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Wednesday, October 24, 2012

Founders behaving badly negatively affect the business

I may look cute, but will certainly do dumb stuff!

I have interacted and/or observed many entrepreneurs and startup companies.  Some of the relationships were start a company, others to attempt to resurrect the dead, some to identify and adjust directions, others to serve as advisor or board member.  I often attempt to help struggling companies because I know a founder, an investor, or an introduction by a friend.  The result of these interactions over time resulted in exposure to the smartest people doing some of the dumbest things imaginable.  In other cases, the smartest do great things that just turned out wrong.  The result is trying to resolve a messy situation.

The issues generated by founders with non-liquid equity that has great value can lead to major financial problems.  For example, one founder sold a home, bought $1MM of property, and failed to obtain a new construction loan.  The result was no place to live, no money to build, and an unhappy banking situation!  As another example, a married couple purchased a $1MM house on equity loans only to find the valuation of the company dramatically fell off before selling the shares.  Then there are those founders that obtained personal loans for their business and later had problems when the company fell on hard times.  In this case, the ultimate disposition of the company was not enough to cover the personal loans thus leaving them with personal debt with not much way out!

How about management that decided to save money and not use proper accounting people or methods?  The company went through 4 audits to correct the books when confronted by investors.  A different company had an executive become personally involved with a staff member and engage in life-style changes.  This disrupted the entire company.  In another case, the ego of an executive caused a major shareholder to dump a few million shares on the market with no regard to price of exit; ouch, that was painful to watch!

These are just a scant few of the ways founders have negatively affected their company.  The following are just a few areas you should be aware of and consider carefully.

Visions of wealth:  Non-liquid equity may be worth a lot of money on paper, but the true value is zero until you can sell it.  Borrowing beyond the means of your actual salary has potential risks if you use a non-liquid asset.  You may be rich on paper, but wait until the money is available and in your account before you act rich.

Personal life impact: Make every effort to leave your personal life at home.  People are negatively impacted when you bring a personal relationship to the office.  They become even more disenchanted if you proceed to leave your significant-other and have your new friend remain in a key position at work.  Keep a solid non-contaminated business professional environment for the sake of the team.  On another note, a company becoming partly owned by a spouse because of a breakup may have negative consequences.

Personal finance issues: Keep your financial issues out of the company business.  If you decide to owe money, keep that issue away from the company.  Your debts tied to the company will drag it down.  Make every effort to keep your personal life on a solid financial basis.  Live on your income not your projected wealth.

Cash management issues: Spend wisely.  Saving money by limiting quality, needed services may not work out the way you think.  Remember the accounting problem above!  The cost of several audits to fix a problem was far more than the cost of having a qualified accounting person full time. The same goes for selecting non-quality service providers or lower cost employees.  Saving money is great, but not at the expense of having to redo all the work.

Ego: Check your ego at the door.  It can prevent business deals; turn off employees; and in strange cases like the one above, make your valuation drop by more than 50% in a few hours.

Issues with decision-making: Failing to make critical decisions can be a huge issue.  Your team is dependent on you.  Most decisions are difficult but failing to decide something can cause major problems.  You can read more on this topic by seeing an earlier article:  Risk and uncertainty stymies decision making.”

Negative impact on employees: Morale is important to performance of the team.  Making them feel negatively will result in poorer performance and greatly reduced creativity.  You do not want zombies walking around the office. You want highly motivated and enthusiastic people performing at their peak.

Failed management: The management team is critical.  The team will follow great leaders that they respect.  Ensure you maximize the leadership and relationship factors within your business.

Clouding ownership: Employees can leave at any time.  Non-employees may be potential business partners or future employees.  Ideas are tossed around in discussion frequently.  It can be very easy to have people come up with a novel idea and the ownership be clouded.  This causes significant problems if not carefully managed.  As one example, a university professor claimed to invent a product at the university a year after joining a company.  The situation degraded to a point where it took legal action and a six figure of expense to clean the mess up! 

 Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon