One of the major sins committed by Boards of Directors comes in the structuring of the compensation scheme for senior management – particularly the scheme for the CEO. Historically, most members of a senior team have received a multiple of their base salary in the form of options. In the past, boards have linked the rising value of the shares of a company to the incentivization of management – in other words, give them options that are only valuable if the share price increases. The weakness in this scheme is the increasingly difficult challenge of creating a public market for shares – as through an IPO. Now that companies are ’staying private’ longer – or, sometimes, not going public at all – the options become valuable only if another private investor comes along with an interest in purchasing them.

But there are downsides to this practice – well, several downsides but I want to focus on just two. The first becomes clear when a company approaches the second opportunity for a ‘liquidity event’ – merger or acquisition. Most acquirers have little interest in continuing, without substantial modifications, the option program of the company they are targeting. In face, the elimination of existing options is a way to further dilute the shares of the target company. In a battle of interests between the investors and the management option-holders, the investors almost always win – if for no other reason than their interests lie more closely with the acquirer than the option holders – they do not want to be diluted either.

Conversion of options in anticipation of an acquisition will seldom work. Most often, a sophisticated acquirer will lock in the capital structure early on in the negotiations. The acquirer will dictate the capital table of the combined companies and they will have little interest in diluting their position.

The second downside of the traditional strategy of incentivizing management with options that only become valuable is the price of shares increases is that the awards are not connected to metrics for individual performance. Each member of the senior team ought to have performance metrics – performance targets – that define company expectations. The good metrics are very granular – they define expectations in easily measurable terms. The very good metrics focus on long-term performance and penalize pursuit of short-term gain in lieu of long-term advances. Good compensation schemes reward performance that is in the interest of the shareholders. The rewards for such performance should be immediately valuable – not subject to the performance of the rest of the team.

Boards – or the compensation committee of a board, if such exists – better represents the interests of the shareholders if they insist on a compensation scheme which:

• does not excessively dilute existing shareholders
• ties awards to performance that advances the interests of shareholders – remember the primary duty of a board is to protect and extend shareholder value
• emphasizes the long-term interest of the shareholders over the shorter-term interests of management – shareholders are in it for the long pull while management will almost always act to maximize current period benefits

In this new, post Sarbanes Oxley world, there is mounting pressure on boards – including boards of privately held companies – to structure more effective and focused compensation schemes. Tying compensation to performance – particularly to long-term performance – whole structuring incentivized compensation that will survive a liquidity event is one of the major challenges that a board faces.

Related Articles:

• Management Incentivization the Right Way
• Components of Good Governance – Three Committees
• Good Governance – The Compensation Committee
• Good Governance – The Chairman’s Role
• Executive Committee Operations
• Board of Directors Responsibilities – Compensation Committee

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

One of the most commonly ignored conflicts in corporate governance is that between the role of the CEO and the one of Chairman of the Board of Directors. In some companies, this conflict is papered over by giving the same person both roles. This arrangement not only degrades the ability of the Board to meet its fiduciary responsibilities to the share holders – it also is an indicator that a Machiavellian culture has taken root within management and that the Board has ceded its responsibility – in direct terms, is acting negligently.

There is an inherent conflict is having one individual fill both roles – one that cannot be resolved with adequate oversight. The Board is tasked, among other things, with monitoring CEO performance, setting pay levels and managing succession issues. The Board is responsible for replacing the CEO if performance indicates that that is best for the shareholders. If the CEO (in the role of Chairman of the Board) is managing the Board, it is unlikely that these responsibilities will be met.

The pure fact is that CEOs who also fill the role of Chairman are – through a pure power play – intent on castrating the Board and reducing the power of the only legal challenge to their unfettered power. What is lost are the therapeutic benefits that exist because of the dynamic tension between the two roles. An independent Chairman forces the CEO to better understand that management works for the Board and shareholders – not the other way around.

The existence or lack of this dynamic tension defines the dynamics of Board. Without it, the Board tends to become a ‘rubber stamp’ for management and a critical corporate function is lost. With it, the CEO is in the proper role of reporting to the Board. (BTW, I am also an advocate that the CEO not be a member of the Board of Directors.) An independent Chairman sets the tone for the relationship between management and the Board as representatives of the shareholders. As a result, the Board tends to be more activist in both governance and oversight of the strategic planning process.

Years ago, whenever I held forth on this position, I was greeted with dismissive snorts. The CEO was, after all, the knight on the white steed – the savior of not only the company but also humanity. However, time and tide seems to have brought opinion to a new place. Support for separating the jobs has been slowly growing for the past decade. The recent corporate scandals and the financial crisis have added new momentum and a sense of urgency.

So where do these actions come from – how does the momentum and urgency translate into action? Most often, minority shareholders force the issues. Recently their actions have forced several major companies to split the roles of CEO and Chairman. In most cases, the Chairman was defined as someone who isn’t affiliated with the bank. Some companies have installed a recently retired CEO as Chairman but (given the focus of that person and the likely relationship with the new CEO, this approach has not been as effective in changing the governance culture. In some ways it appears to replace one conspiracy against the interests of the shareholders with yet another.

