Over the years, I have been involved in early-stage companies as an informal advisor, board member and investor. I would like to share some observations and important lessons I have learned, many of which are also applicable to more established firms.
Founders and CEOs
Founders and CEOs, surround yourself with people more experienced and with expertise who can give you advice across a range of areas. Early-stage companies have advisory boards. When you start to raise capital, your investors will require you to form a fiduciary board. Listen to the members of your board. Be transparent with them and earn their trust. They will help you face the brutal facts of reality.
Under-promise and over-perform. CEOs, your job is not to achieve your goals, but to blow through them to the greatest degree possible. The way to do that is to set internal goals higher than what you promise the board and your investors. Your board meetings will be shorter and more upbeat, and your employees will be happier, and will take pride in the fact that they are exceeding your goal commitments to the board and investors.
I sat on the board of an early-stage company where the CEO continually fell short of the company’s quarterly and annual cash flow goals. His track record of delivering results did not help when he went to raise the next round of capital from investors. If the CEO couldn’t keep his prior commitments to achieve goals that he set, why would future investors believe him? He was eventually replaced. Credibility, trust and reputation are the most important currencies of any leader.
CEOs of early-stage companies, the first employees you hire are critical to your success. Hire wisely. The right people are your most important asset. Quoting Jim Collins in his legendary book, “Good to Great,” using a bus analogy, “Look, I don’t know where we should take this bus. But I know this much: If we get the right people on the bus, the wrong people off the bus, then we’ll figure out how to take it someplace great.” CEOs, listen to the people you have surrounded yourself with. They are an invaluable source of guidance.
As you grow, some of your early hires may not have the capability to be successful in jobs that change over time and that demand more from them. You will need to make changes to your team. Do so, even if you have developed friendships with them. The success of your business and your ability to generate a return for your investors depends on your ability to assess the talent within your company and make changes when needed.
Board members, in many cases your CEO is also the founder of the company. He or she may have developed the product or service being marketed, but that does not mean that they will be an effective leader of the company, especially as it grows and becomes more complex. The CEO may need leadership or other types of training. Effective CEOs develop good critical judgment from their past experiences. Your founder/CEO may not have had years of experience, so your job is to provide guidance. You may even reach the point where the CEO needs to be replaced by a more experienced individual.
Board members are responsible for governance, not operations. Boards of early-stage companies have a greater tendency to get involved in operations if the operating managers are not experienced. This should only be short-term. You can’t hold management accountable if you are making decisions for them.
One of the responsibilities of a director is to provide advice and counsel to the CEO. When I became the CEO of PQ Corporation, PQ chairman Richard D. Wood Jr., also at the time chairman of Wawa Inc., showed me the most effective way a director could assist a chief executive officer to think through a critical issue. I needed to make major organization changes, and discussed various alternative structures with Wood. He never once suggested what I do, but rather kept asking questions about the strategic and operational implications of the new organizational structures I was considering. This guidance was invaluable in helping me reach a decision, one that I personally owned.
As an investor in an early-stage company, you should be aware of possible dilution of your ownership position. When the company goes out for subsequent rounds of financing, as an investor, you will have an opportunity to invest to keep your proportional ownership. If you don’t have the desire to reinvest during these subsequent rounds of financing because you do not believe in the new valuation given the company’s prospects or do not have the financial capacity to make subsequent investments, you may choose not to invest. By not doing so, your ownership position will be diluted.
If in addition to being an investor you are also a board member, you will be expected to participate in subsequent rounds of raising capital. Prospective investors will ask if the current board members are participating in the new round of financing. If the answer is no, prospective investors may have doubts about the company’s potential.
Depending on how the new investors feel about the strength and prospects for the company, they may require a higher preference than former investors in the event of failure of the company and its subsequent liquidation. In this case, the newer investors will get proceeds from liquidation before the earlier investors. As an early investor, be aware of the risk of being “preferenced out.”
Founders and CEOs, board members and investors, be aware of the issues outlined above. It will increase your effectiveness as well as the probability of a successful enterprise.
About the author
Stan Silverman is a speaker, writer and advisor who focuses on helping businesses and organizations cultivate leadership cultures. He currently is a Leadership Catalyst for Tier 1 Group, a firm of strategists and advisors for preeminent growth. Stan is also Vice Chairman of the Board of Trustees of Drexel University, a lead director on the board of Drummond Scientific and and serves on the board of Ben Franklin Technology Partners. He is the former president and CEO of PQ Corporation. Stan can be reached by email or at his website: www.SilvermanLeadership.com.