Several years ago, I was contemplating a venture that involved the formation of a brand-new management team—people I didn’t know well but who came to me with good recommendations and references. One of these folks was poised to become the head of an important area of the company. My partner and I explained how we planned to allocate a fixed amount of shares to each major area of the business, which would then be disseminated among the members of the individual teams. We hit a stumbling block when the candidate insisted on a stake that amounted to between 80% and 90 % of the entire team’s allocated value. Not only were we never going to agree to something like that, but we also became concerned about the kind of character we were thinking of inviting into our venture. Optics matter—and what this fellow failed to realize was that at some point he’d be found out, to the detriment of his and our credibility.
Encourage Proprietary Interest
Entrepreneurs prod their employees to take an ownership interest in the company. But the truth is, it’s hard for employees at every level to really feel as if they have a stake that’s worth protecting. I’ve tried to express this concept a little differently by putting it in terms of personal dollars and cents. For example, my management team once had a lengthy debate about outfitting our new offices. My chief financial officer and I wanted middle-of-the-road, utilitarian furniture for the space—including our own offices. Others petitioned for something more elegant or, as they described it, “commensurate with the successful company we’ve become.” So, I presented the options to my team in the following terms: Would you rather sit on your money or have it in your pocket? Guess what we ended up doing.
Rapid Growth and Roadkill
There are no shortcuts to sustainability. I’ve seen companies reach for bigger and bigger sales only to find themselves with untenable concentrations of customer risk—where their businesses became dependent upon fewer and fewer customers who wield greater and greater influence as a result. I’ve also seen companies that were so eager to grow that they failed to adequately prepare to manage that growth. I’m not advocating an “If we build it, they will come” approach to infrastructure investments, but I am suggesting the importance of planning ahead for different growth scenarios. Otherwise, you’ll find yourself playing an expensive game of catch-up.
Epilogue excerpt from Practical Finance: A Straightforward Guide to Personal and Entrepreneurial Finance