One of the most distressing data points is that the combined role arrangement tends to be most common at the extremes of corporate size. Small and medium sized companies quite often have a CEO who is also Chairman. The tragedy here is that a management team that could really benefit from oversight – adult supervision – does not get it. I have worked with a number of companies that have suffered from this lack. The mentoring function of Board members is enhanced when there is a separate Chairman.

At the other end of the spectrum, the odds of having a separate chairman get smaller as the company gets bigger. The most frequently offered justification for this arrangement is that the CEO acts as a bridge between management and the Board. While I agree that that is necessary, it is clear that this bridge can be built without appointing the CEO as Chairman. A Chairman does more than act as a bridge. They control the board meetings, the agenda, allocate resources of the board and deal with the hard questions of governance.

In the battle over separating the roles of CEO and Chairman, management deploys an array of ‘experts’ who point to the value of having one person occupy both roles. The first argument offered is on of particularism – “after all, this is not a theoretical issue – this is a particular company with a particular CEO and particular circumstances”. This argument is intended to dissolve the issue of the legal definition of the role and responsibility of the Board as fiduciary representatives of the shareholders. By removing the legal reality from the table, the CEO and management team seek to both remove the argument about fiduciary relationships (a potent issue in law) and the exposure that they might incur by acting in ways which limit or degrade shareholder value – particularly when their own fortunes increase as a result.

The truth is that the combination of the roles is a pure power play on behalf of the CEO and management. It is accomplished with the clear intent of subverting the oversight role of the Board and allowing management to focus on maximizing its own short-term gains. However, since Sarbanes-Oxley, there had been a new factor in the calculation. Management may be successful in subordinating the Board but the law now fixes the blame and liability on the Board members who have allowed this subordination to occur. In some cases, going along may mean going to jail.

Related Articles:

• The CEO involvement in the Succession Process
• New Board Member Selection
• Board Succession Planning – Two Tiered Candidate Criteria
• Good Governance – The Chairman’s Role
• Corporate Ethics and Good Governance Leadership
• Corporate Board Dangers

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

I recently had two conversations with decidedly different people who had the same perspective on business – most notably, their businesses. When something like that occurs, I tend to stop – light up a good cigar – and settle down for a think. Most often, the results of the effort are at least therapeutic – and sometimes enlightening. Well this time the results were somewhere in the middle – sorry to you folks who were anticipating enlightenment!

Both individuals were waxing philosophical about their business and career goals. Both were about to launch into entrepreneurial efforts. One was about to found a new business while the other was running one in an early start-up phase. For what it is worth, here is a snapshot of the conversations.

“I want to run my own shop – be my own boss – be in command of my own destiny. I don’t want to report to anybody – be beholden to anybody – or controlled by anybody. As captain of my own ship, I can make the decisions – take the actions – and suffer the consequences without asking permission.”

Midget Hitlers – Naive Napoleons – Minor Machiavellis: Whenever I hear something like this, I shake my head and sigh – mostly metaphorically, of course – I try to avoid awakening the assiduously asleep whenever possible. There is no good reason to disturb the self-worshiping or misapprehending that goes into such an antisocial and repressed worldview. I say ‘good reason’ based on lots of personal experience. In earlier days, I might have donned my armor, mounted the sturdy Rocinante and set off a-tilting at windmills. However, those were younger days when I was too full of myself and confident that I could face any challenge successfully. Now, after building six businesses and helping a couple of dozen others build theirs I have come to understand that there are some swamps that are best left undrained.

Madness is, of course, a relative matter and one of interpretation – thereby doubly subjective. However, delusion is continually self-inflicted. Self-deluded people form the gods that then turn and destroy themselves – a kind of one man circular firing squad.

Let’s get to the nub of the matter. The very idea behind the comments posited by my two errant entrepreneurs – the very concepts that they rest on – are both a delusion and a snare. Like Plato’s allegory of the cave, an idealized reality that, although completely imaginary, leads to tragic misunderstandings and broken dreams – wasted lives and efforts.

No one runs their own shop – no one is their own boss – no one is control of their own destiny. Business is a collaborative team sport – the team the works most closely and effectively together regularly buries the lone riders and dysfunctional gaggles.

Ok – you got me – there is an exception if you are operating your own lemonade stand on an uninhabited island. However, you do rely on the trees for lemons and the spring for water. Ahhh well!

The common characteristic of my two ‘declarers of their own independence’ was that they were both deeply anti-social. Their view of the world was essentially egocentric – ‘me centered’ – they were absolutely determined to keep people at a distance. Both seemed to be suffering from a repressed adolescent fantasy – a kind of Never-Never Land imagining of the human race and their place in it. Of course, you can probably guess who was filling the role of Peter Pan in their fantasies. Americans seem particularly susceptible to this ‘perpetual youth until perpetual death’ fantasy.

