Executive Pay in Startups

I know this is a hot issue, and one that many will not agree with, but here we go anyway.

Investors get pretty nervous when management teams are paid too much money in really young companies.  Basically because there is a belief that the overpaid emerging company executive should be 'hungry'.  

I often describe it as one pay lever that has 'equity' at one end and 'cash' at the other.  If the lever is pushed toward cash then less equity should be available.  If pulled towards more equity then less cash should be taken.

Any package should be generous, but it is the mix of equity and cash that is critical to get right.

The next issue is how much cash ?  The point I often make is that this can  always change over time - so the first award is not set in stone.  I have seen 2 examples of start ups where investor indigestion has taken place.  

The first was a few years ago when an inexperienced VC, but really successful property developer backed a venture where the CEO was on $500,000 package.  Basically all money that was going into the venture went to the CEO.  The VC became agitated and pushed for unrealistic results on an even more unrealistic timetable.  All very disappointing as both individuals were talented and the business model had real legs.  it all fell apart in my opinion because of the poor initial salary package which was unsustainable.

The second is more recent.  A management team is on a good wicket ($300k packages) and have sought funding.  Investors have pushed back on this as they want money to go into the development of the business - not the hip pockets of the executives running it.  And there is a difference.

In my opinion the right level for executive pay in start up land (depending on size of company) is between $80,000 and $150,000.  This assumes that equity grants will take place as well.

A tough issue, but these are my thoughts.  For the executive the balance needs to be struck between what they will be paid, and how investors will view those pay packets. If the pay packet is seen as off balance then it may have bigger ramifications for funding going forward. 

What IT Backup Systems do you have ?

Sydney has been recently undergoing a number of power failures which of course are really inconvenient.  Also pretty weird with all the sirens going off !

But more importantly they bring into question what protection you have in place across your business model.

When Sydney went down our Firm was pretty well placed because of 2 basic operational initiatives we have in place.

Firstly, we made the decision to host our Microsoft Exchange offshore with a global player.  Therefore when the power was cut our Blackberry's still worked.

Secondly we have a setup around our Server where the power is cut it immediately switches to an external power source and does an immediate backup.

The offshore hosting of email is provided by many players and is actually very reasonably priced.  The addition of the Uninterruptible Power Supply (UPS) is also pretty cost effective and when combined with a 1TB external backup means that your data will be protected.

This type of planning is very important - and if you are going through a corporate transaction it will also be a core area where the investor / counter party will definitely focus.  Unfortunately when in a young company there are so many things on the plate, it is often overlooked.

So free up a bit of time.  Have a look at how your IT system works.  Work through what you will do in crisis.  Put it into place.

Selecting Not Hiring Talent

A great book that I recommend that you read is the story of the RItz-Carlton Hotel Company.  It is titled 'The New Gold Standard'.

A section of this book covers the attraction and development of staff, with a key point within that section being the 'selecting' of individuals as opposed to the simple hiring of heads.  What does this mean ?

In a nutshell taking great care to ensure that those that are brought into an organisation can integrate with that organisation's values and vision.  The recruitment process is a crucial and highly time consuming event in the life of any organisation.  Great care needs to be taken (particularly by small companies) because losing an individual can cause a great distraction.

The current market conditions are an ideal time to upskill your organisation.  With unemployment on the rise there are an abundance of really talented people out there.

So work out what you need.  Be selective on whom you engage with.  Upskill in an opportunistic marketplace.

Building a Data Room for Due Diligence

The first thing that needs to be built inside a client's operation (in any corporate transaction) is a data room.

Be in it physical or online form, this is a place where all information on the Company is presented so that it is able to be inspected by interested parties.  Everything from contracts through to corporate information (shareholders, funding documents, shareholder agreements, etc.).

I suggest that you build this on a progressive basis, interweaving it with the day to day operations of the Company.  As such information can be built out gradually as opposed to a mad rush in the face of a transaction.

Standard due diligence lists are readily available, and you can access one from the 'Resources' section of the Lincoln Crowne & Company website.

Do You Have An Operations Manual ?

This is a really simple one but again something that is consistently overlooked. Does your Company have an operations manual ?  A central document / information site that lists all sorts of basic information on your organisation.

In this day and age it is difficult to keep track of all the passwords, account numbers and contacts that are spinning around a Company.  Take the time to develop and store this in a central location.  It makes finding information and dealing with administrative things much simpler.

You should include anything you can think of from an administrative perspective into this.  Account numbers.  Websites that you use (and passwords).  Service providers.  Contact details. etc.

You can also look at storing things in a central location online.  Services such as WEBEX are absolutely brilliant and also give the added benefit of ensuring information is secured and accessible from anywhere in the world.

Valuation in Young Companies / Commercial Readiness

A current job we are doing entails advising a 'green' company with raising capital.  The financial projections are seeing revenue increasing rapidly.  We have been working with the company to ensure that the financial model can be defended in a commercially sensible fashion.

To this end we have the client focussing on 2 specific things :

Firstly, explaining how the maturing of the business and its products are in turn leading to an increased volume of inquiry.  That is, the company is positioned to meet customer demand (which it wasn't a year ago).  Constraints of supply have been overcome.  The message is out there.  Commercial model 'attachment' is taking place.

Secondly, the development of a distribution strategy using channels and offshore alliance partners.  The important thing here is not so much the projection of sales, but the establishment of the fact that the company is casting its net wider and therefore better positioning itself to effect sales.

This approach focusses on building credibility into the business model - as opposed to just throwing numbers out there.  When dialoging with an investor the financial model becomes part of the conversation as opposed to all of it.  The majority of the conversation can be directed to the verification of the commercial readiness of the organisation - without which the financial projections are most probably just academic.

Redirect the Pennies

It is amazing how easy it is for financial waste to creep into a business model.

Even inside LCC one of the 'Nick Assef Principles' is to review the cost base on a quarterly basis, challenge all service provider agreements and any other expenditure.  And this is not necessarily to just save money.

Our challenge as a Firm has been to get the best possible tools and staff.  Every time we save some money we can afford to upgrade our resources.  So it is well worth doing.

I recommend you take a couple of hours to really study the cost basis of your operations every few months.  It is a simple but effective exercise.