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What Parenting Has in Common with Raising Capital

By: Chris at www.CapitalistExploits.at

Fathers and mothers everywhere recall with a certain fondness the years BC. For the average pre-family adult, life was starkly different before children (BC). Responsibilities ended at the individual level and oh, the freedom. Money was yours, time was yours, and you could do with it all as you damn well pleased.

Come home late? Sure!

Not come home at all? Of course!

Take off on a whim? Hell yeah!

Spend silly money on things you don't need? All the time!

Being a parent changes this. Sure, there are parents who ignore responsibilities but that's why they're called bad parents, scowled at by their peers, and the neighbors secretly all expect to see their children end up on Jerry Springer.

When that little ball of screaming flesh drops out of... oh, never mind. You know how it all works. As soon as you become a parent that child is your responsibility. Period, end of story. No going back. If you don't like it you should have thought more about what you were taking on, or more precisely what you were putting where and the potential ramifications. After all, a vasectomy could solve the problem and you get to walk around like John Wayne for a week. A win win if that's what you're after.

After children everything you do going forward is done with the knowledge that there is this underlying responsibility. It can be a burden, or it can act as a massive awesome driving force - this all depends on temperament. The question then becomes what temperament are we dealing with?

Starting and running a company with your own capital is still like being a bachelor. It's your baby, your problem and you answer to nobody but yourself.

You wanna blow money on expensive office space? Sure!

Business class travel and high end hotels? Sure, why not!

When a founder raises capital it's akin to having your wife give birth. Everything changes. No more late night drinks with the boys, no more dragging yourself out of bed at 10 AM on a lazy Sunday. Hell no, you've got others to think about and take care of and guess what - they come first. They're called shareholders and they've worked hard to acquire the money you as a founder are now taking.

 In a recent email exchange with one of the Seraph's portfolio company CEOs the particular gentleman mentioned half jokingly that he's the indentured servant of his shareholders. This CEO has an immense amount of experience in both public and private companies and he "gets it". He knows that the responsibility is his, is large and can't be taken lightly.

Not all founders think like this. Some raise money thinking that its somehow a given and that once they have the money that this is now "their" money with which to build "their" company.

I like to see a company run where founders have a meaningful stake in the business and I want to see them treating the company as their own. The fact that should not be lost however is that shareholder funds are of course company money entrusted to founders in their position of managing the company. As a matter of due diligence this is a distinction I like to determine. It's dangerous to place capital with founders who can't tell the difference.

As soon as you sell equity in your business a piece of that business is NO LONGER YOURS and your responsibility is now to shareholders. Directors in a business, whether founders or equity holders, or as the case typically is, usually both, also have a responsibility for looking after the interests of a company's shareholders. One way to ensure this takes place is to ensure that there is a separation of roles between the board of directors and management. This structure can help ensure good corporate governance.

Annual and medium term objectives for management need to be laid out. There is a large risk where a company who's management are majority shareholders perform poorly or even destroy shareholder value out of sheer incompetence, lack of adequate skills or in some instances by fraud. The board's responsibility is to be able to ensure that corrective measures are taken.

In discussions with our many advisors who collectively have decades of experience working with companies right from start-ups through to multi-billion dollar enterprises the consensus is that at a minimum at least half of managements compensation needs to be tied to their achievement. This compensation can be in way of equity or salary or a combination of the two.

Results should be measured by results such as EBITDA, return on capital and/or revenue growth.
It's the board's responsibility to ensure that management are executing on the business plan which includes ensuring managements performance and the ability to remove management in the event metrics are consistently not met.

When investors see mismanagement, incompetence, breach of fiduciary duties and abuse of funds then watch out. It can quickly turn into carnage for founders who've not taken responsibilities seriously and where recourse is available, either by means of step in rights being used or by legal means. For irresponsible founders this can be as dangerous as spilling an Englishman's pint.

- Chris

 

"A hero is someone who understands the responsibility that comes with his freedom." - Bob Dylan