The reason that I no longer spend much time working with these Peter Pans is that I have lost my passion for making kamikaze raids on vacant lots. Business is a team sport that requires all team members to have a strong inclination to collaborate, communicate, learn, teach, evolve and contribute. Over the years, I have helped numerous entrepreneurs build their businesses. The good ones – the successes – have come when the understanding of the ‘business of business’ is not an issue – when there is a maturity that has vanquished adolescent fantasies.

The fading memory of the tech bubble bust has diminished the appreciation of how damaging and costly these adolescent attitudes are. Today they are mostly limited to small business and start-ups that will probably go nowhere. However, there were days when Midget Hitlers, Naive Napoleons and Minor Machiavellis strode the stage – sucking up financial resources and declaring that they were going to change the world as we know it – denigrating the weakness and stupidity of their clients and potential clients (all of whom were running larger and much more successful businesses by the way) and exuding a sense of manifest destiny. Mercifully, most of these megalomaniacs are now productively employed in the fast food service industry. The path of destruction that they left – the broken lives and misdirected careers – are still with us. The hugely wasteful loss of capital still echoes.

The truth of the matter is simple to state – and just as difficult to deploy. Before you get into business in an entrepreneurial role, try to find a non-instrumental reason that people are co-habiting this world with you. Slay your own daemons before you allow them to savage the people you attempt to work lead. In other words, grow up Peter.

Related Articles:

• Assumption is the Mother of All … – Lessons for Young Wannabees
• Good Reasons Not To – Lessons for Young Wannabees
• Change Aversion – Coming to Terms
• Yes You Can
• Building Productive Relationships
• A Non-Cumulative Life

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

Listening to the delivery of an elevator speech is the single most distracting event in an investor’s journey. It is to that point in time – the equivalent of ‘love at first sight’ – that most of the subsequent failures can be traced. An elevator speech is an advertising undertaking. It is an attempt to draw in a potential investor and get them interested in providing funding for a venture. It the starkest terms, it is a money trap.

Because of their brevity, elevator speeches are selective in their focus. They dance away from – or avoid all together – issues that undermine the apparent viability of the value proposition on offer. The necessarily simplified approach begins with an assumption that the presenter and team is able to execute and that their ideas are their own. In stark terms, an elevator speech is a swindle – a created illusion that – necessarily – avoids or minimizes potential lethal challenges and highlights a series of yet to be tested and usually overly optimistic assumptions.

If you are getting the impression that I have a strong aversion to the entire idea of elevator speeches, you are correct. Investors have lost more money because they failed to critically evaluate and aggressively test key underlying assumptions than for any other reason. This single misstep is by far the biggest ‘deal killer’ in the process. In a recent article – Assumption is the Mother of All … – Lessons for Young Wannabees – I argued that untested assumptions are the primary reason that start-ups fail. Here I would add that untested assumptions are the primary reason that investments in start-ups go south.

Here is a series of questions that I recommend any angel investor push hard on before then even considering providing money for a start-up:

1. Why should I think that you are capable of building and running a business? Prove to me that you understand the business of business – not just the business of your intended business. Repeatedly I have encountered companies whose CEO was very good at promoting themselves and the idea behind the company – they were masters at the kind of shallow-water thinking that goes into creating a good elevator speech – but a complete failure at assembling, managing and leading a professional and effective team. Investors have to ask the hard questions early on and challenge the assumption that the elevator speaker can build and run a successful company. The hard truth is that most of them cannot.

2. Who is on your team that would impress me and what kind of a deal did you have to make to get them onboard? I will want to talk to them – to see if they are floaters or workers. What have they accomplished since joining the team? I am surprised at the percentage of sociopaths that find their way into becoming CEOs. Primarily they are of two kinds. The first is not comfortable with the idea that there are other people on the planet. They are more comfortable with ‘ideas’ and ‘concepts’. As a result, they constantly are moving the flatware around on the table – but cannot seem to assemble a team dedicated to their ideas. The second are the ‘uncritical assemblers’. These people are good at piling up names but, when you start poking around the team, you find that the dedication to – and often understanding of – the value proposition behind the company is somewhat gossamer. These entrepreneurs are not able to build effective and dedicated teams. They are talk show hosts and always very bad investments.

3. Do not tell me about your passion tell me about your accomplishments. I am not looking for the glib or theatrical. What have you already done to turn your ideas into a going business? If the answer is nothing of substance, come back then you have. Passion is one of those buzz words that simply will not go away. In my experience, it is a poor substitute for other, more important, ingredients. I prefer an entrepreneur who is focused, persistent, knowledgeable, determined and who makes the best use the resources at their disposal. The illusion of passion can be manufactured – most educated people are adept at it – but these other things cannot.

