Situation: The founding
CEO of a technology company is considering options for the future. The company
is doing well, with two options for future development either within or outside
the company. How do you choose between strategic options?
from the CEOs:
expertise is less important than business experience, P&L experience, and fund-raising
success. A diversified background and successful experience as a CEO are as
important as specialty industry experience.
to pursue all options for the time being. See how the new opportunities mature
before making final choices, and either split time between the options or
assign good managers to oversee each.
agreements should be based on cash investment of the parties – not time and
#1 – Focus on the primary company.
challenge is that most of the Board members just see the numbers, not the
dynamics of day-to-day operations. They don’t know the CEO’s contribution.
that the Board understands the CEO’s contribution and is rewarding the CEO appropriately.
#2 – Focus on New Opportunity #1.
this option more like a product or a company?
this option as a product incubator rather than a single product company –
producing and spinning off a series of ideas for development.
can be done either within the primary company or as an outside effort.
#3 – Focus on New Opportunity #2.
development can be self-funding. Compared with manufacturing, software is
inexpensive to develop and requires little investment to scale and sell once
the code is written.
trick is to rigorously focus on market opportunity while minimizing cost.
staffing commitments. Use scarce resources to lock up irreplaceable
capabilities. Hire or offer equity only for significant contributions such as
IP development. For labor, use consultants, independent contract arrangements,
or look for what can be outsourced.
Option #2 this can be done either within the primary company or as an outside
Situation: A company was created from IP originally developed by the founder at a large corporation that was not interested in commercializing it. The new company has now become successful and visible, with the large corporation as an important partner. The CEO wants to make sure that she has all bases covered to secure the future of the new company. How do you manage a key partner relationship?
Advice from the CEOs:
There must be clear agreement between the company and partner on ownership of the original IP – a legal document signed by both parties. You can bet that should a conflict arise, the lawyers representing the larger company will argue that their client owns the IP. Once this is secured, focus on developing and licensing software that you clearly own.
Develop contingency plans should the key partner decide to exit the business on which your relationship is based. Identify what other companies could replace lost revenue. Start to build these relationships.
If the partner helps to fund current development, take the money that you save and develop your own IP, independent of the partner relationship. As an alternative, at least develop critical components of the software as your own IP, without using the partner’s funding.
This will free you to develop other customer segments to broaden your business base.
What concerns does the partner have? Strategically, large corporations can be uncomfortable if they feel dependent upon a much smaller company. There are two things that you do:
Makes a concerted effort to assure that you are essential to the large corporation’s overall business.
Make change as painful as possible.
How would you get paid if the large partner exited the relationship?
Negotiate a contract with a 2-year window to any change that partner wants to make. This will provide you with the room to develop new clientele should the partner exit.
Have contingency plans to rebuild capabilities that might be lost and sell it to other clients.
Customize your software by client. In the process, you will develop new methods to keep your edge over competitors.
Keep critical parts of your processes “manual” so that they are essentially trade secrets and not easily replicable if the partner were to try to take over the IP.
Situation: The CEO of a business that has been in place for several generations is frustrated by the challenges of working with family members. Relatives are involved in top positions, but frequently place personal concerns above the priorities of the business. This leads to tense situations where other family members, not in the business, will intervene to support their close relatives without appreciating the conditions facing the business. Must a family business always be “family”?
Advice from the CEOs:
For the business to thrive, you must match skills and talent to available positions – not just the “best” family member fit for the position.
Understanding that it is difficult for one family member to communicate negative news to another family member, consider hiring a consultant or HR company to evaluate and be the go-between in determining best family fit, or family/non-family choices for open positions.
If the company involved unionized employees, and some family member employees are union members, this may complicate your choices. Seek outside non-union counsel to help you evaluate situations and navigate solutions.
Hire a professional facilitator to assist in running company planning meetings which involve family members. A facilitator can approach the situation from a neutral standpoint, and does not carry the personal history of brother-sister or close relationships within the company. Choose an individual with experience with family-owned companies who can build a company vision that goes beyond personal relationships and concerns. This individual can also help navigate the operational situations facing the company.
Look at both your organization and ownership structure versus applicable regulations and licensing requirements. This may present new alternatives for you to consider.
Situation: A founding CEO is evaluating a purchase offer for his company. The buyer wants the CEO to retain some ownership interest to assure a smooth transition post sale, and ongoing assistance from the CEO so that the company continues to succeed post-sale. Should the CEO retain a minority share of the company? How do you structure an earn-out?
Advice from the CEOs:
The ideal option is full payment up-front. However, if the CEO is perceived by the buyer as critical to the company the buyer will want to have some assurance of continued services for some period.
An earn-out of fixed payments over time is acceptable provided that the language of the agreement is acceptable. However, performance-based earn-outs make no sense if the CEO no longer has control over the decisions that will impact performance. Don’t structure the payment as an earn-out, but as a retention bonus and assure that the terms are favorable.
Post-sale a minority share of your old company holds no value if you can’t monetize it. Holding a small share of a non-traded company has the same challenges.
It is all about liquidity.
If the other party offers this, ask what is the value is to you of the retained share.
Minimize the earn-out if one is demanded, but don’t count on it.
If there isn’t a strategic fit between the buyer and the company, the value of the company in a sale will be lower.
Situation: A company anticipates closing a Round 3 financing this year. The CEO has an idea of the range of management team ownership that is likely at this round. He seeks advice from others with experience. What can the team do to assure that their ownership is at the upper end of the range? How much should management own post-financing?
