CEOs of startup and emerging growth companies regularly face any number of challenges and tough decisions in the daily operation of their businesses. The pressures and potential liability for CEOs can be enormous, and these chief executives should take appropriate steps to maximize success for their business and mitigate liability risk to themselves.
Here are seven rules of success for startup CEOs:
1. Effective CEOS are in Continual Fundraising Mode
Raising angel, seed, or venture capital financing for a company is often difficult and time consuming. Savvy CEOs know they must be in continual fundraising mode, or at least always be fundraising ready. Being ready entails a number of things, including:
- Having a complete up-to-date investor pitch deck available to be sent to prospective investors
- Being open and responsive to investor inquiries (even if you have recently closed a round of financing)
- Having an ongoing PR and marketing campaign that can reach potential investors
- Being introduced to new investors by Board members, company lawyers, and existing investors
- Having a great 30-second elevator pitch ready to give at any time
- Having an online data room housing the company’s key contracts, corporate documents, intellectual property information, employment agreements, and other documents that an investor will want to review for due diligence purposes
- Not being overly concerned about dilution—having enough cash to continue funding and growing the business is more important than optimizing stock percentage ownership
2. Effective CEOs Monitor the Company’s Key Financial Metrics
Even if you do not have a financial or accounting background, as CEO it is imperative that you constantly monitor and analyze the company’s key financial metrics. Failure to do so can have serious negative consequences for the business. While having a great CFO or VP of Finance will help, you should always have a solid understanding of the company’s finances. Depending on the nature of the business, the following monthly key metrics will be important:
- Cash burn (or monthly positive cash flow)
- Gross revenues (and key components thereof)
- Gross expenses (and key components thereof)
- Gross margin (the difference between revenue and costs of goods sold divided by revenue, expressed as a percentage)
- Lifetime value of a customer
- Customer acquisition cost
- Customer funnel metrics/pipeline
- EBITDA (earnings before interest, taxes, depreciation, and amortization)
- Customer churn
- Accounts payable
- Accounts receivable
- Cash in the bank
SaaS companies have additional important metrics to consider, such as monthly recurring revenue, annual recurring revenue, and annual contract value. See 12 Key Issues for SaaS Startups Seeking Financing.
3. Effective CEOs Keep the Board of Directors and Investors Updated
Board members can be a great resource for challenges and problems faced by a CEO or founder. Keep in mind that Board members hate to be surprised at Board meetings with bad news.
One useful strategy is for you have a 30-minute call with each Board member individually before a Board meeting, previewing what will be presented at the meeting. This will allow you to inform the members in advance and obtain advice that might impact what is eventually presented at the Board meeting.
As CEO you should also contact each Board member promptly when material developments occur. Depending on the nature of the matter, such contact should typically be done by phone versus email, especially if potential litigation is involved (to avoid litigation discovery issues). Material developments could include:
- Loss of a major customer
- Litigation or threat thereof
- Claims of sexual harassment or discrimination
- Material deviations from the Board-approved budget, especially if it affects cash on hand
- Proposed hiring or firing of executive officers
- Inquiries from potential acquirers
- Governmental or regulatory inquiries
- Data breach or cybersecurity issues
It’s also good practice to keep your investors updated periodically via email. The updates don’t need to be incredibly detailed, but here are some general items you should consider including in your updates:
- Summary of the progress of the company
- Summary of product development
- Team and recruiting update
- Recent press or PR
- Key metrics you are paying attention to
- Financials, including monthly burn rate and current cash position
- Strategic issues you are facing
- Request for help by introduction to prospective investors, partners, and customers (you want to leverage their networks)
You should strive to maintain great relationships and connections with your investors. And you don’t want them to be surprised when you need to go back to them for additional financing.
