Being Naive, Unrealistic or Soft About Team Members and Leaders
When you are running a start up, you are thankful for having the help of a spouse, uncle, friend or friendly retiree. There are also visionaries who fall in love with your earliest product or technology, warts and all – and they buy into it heart and soul and come work for you. For both groups it isn’t about working for a company that may be struggling to survive its infancy – its about love of team or love of the product. That love usually means they are willing to work extremely long hours and wearing a lot of hats.
This can lead to the deadly sin of being naive, unrealistic or software about team members and leaders – including you!
Lets start with being naive – about yourself. As a CEO, you owe it to your shareholders to understand team management and rewards before you actually start the venture.
Dispense with the exceptions: Bill Gates stayed, but Paul Allen left. Steve Jobs stayed (got kicked out, and triumphantly returned) but Woz left. Very, very few members of a founding team persevere and remain in management positions. It isn’t necessarily about growing with the company either, or scaling up or getting kicked out. Its about growing in the direction that the company needs to grow in order to maximize shareholder value.
The managing team – in most cases – should change before shareholder value really blooms. Few teams that are truly astounding during the start up phase are going to be equally astounding once the company and its services and products are entering a maturing period. This is a frightening suggestion – but revisit your own mandate with the company – are you building shareholder value (and as CEO, you are a major shareholder, right?), or are you just there to only to garner a bigger paycheck? As this of yourself first, before you try to apply it to other founding managers.
Walk into this with eyes wide open, but without Machievellian intent; you can be generous within reason. Founding team members are laying the foundation for your business and should be rewarded for their incredible sacrifices.
This brings us to being unrealistic about team members and setting expectations for team members that might be unrealistic about the business. Let’s assume that you plan is to have a business on a typical technology company lifecycle – you grow the company from a small to a large business, accepting just enough external investment to allow your enterprise to step up to the next stage of business ($500,000, $1 million, $5 million, $20 million + in annual sales) and eventually to either take the company public or to sell out to an entity that will pay maximium dollar for the privilege. Your plan is not to be come a lifestyle or leisure company.
Is it realistic to expect that your spouse, uncle, friend or friendly retiree will acquire a combination of skills, contacts and management required to take the business to the next level?
It really is not. As a responsible CEO, you owe it to your shareholders to assume that these people will need to be replaced; you can allow for the opportunity to grow, but you should assume that they will not.
No Special Favors or Strings Attached
Prepare yourself and allocate a very generous block of dilutable shares, and resist arguments for non-dilutable shares.
An obscene number of dot-com era business books recommend demanding non-dilutable shares. The benefits seem immediately obvious – its like asking for more money rather than less. It is also strategically unsound to actually grant them.
Your business must have as few strings attached as possible to achieve the goal; being a success in any vertical market is hard enough, since value attracts ardent competitors. Its during the start up phase that rewards and compromises get made that hobble long term value. Let’s look at realistic vs unrealistic rewards for founding team members – Lump stock + options vs fixed percentages. A surprising number of small companies guarantee early investors and founding team members a fixed percentage of stock.
Giving and Taking Lumps
A lump stock share reflects the value of the work invested into the company – but in addition, it also represents an ongoing risk as a shareholder, to ensure that they leave the company is a healthy state and also to ensure (if permitted) voting for responsible executive board members. Fixed percentages will also scare away much additional and needed investment – unless your venture is a stellar success, future investors will view fixed percentage investors as unreasonably compensated.
Don’t give fixed percentages – just issue enough shares to compensate for the incredible value your founding team deserves.
Special Stock Classes and Special Voting Rights
Special voting rights (such as the right to turn down an acquisition) especially are turn offs to future investors. Also, your reasonable founding team member could die or have a change of heart that cause the owners of those shares to become unreasonable when you most need their agreement. Your founding team is critically important to your success, but their contribution is not so critical if their participation options cripple your ability to grow the business.
Being Soft – With Yourself
This brings us at last to being too soft on team members, including yourself. You may not be prepared as CEO to take the business to the next level;your team may recognize this but say nothing out of a sense of loyalty. As CEO, you must be extremely critical of your own performance and seek out the company of peers who can be equally critical of you – put in place an advisory board that has the experience to understand if you are really doing a good job or not. The pain of being replaced by an advisory board is not nearly as long lasting as the realization later that you drove your company (including the hard work of your team) out of existence.
Being Soft – With Your Team
Your founding team suffered together. You formed some serious personal and professional bonds with the long hours, strategic meetings and brain-breaking code review sessions. A few team members may neglect their personal lives enough to end up divorced. Loyalty is a beautiful thing. Loyalty drives managers to look the other way when they shouldn’t, or cover up mistakes. It can make you give your team members too much rope.