4. Do not tell me about markets. Who are your customers? Amateurs have markets – pros have customers. Who believes in your ideas enough to pay for them? This one really drives me nuts. Somebody sends me a business plan and I get to the section that is supposed to be focused on the possibility of revenues and encounter something like the following. “The total market is XXXXX billions of dollars annually and if we get even one tenth of one percent of that … (blah, blah, blah)”. This is a simple bait and switch – an investor is baited with a huge number – then shifted to accepting the ability – and, most often as it turns out, the inability – of the team to implement in a way that captures any of that huge number at all.

5. Do not tell me about your revenue model – tell me about your revenue. I do not trust Excel spreadsheets – projections are usually self-serving crap. Tell me about your revenues to date. CEOs that are not dedicated to generating revenues from the very beginning need to be avoided. I recently reviewed a ‘business plan’ that admitted that the company would be cash flow negative through at least two follow-on capital raises. In other words, if the company were not able to raise the additional capital, the investors would loose their investment. The message behind the business plan was, “we are too busy doing product development to dirty our hands chasing revenues.” These are not companies – they are science projects. If you want to supply grant money, go ahead. If you expect a return on your investment, dream on.

6. Do not go on about differentiators or competitive advantage; tell me about a customer that you took from another company. It is not ideas that I am interested in – its implementation. Show me that you have implemented your ideas – stolen customers – generated revenues. This point relates to the one above. No validation of the value proposition is relevant unless it comes from a customer who has paid real money for what the company has on offer. The real test of the validity of the value proposition is the market – not the investors or the founders.

7. Slow down – I am not interested in being the focus of a heated rush. If you think your business can be described in a few sentences, you are far more simple-minded than the world as I know it. I often suspect that ‘entrepreneur wannabees’ who are good at elevator speeches suffer from ADD. Their attention span is so short that the brevity of an elevator speech is all they can manage. Their vision of business, their business and the investor’s world is so abbreviated that anything beyond instant gratification and casual agreements is beyond them. Getting a CEO beyond the elevator speech and into deeper waters is one of the best ways to test their ability to build and manage a company.

8. Recent trends and the economic downturn have made this an unfavorable time to seek financing. You do realize that, if we do reach an agreement, the valuation of your so-called company will be very low and I will end up owning most of it until you can produce results that allow you to buy it back. I occasionally receive packages on pre-revenue companies with proposed valuations in the millions. My response is always the same – set the valuation at the investment amount and allow the management team to buy in through sweat equity and results. Initially the investors will own most of the company but, with success, the management team can increase their share of ownership. Most investors are very happy to allow the team to achieve a majority position – if they earn it.

These are just a sample of the questions that I recommend investors ask when reviewing a potential investment. Pressing them will improve your returns. If you cannot bring yourself to press them, bring in somebody who can. Whatever they cost, you will be a small matter compared to loosing your entire investment.

Related Articles:

• Angel’s Sins
• Angel Investing – Governance
• Angel Investing – Hard Choices or Hard Times
• Customers as Financiers
• Exit Strategies Under Current Conditions – Part 4
• Attitudes, Agendas, Interventions and Compromises

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

The reaction to my two prior articles in this series has reinforced my view that angel investors often, by their own tendencies, can make it less likely that their investments will prove profitable. In Angel’s Sins, I outlined some of the mistakes that early stage investors make. In Angel Investing – Governance I described how many investors overlook the contributions that a professional, independent board of directors can make. I have received quite a few responses from investors – some that contain tales of woe and loss while others invite me to ‘get involved’ in an effort to salvage what can be of a lost situation. I don’t much like these latter invitations – too hard on the digestion with little to show. Treating sick puppies may be necessary but this series is about preventive approaches.

The message that I deliver when I speak to groups of early-stage investors is that they have to look to their own tendencies. Physicians heal thyself! Their options are hard choices or hard times. If they don’t take a firm, focused and demanding approach to setting and enforcing the terms surrounding their investments, they turn the whole process into a rolling of the dice – and that is more like gambling than investing.

Most angel investors seem to approach the process with a kind of ‘grandfatherly’ attitude – or, perhaps, like a ‘rich uncle’ who is supporting the ‘younger generation’ with their favors and support. The damage this ‘gentle’ and disconnected approach can do is hard to overstate. Life understandings are ‘softened’ and rendered formless. Understandings that might support a career of success and accomplishment are turned away – and the result is failure where success should have been.

If you are getting the sense that this article is more about the negative impact on the recipients of angel investment, you are right. I have seen this benign neglect and ‘grandfatherly’ soft-soap ruin both businesses and careers.

I am not one out to change the world, as we know it. I have long ago come to the realization that people are not going to change. My work with early-stage investors focuses on getting them to accept the need for effective, direct and often stiff adult supervision. In my book Amazing Pace: Turbo-Charged Business Development, I describe how this adult supervision can be arranged for the business development process.

In my writings about governance and oversight, I have focused on demonstrating how important a professionally organized board of directors can be in determining the future prospects of a company.