4. Effective CEOs Have a Good Employment Agreement
You should attempt to negotiate an employment agreement for yourself with favorable terms. This will give you some peace of mind. A good employment agreement will often cover the following items:
- Base compensation and bonus (and the bonus provision or bonus plan should be clearly spelled out so that there is no doubt as to whether you will entitled to a bonus)
- Health, dental, 401(k), and other benefits
- Right to a Board seat
- Grant of stock options or other equity incentive plans/reasonable vesting schedule
- Severance payment/continuation of health benefits, in the event of termination by the company without good “cause” or termination by you for “good reason” (and how these terms will be defined)
- Accelerated vesting of equity incentives upon a sale or change in control of the company
- Accelerated vesting of equity incentives upon a termination of employment without cause by the Board
- Arbitration in the event of any dispute under the employment agreement, to avoid costly public litigation
- Protections in the event of disability or death
- Limits on post-employment covenants (non-solicit of employees; non-competes to the extent legally enforceable, etc.)
See a detailed discussion in 14 Key Issues in Negotiating Employment Agreements.
5. Effective CEOs Obtain Appropriate Liability Protection
You want to ensure that you have broad liability protections, covering your performing services within the scope of your employment as CEO:
- Does the company have adequate Directors and Officers (D&O) insurance coverage?
- Do company bylaws provide for indemnification protection for officers and directors?
- Does the company’s corporate charter limit the liability of officers and directors to the maximum extent permitted by law?
- Is there an Indemnification Agreement protecting the CEO that encompasses: (i) indemnification protection for claims; (ii) automatic advancement of legal expenses; and (iii) protection even if the CEO is no longer employed by the company? (Note statutory limitations on indemnification.)
6. Effective CEOs Are Aware of Important Legal Issues
Ignoring key legal issues can sink a company. As CEO you should try to ensure that the company is taking steps to comply with applicable laws. Here are a number of the key legal points to focus on:
- Has the company been properly organized?
- Has the company complied with applicable securities laws in issuing stock or options?
- Are appropriate steps being taken to protect the company’s intellectual property (such as through trademarks, copyrights, patents, non-disclosure agreements, etc.)?
- Is each employee and contractor required to sign a comprehensive Confidentiality and Invention Assignment Agreement (assuring that any intellectual property developed by the employee or contractor related to the business of the company is deemed owned by the company)?
- Does the company have appropriate policies in place to prohibit sexual harassment or discrimination?
- Is the deal with any co-founders clearly documented, and in the event of a departure is it clear that there won’t be a dispute about the company’s equity ownership?
- Does the company have a great form of customer contract, protecting the company and mitigating liability exposure?
- Does the company obtain all the required documentation from employees (e.g., at will employment letters, benefit forms, IRS Form W-4, USCIS Form I-9, etc.)?
7. Effective CEOs Are Prepared for an M&A Event
If you are fortunate enough to have the opportunity to sell your company at an attractive price, a whole new set of issues will come into play. It is important that you are prepared and have educated yourself on the complex merger and acquisition process. Here are some of the many issues you will have to get up to speed up on quickly:
- Should you go into a broad selling process?
- Should you hire an investment banker?
- Will you be able to get support from your Board of Directors and investors?
- How can you maximize price and terms via a competitive auction-like process with multiple bidders?
- What steps do you need to take anticipating a comprehensive due diligence process by a buyer?
- When should you sign a letter of intent and go into exclusivity with a potential buyer?
- What key terms can you negotiate in the letter of intent (such as price, type of consideration, escrows or holdback, scope of indemnification, and many more)
- Who will conduct the M&A negotiations? (It may be better for an experienced advisor to conduct the negotiations so you are not viewed as difficult by the buyer.)
- What employee issues will you have to address? Should there be a carveout plan to benefit employees and management?
- Since M&A deals can take a long time, do you have enough cash runway to get to a closing?
- Do you have defensible financial projections and underlying assumptions? (as these will be scrutinized by a buyer)
- What intellectual property issues will you likely encounter?
- What third-party consents will you need to obtain?
- What lawyers should you hire? (You need experienced M&A counsel.)
- How can you get to a deal with a buyer without letting the business deteriorate because of the distraction from trying to do a deal?
- Should there be a bonus or deal success fee to the CEO if the deal closes?
- How will employees and management be treated by the buyer after the closing?
For an in-depth discussion on M&A deals, see:
Copyright © by Richard D. Harroch. All Rights Reserved.
About the Author
Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a venture capital fund in the San Francisco area. See all his articles and full bio on AllBusiness.com.
This article was originally published on AllBusiness.com.