Advice from the CEOs:
The numbers change depending upon both company valuation and the funding environment. Currently, Silicon Valley venture capital firms are becoming more cautious and risk averse. This is because many companies that have received financing over the last 2-3 years have underperformed. Many have yet to even produce and release a product. In this environment, the chances for maintaining a larger share of ownership for management are not as good as in headier times.
Seek two outside counsel to generate two independent opinions on a fair management option pool, and to assist in negotiations. These will likely be boutique firms.
Approach the situation as an executive option pool objective. Determine what needs to be in place to attract new executives, as well as to replace existing executives should they leave or be unable to serve.
When discussing this with your board and investors, phrase the challenge in win-win terms. The objective is to lock-in key personnel and assure that key positions will be filled to meet company objectives. This is the best way to assure future financial success.
Key members of the executive team may want to seek independent advice, apart from the company or executive team.
Situation: A CEO wants to push project ownership down to lower levels of the company. This is not happening unless the CEO pushes. How do you delegate yet stay informed as you push authority down the organization chart?
Advice from the CEOs:
The company needs systems and guidelines to clarify on what and when the CEO wants to either have input or hear back, and what can happen without the CEO’s knowledge.
Set levels of approval – dollar impact or decision type – and clarify what decisions can made at what level, what decisions need higher level approval and at what level, where they must inform you, and where you must sign off.
Similarly, establish regular reporting and meeting schedules, along with guidelines as to what is to be reported – again by budgetary impact or decision type – and assure that this reporting takes place.
“The Great Game of Business” by Jack Stack describes a company which has implemented these systems with astounding results. It provides a template and describes in detail how the system is implemented and what bumps they encountered along the way.
Invest more time in setting roles and responsibilities for your direct reports.
Keep reporting systems aligned across the company.
Expect over time to adjust levels of authority as individuals grow in responsibility and accountability.
Most importantly, lead by example. If a team member comes to the CEO for guidance on a project, refer them back to the proper manager for advice.
2015 Top ranked software systems to manage projects and processes from selected searches:
Capterra: Microsoft Project, Basecamp, Atlassian, Wrike, Podio
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.
Situation: A company is a C Corp with several owners. As it is the end of the year, there is an active debate on owners’ compensation. The CEO has looked at a number of options, but would like the advice of others in a similar situation before making a decision. What do you see as the pros and cons of various options for end of year owners’ compensation?
Advice from the CEOs:
In one company, profits are split among owners according to stock ownership. This is similar to a public corporation where dividends accrue according to stock ownership. The pro is that it is equitable; the con is that smaller owners who may have made significant contributions during the year don’t necessarily receive the recognition that they may believe they deserve.
Another CEO varies owners’ compensation according to company performance. In good years, there is the option to be generous through enhanced bonuses, etc. In slim years it is more important to conserve cash, and quite frankly company performance didn’t justify significant bonuses. The pro is that this offers the CEO more flexibility than the first option to recognize significant contributions; the con is that the recognition of some may seem arbitrary to others.
In response to the latter observation, a third CEO sees this as acting like a good father – sometimes you just have to declare your prerogative if employees squabble about your decisions or push too hard for unreasonable requests.
The CEO who originally asked the question followed with an additional question – how do you present your compensation decisions to owners or staff who may think that they deserve more than their stock position or company performance over the year allows?
This is a facts of life situation – once the final determination is made it is not negotiable.
Situation: When an early stage company was founded, the CEO made vague promises of stock ownership to new employees. Some original employees have asked whether and when they will receive ownership. Should the CEO offer stock ownership, and what is the message to employees?
Advice from the CEOs:
The first question concerns company policy on ownership. For example, what do the founding owners think about expanding the ownership pool? It is important for the founders to have this discussion and agree on official company policy on ownership. This can then be communicated consistently to employees.
Investigate practices for similar companies in your industry. If you find that there is a size at which companies typically start to diversify ownership, then have a conversation among the owners as to what your company will do. You don’t have to follow the pack, but you may risk turnover if your policy is significantly different from the industry norm.
Employee stock ownership is a double edged sword. Employee shares only receive a true value in a liquidity event – sale of the company or an IPO. Absent a liquidity event, employee stock ownership can complicate corporate decisions, and there’s also the question of the value of an employee’s stock if the employee leaves.
If you decide not to expand ownership, what’s the best way to update earlier promises of ownership?
Tell the story: stock ownership was one option that we considered. We looked at industry practice, and here’s what we found. We determined that at our size there are few advantages to broad employee ownership, and several potential disadvantages to additional owners including tax consequences. Therefore, we decided that we could achieve our objective more effectively through our profit sharing plan.
Situation: A company has grown largely through the determination and energy of the founding CEO who is still the principal business development resource. The CEO wants to move from day-to-day focus to a leadership role, planning for the future. How have you evolved from principal doer to leader?
Advice from the CEOs:
Start by developing and managing an organizational chart for the business.
Create the organizational chart initially by role and responsibility.
Match existing people to the roles. Individuals may fill more than one role, but be sure that the individuals are suited to the roles to which they are assigned.
Give ownership of areas of responsibility to others.
Make it clear for each area of responsibility that the individual assigned is now in charge.
Match projects or assignments with individuals’ abilities and available time.
Establish quarterly or annual performance objectives WITH as opposed to FOR each individual – objectives that support company objectives.
See that people are rewarded for their results – both soft and monetary rewards – as appropriate to the responsibility held by each.
While you continue as the lead of business development, hand off new clients to others as soon as you get them on-board. Let others take on the customer nurturing and maintenance roles. Establish a plan to replace yourself in this role.
The EMyth Revisited by Michael Gerber provides a soup to nuts recipe for moving from doer to leader of a company. Everything starts with your organizational chart.