When I write about my advisory work with CEOs, I argue that the kind of direct and firm guidance that an experienced serial entrepreneur can bring to the table provides a template for the aspiring entrepreneur. It also supplies the demand for accountability, veracity and a commitment to results that goes well beyond the verbal.

Failure is a much sadder tail if it is the result of indifference, missed opportunities and regrets for what might have been. Investors advance their own interests by making sure that there is a firmness – even forcefulness – in the mentoring of the CEOs and management teams they have invested in.

Related Articles:

• Angel’s Sins
• Angel Investing – Governance
• Gap Analysis
• Executive Coaches as Mentors and Advisors
• Reflections of a Coach
• Team Coaching – Building Value by Unlocking Potential
• My Executive Coaching Perspective

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

Most angel investors, when funding a start-up, ignore the structure and operation of the board of directors. Most early-stage companies that I work with have only a casually structured board that seems to exist to satisfy legal requirements. Accumulated experience has shown me that this is a very risky approach. A board has defined obligations that are important to the future of any company. Boards unable to fulfill these obligations severely limit possibilities. Here are some of the guidelines that I offer when working with these start-ups:

Composition: A well functioning board is independent of the management team. Friends and family do not meet that test. A board, which is simply a rubber stamp or doormat, creates an imbalance within the organizations culture – key functions are untended or receive short shrift. A functioning board should have a majority of independent members. In my view, the term independent excludes both members of the senior team and investors.

Balance: All the rhetoric aside, the tendencies of management are inherently tactical and self-serving. The CEO is – or should be – focused on implementing the strategic and tactical plans. All implementation is inherently tactical. The team’s compensation – if it is correctly structured – should depend heavily on meeting those metrics and delivering on the plans. Even the most experienced CEO work this way. That implies an unbalanced emphasis on the tactical. An independent board acts as a counterbalance to this tendency.

Professional Members: Board members need to have the accumulated experience and refined judgment that will allow them to help formulate an effective strategic plan. Their vision needs to be long-term. They fulfill their fiduciary responsibility to the shareholders by balancing short-term tactical issues with longer-term ones. One of the changes that I have seen in recent years is a tendency among angel investors to seek out professional board members to take the seats that their investment entitles them to. Angel investors can draw on two pools of talent. The first is successful serial entrepreneurs and the second is professionally trained directors. Both bring important knowledge and experience to the board – both add significantly to the corporate culture.

The Business of Business: As I have written elsewhere, most start-ups fail (one in ten makes it to their fifth anniversary) because the team fails at the business of business. Most start-up teams have a good grasp of the business of the business. A well-functioning board will help make sure that the ‘non-technology’ aspects of the start-up are not the ones that bring it down. One of the most important of these is oversight – both strategic and tactical. Professional board members have the experience to tell when a management team is blowing smoke or missing the point. They also have the ‘stiffness’ to confront the CEO and force the necessary changes.

Standards and Metrics: One of the biggest dangers in a start-up is constantly moving goalposts. The double diversions of constantly evolving Power Point slide stacks and constantly reworked Excel spreadsheets can eliminate the possibility of holding the management team to any metrics at all. A functioning board will insist that performance meet projections and aggressively oppose the proposition that projections should be adjusted to match performance. The later is one of the most serious diseases that can infect any start-up. A management team that constantly lowers expectations to match failure is an amateurish gaggle.

Holding to Account: In most simple terms, if you cannot say what you are going to do and then do it, what is your word really worth? If you say you are a CEO, make statements about what your team is going to accomplish which induce investors to risk wealth based on those statements and them fail to deliver on those statements, you are not a CEO – you are a highwayman. A well functioning board will detect these bandits and take steps to replace them with people that are more professional and productive.

There is a tendency to overlook the impact of governance on the fortunes of start-up companies. My view is that this is a mistake. A well-structured and focused board significantly improves the prospects of any start-up. The cost of such a board is incidental when compared to the risks that it helps control and overcome. ‘Adult supervision’ alone is worth the investment. However, the other benefits – such as a wider range of contacts, introductions to important decision-makers, support in implementing effective control systems, professional evaluation of performance and more, make a well functioning board one of the most valuable assets any start-up can have.

Related Articles:

• Angel’s Sins
• Red-Teaming: Improve Your Chances of Getting Funded
• Gap Analysis
• Recruiting Successful Board Members
• Board Governance – Searching for Leadership
• Boards, Leadership, Governance and Risk

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

In this case, I am talking about early-stage investors and the sins that they sometimes commit when they decide to back a start-up company. I spend a lot of time engaged with such companies – and much of that time is spent working to set right things that were set in place when the first round of angel funding occurred. What follows is a partial list of ‘sins’ and a few suggestions that might both mitigate their impact and improve the investors’ prospects.

CEO Compensation: I regularly come across pre-revenue companies that are paying the CEO at levels that would only be prudent if the company was generating a run-rate in the twenty to thirty million ranges. As a result, lots of the investment capital is going out the door in the form of a fat monthly check. CEO compensation should reflect the condition of the company and the unavoidable fact that, in start-up situations, cash is a very rarest of commodities and needs to be conserved.

