your clientele.

  • Once the three rounds are completed, formulate the top findings of each round into your Value Agenda for the company.

o  A Value-Driven Operating Model gives your company the ability to deliver on your Value Proposition.

o  Your Value Discipline is the combination of operating model and value proposition that will allow you to be the best in your market.

How Are You Staying Positive in This Economy? Seven Thoughts

Situation: The recovery continues to be uneven and uncertain. One company finds that both staff and their families are nervous about how the company will fare and the future of their jobs, and this has created strain. What are you doing to stay balanced and positive – both within your company and also in your personal relationships?

Advice from the CEOs:

  • Transparency and communication. These are critical in both business and personal affairs. You have to be honest, avoiding either pessimism or unwarranted optimism.
  • Share the metrics of where you are – the reality – and projections on your expectations of how things will go. This has been a long bump in the road, but eventually things will get smoother.
  • Involve your staff in difficult decisions. Do the same with family on difficult personal or family decisions.
  • Be frank with family, but keep communicating. Time is more important to family than money – they want you to be there with them. If you’re working long hours in the evening, at least go home and have dinner with your family.
  • Staff adjustments, where necessary, have been done as single events and weren’t drawn out. CEOs have communicated more frequently about the state of business and pipeline. Assure staff that the company is solid. Show them the runway.
  • Those most worried are employees without project work. Some companies focused them on infrastructure projects to keep them engaged.
  • Cross-fertilize your teams. One company brought professional service employees into product engineering. Both groups learned and benefitted from understanding each other’s perspective.

How Do You Move a Live Online Data Center? Seven Suggestions

Situation: A company has run out of space and is planning a move to a new and larger facility. The biggest challenge is that they maintain a live online data center upon which their clients depend. How do you move a live online data center?

Advice from the CEOs:

  • This is not a rare event. Many companies with live online data centers have to upgrade their systems on a regular basis as equipment and software technologies evolve. Maintaining service during a move is not significantly different. Research what steps these companies have taken to minimize disruption during upgrades.
  • Don’t try to do it all by yourself. Seek outside expertise to help you plan the move, and to develop options that will minimize both downtime and service interruption.
  • Ask a trusted data center resource for a 3rd party audit of your move plan.
  • When one company moved, they overlapped their leases by one month, and their Internet connections by 2-3 months. This gave them breathing room as they completed the move and allowed them to stay live uninterrupted through the move.
  • Another company increased their back up servers and service. They also planned their move to occur during what they knew would be a low demand block of time. As a result, they were able to complete the move, plug in the servers and were only down for 30 minutes.
  • If it is feasible, consider leaving your old center in place as a back-up data center.
  • Conduct a number of practice shutdowns and restarts to test your systems.

How Can a Lawyer Help You Meet Your Goals? Five Ways

A small company has need for legal advice, but is unsure how to properly utilize a lawyer. Legal costs have gone up over the last decade, so expense is one concern. Another is a desire to understand how to form an effective relationship with a lawyer or law firm, and how to effectively manage billable hours. Bottom line, how can a lawyer help you meet your business goals?

Advice from the CEOs:

  • First, seek the counsel of a firm that specializes in small businesses. Just as you would seek a specialist physician to treat a serious medical condition, SMBs are best served by corporate lawyers who understand how they are different from large corporations and who can advise them at a rate and under an arrangement that fits their financial situation.
  • Schedule regular “off the clock” lunches and conversations with your lawyer. The ideal lawyer for smaller companies serves as an “outside counsel.” Your outside counsel is essentially your legal quarterback and should be willing to meet with you off the clock to discuss general business needs. Of course, as a courtesy to your lawyer, if your conversation starts getting into areas where you are receiving legal advice you shouldn’t expect free advice.
  • Know what to ask your lawyer versus what to ask your auditor and tax specialist. Each has a separate and distinct domain.
  • Trust your lawyer – or find a new lawyer. The best legal relationship is when your lawyer is treated as a member of your team. Sharing the business context aids your lawyer in advising you.
  • There is no need to overspend on lawyers, but you do need to assure that you spend for what you need. A good relationship with your lawyer can help you to walk the line where you are spending appropriately.
  • Special thanks to Deb Ludwig of DJL Corporate Law for her contribution to this discussion.