Top-Heavy Teams: I was recently asked to look at a company that had a senior team that was appropriate for a much larger company. There was lots of talent available but they were being underutilized. In this case, they had a fully competent director of human resources and an experienced vice president of finance. Both were high quality and very experienced people. However, what the company really needed was a first-class recruiter and a competent bookkeeper. The team has to match the needs and condition of the company.

Compensation Schemes: Quite often, I encounter companies that have base compensation schemes that are not conditional on performance. These schemes act as a disincentive and do not reflect the ‘risk profile’ of the company. A better way forward is to divide senior team base compensation into two categories – one for filling the role and a second that is calculated based on results. A good measure of the prudence of a compensation plan for a start-up is the percentage of investment capital that goes to senior team members no matter what the results are – the smaller this percentage is the better.

Technology Centric Focus: Many angel investors ‘fall in love’ with the technology and ignore the fact that the business of business is just as important as the business of the business. An unavoidable fact about any business is that implementation – not technology – is what makes the difference between success and failure. Certainly, the team needs a strong component of technologists. Implementers – those driven to turn technology into revenues and profits, dominate winning teams.

Hands-Off Oversight: Many investors seem to take the position that, once invested, the future of the company is up to the management team. Many of them actually sit on the board of the company. Two of the keys to start-up success are board oversight and ‘adult supervision’. Without it, the effort can descend into a simple roll of the dice. Investors – or better, their professional representatives on the board – should play an active and forceful role in determining the strategic direction of the company. One of the strengths of many angel investors is that they have had successful careers – experience in building and managing businesses – and that experience is invaluable to a new company and team.

Fanciful Projections: The two most insidious – nay, dangerous – pieces of software for start-ups are Power Point and Excel. Both promote shallow thinking. Start-ups are particularly vulnerable to the kind of loose thinking and untested assumptions that spreadsheets seem to cultivate. I often encounter start-up companies that are using incredibly convoluted financial models – companies that have yet to put two months of cash-flow positive results on the books. This kind of over-engineering distracts from the simple fact that the company has yet to become a going concern. Most often, these Rube Goldberg models result in a continual re-setting of expectations and little change in the culture, focus or profitability of the company.

Performance Reviews: In going concerns, the performance review is a key to evaluating management. The board uses the reviews to decide whether the company has the right CEO and senior team. It is rare that I encounter a start-up that has this process in place – and rarer still to find formal reviews as part of the corporate records. Every member of a start-up team should be performance reviewed by the board on a regular basis. Those reviews should be used to set compensation, renegotiate contracts and arrange for severance when necessary.

In the start-up world, only one in ten companies makes it to their fifth anniversary. My experience has been that most of those that fail do so because the team has performed poorly in the business of business – in other words, they do not fail because of their value proposition or the technology that is at the heart of that value proposition. They fail because they have not implemented the strategic and tactical plans in a way that generated revenue and an expanding customer base. Angel investors have it in their power to improve the odds for companies they invest in. However, to do so requires a more focused and professional approach.

Related Articles:

• Red-Teaming: Improve Your Chances of Getting Funded
• Venture Capital – The First Meeting
• Gap Analysis
• Presenting to Early Stage Venture Capitalists: A Few Things to Remember
• Customers as Financiers
• Good Governance – Strategic Positioning for Strategic Planning
• Governance By Visionaries

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

You can finish the title of this article any way you learned it. The way I learned it cannot be repeated here. The message, however, is one that every entrepreneur and start-up team needs to learn and, in my experience, almost none of them do learn. The postmortems that I have done on dead and dying start-ups show a clear pattern of mistakes and oversights which lead to the eventual demise of the company – and dissipation of the resourced and energy of the founders. At the center of most of these patters is the same mistake – made by team after team repeatedly.

In any logical structure, there are key assumptions that, if overturned, will result in the total disintegration of that logical structure. In philosophical terminology, these are ‘synthetic judgments a priori’. The point is that these assumptions are taken as given without question. Examples might be ‘god exists’. ‘I am alive’ or ‘today is the day after yesterday’. However, if these assumptions are proven false, the entire structure that has been built upon them crumbles and falls.

Synthetic judgments a priori are an essential part of philosophy but they are an insidious component of any business plan. Unwarranted assumptions bring down more companies than any other cause. If does not have to be that way and only is because founders ‘preach to the choir’ so passionately and avoid the hard questioning of the founding assumptions that have lead them to start a company.

A very successful entrepreneur and long time friend carries a card in his wallet with the following guidance on it:

These conversations are usually difficult. Most team members – and certainly the CEO/Founder do not like to have the founding assumptions of their dream of success and wealth creation questioned. If they engage in validation at all it usually focuses on the less important assumptions like financing, customer satisfaction or the appropriate distribution model. I do not mean to imply that these are unimportant issues. However, if the core assumptions are not aggressively tested and adjusted, the result will be a highly inefficient structure that will have a sharply diminished chance of success.

One of the best ways to avoid the proverbial ‘kamikaze raid on a vacant lot’ is to organize a high-level red-team to review the business plan and operations on a regular basis. I regularly build red-teams for this purpose and the results have been stunning. It is amazing how easily someone with two or three decades of experience can see through to the core of problem and identify the ‘of course’ – the ‘synthetic judgment a priori’ that lies at its center.

The first meeting of the red-team is always an explosive occasion. The CEO and senior team end up fighting a defensive action – defending their assumptions against an experienced and focused onslaught. The atmosphere begins to change when red-team convinces them that they were endangering the company and degrading its future by blindly assuming what was clearly not true. After that, the good teams and CEO want as much of that as they can get.

Remember: in business, it is much more important to be successful that to be right. Business is not about demonstrating the inherent correctness of your belief about reality. It is not about validating your assumptions about reality. It does not give you an opportunity to ‘change the world as we know it’. Business is about connecting a value proposition that can be delivered on with a set of customers who recognize the value of that proposition and are willing to pay an adequate price for receiving its benefits.

Related Articles:

• Good Reasons Not To – Lessons for Young Wannabees
• Change Aversion – Coming to Terms
• Balancing Work and Life
• Yes You Can
• Building Productive Relationships
• A Non-Cumulative Life

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

At times, I lecture to a class of undergraduates or MBA students. Mostly the courses center on entrepreneurism or some other aspect of business. A professor who is helping his students come to terms with what being in business really means generally invites me. I am able to speak from experience – having started and built six businesses – and I have learned that much of what I have learned as an entrepreneur was not well covered during my time in business school. Here are some examples of what I tell the students:

Why go into business? My lectures bring back memories of my own early misunderstandings. I remember thinking that going into business was a way to create wealth and retire early. I also thought that I should go into business because my father suggested it. It took me more years that I would like to admit to disabuse myself of those ridiculous fictions. Going into business is a way to get paid for doing what you love – and only if doing what you love requires that you go into business.

There is a passionlessness among the young that does not serve them well at all in this matter. For them, business is a process that you engage in to make money – that is the mantra – the rallying cry. It does not make any difference what business – business is a vehicle that will help you get rich! Many students – particularly those in the graduate classes – are well on their way to demonstrate how hollow this logic is.

Part of the fault lies in the structure of the business school curriculums. Even in the entrepreneurial courses, there is a focus on the tools and techniques of business. Students are not taught how to look inside themselves and discover 1) if they should enter the business field at all, 2) what they bring to that field in terms of insight of passion or 3) whether entering that field will give them the kind of life they want or are suited to live.

Half a dozen times during my coaching practice, I have helped ‘entrepreneurs’ extract themselves from the businesses they had founded and head off on careers that are distinctly non-entrepreneurial. The lesson they learned is that not everything in life is business – life is finding your passion and following it – passionless living may be profitable but it is not edifying.

How do you make money? Shakespeare wrote “There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy”. One of the biggest mistakes that young people make is to assume that the world is as they understand it to be – or worse – as they wish it to be. This is particularly true for students who have little life experience and a head crammed with the tools and concepts that pass for a business education these days. The truth is that the world pays little attention and cares even less about what you want it to be. It just is.

Self-knowledge is the path to a fulfilling life – and self-knowledge only comes from living. An old friend was fond of saying, “look Chief, people will pay you for doing all sorts of silly things, find the thing that makes you giggle with glee and then do it with gusto! The money you need to live the life you need will follow.” A bit more Zen and a little less accounting will clear the way.

What is the point of living? My greatest criticism of business schools is that they fail to realize that there is a single question that must be answered before any of their curriculum matters at all. My work with CEOs has shown me that this blind spot continues well after graduation and, at least in my humble opinion, is the number one reason why people’s businesses fail. It has nothing to do with financing or resourcing – neither technical training nor technology is nearly as important. So what is the single most potent limiter of potential? I often put it this way: “You have got to find a non-instrumental reason why there are other people on the planet”.

I am sure that statement sounds strange – particularly given the period that we have been through – when people were divided into predator and prey – seller and buyer – producer and consumer. However, this is precisely the time when that lesson is the most important. We have lived through a time where the only reason for other people living on the planet was that they could buy the product or service that a company was offering – and that has had terribly anti-humanistic consequences.

One of the questions I put to students during these lectures is, “what are your interests outside of business?” The first offerings are expected – sports, video games, reading, movies, etc. Most often, none of these are monetized in any manner other than cost – in other words, they are not considered ways to make money and build wealth. My point in suggesting this focus is that there are parts of your life you pursue simply for the joy of engagement. Compared to that, your business life is a desert.

The most successful entrepreneurs that I have know love people – not just as a theoretical idea; such as people as customers or clients – but as others who are different from them and from whom they can learn and grow. These distinctly un-Machiavellian types have a love of those differences and a wonder at the diversity of the human experience that borders on childlike awe.

I generally end my lecture by asking students who their mentors are. Most talk about their parents or a member of the faculty. The most fawning of the class tend to point to the professor. Then I tell them about something that Richard Rorty – the great American neo-pragmatist philosopher – was fond of saying, there are writers who teach you how to be the best person you can be and others who teach you how to be a productive member of society. You need both to become the person you were born to become. That is a greater lesson than any you will learn in any business class.

Related Articles:

• Making a Difference
• A Question of Identity
• Building Productive Relationships
• Seeking the Upward Path
• A Non-Cumulative Life
• Presence in the Present
• A Cost of Anti-Humanism
• Walking Together Alone – Searching For the Self

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

In the first four articles in this series, I discussed the difficulties of cultivating and maintaining innovation in a corporate environment. In this article, I would like to describe two companies. They addressed the challenge of cultivating innovation from two quite different directions. The first was a case of too much innovation while the second was the more traditional case of too little.

The Story of Company A

With this company, the balance was all the way over to innovation. Almost the entire team – with the exception of clerical support – was PhDs. They jokingly referred to themselves as a ‘dysfunctional gaggle of a-social eggheads’. Their windowless office space was in the basement of a building. Most of them arrived before dawn and left well after most other offices had closed. The strength of the organization was innovation – they were incredibly prolific. Advance after advance flowed from teams that were attacking difficult problems with apparent ease.

However, there was a major problem – they were not turning their innovations into revenue. None of the team had any experience with negotiating agreements and the ones that they had negotiated had turned out to be unproductive at best. Many of their attempts at ‘technology transfer’ were stillborn – generating no revenue at all and tying up the technologies under unproductive agreements. Further, no one on the team who had the slightest interest in gaining the abilities needed – they were all having too much fun ‘tinkering and creating’. Reality, however, was pressing in – the bills had to be paid and less-than-desired levels of compensation were an ongoing issue.

Working with this company presented a particularly delicate set of challenges. The first rule in any intervention is, ‘do no harm’. In this case, that meant avoiding any actions that derailed the culture that was producing so many great advances. That engine was delicately tuned and any damage might be impossible to repair. A core of team members realized that the commercialization of their advances was critical. With that support, it was time to try something new.

A first step was to open a ‘store front’. As it turned out, there was open space on the ground floor of the building. The idea was to move the innovations from the basement to the shelves of the storefront and to staff that part of the organization with ‘sales people’. Eventually they joked about putting in a ‘dumb-waiter’ to accomplish the transfer.

A key hire was what we came to call the ‘translator’. This person acted as liaison between the storefront and the basement and was the key to making the structure work. One of the principal difficulties in monetizing the innovations turned out to be the tendency of the team to loose interest in the innovations as soon as the ‘problem’ was solved. This meant that they usually stopped working short of ‘proof of concept’. The translator’s job was to set the ‘state of development’ required before the new product became commercially interesting. Once the new organization was in place, the storefront’s ‘shelves’ became stocked with lots of interesting and commercially viable products. The sales force began to make much more attractive arrangements and revenues increased significantly. The PhDs kept working and producing. The cars in the parking lot became newer and more upscale.

The Story of Company B

The organization and culture of this company was very different from the first one. It focused on extracting value out of a series of products developed by the founders more than a decade ago. The founders had retired and the remaining team had continued the business. Over the years very little innovation had occurred. The company was facing a gradually declining revenue stream. The team focused tactically. No significant forward investment occurred.

Although customers were constantly telling the team about new functionalities which would be desirable or new problems that they would like the company to address, the opportunities for new revenue streams was being lost through inaction. The initial establishment of a research and development department was problematic for two reasons. First, it was prohibitively expensive. The second was that the culture of the company would militate against its success.

A first step involved the outsourcing of the development. The company formed a partnership with another company focused on innovating. The resulting arrangement worked well because the ‘innovation’ culture was ‘out there’. Although the initial investments were modest, almost immediately the results were clear and significant. Customer concerns and needs were better addressed. New products and updates of older ones began to flow into the company’s offerings. The acceptance of the need to innovate came easily.

After a few years of this partnership, the team decided to develop an ‘in-house’ capability. They were able to do this through a merger with their partner. By this time, the team understood the need to allow and support this different way of operating. The senior teams of both organizations merged and a new culture of innovation emerged within the company.

Lessons Learned

Each situation is different – each company starts from a unique place. Efforts to cultivate a culture of innovation always require accommodations to the reality of what is necessary to reach that goal. There is no one-size-fits-all solution – only results that are productive or unproductive. It is not ‘rocket science’ but it is a terribly delicate dance.

Related Articles:

• The Challenge of Cultivating Innovation – Part 1
• The Challenge of Cultivating Innovation – Part 2
• The Challenge of Cultivating Innovation – Part 3
• The Challenge of Cultivating Innovation – Part 4
• Attitudes, Agendas, Interventions and Compromises
• Battle at the Cottage Gate

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.