August 30th, 2002
“If you ain't
part of the game,
Then how can you
find a solution,
Nobody said that it would be fair…
And once you dig
You'll find you'll have yourself a good time” –
Lenny Kravitz, Dig In
you want to be a CEO, huh? You want to run a company.
Seems like the good old days of having the
company lend you millions of dollars to buy shares of
the Company, rare art and $19,000 shower curtains for
your third home are all but over, pal.
These guys at Enron, Tyco, Worldcom and Global
Crossing have ruined it for the rest of us.
There is a bulls-eye pattern on CEO suit jackets
these days as the furor mounts over public company
executive compensation and chummy Boards of Directors
that look the other way.
Under this intense scrutiny, the concept of what is a CEO
and what is it, exactly, that they are supposed to do
every day needs to be explored.
And of course I want to bring this down to a
realistic level and talk about the start-up.
After all, not many of my readers are flying
around in corporate jets and have fat seven figure
Except for you, Darren.
Here is what it means to be a CEO of an incorporated
company in Canada (and the U.S.): You serve at the
behest of the Board of Directors (they can hire and fire
your ass), and your every act has to be in the best
interest of your shareholders.
All of them.
Every one of them.
To make matters more complicated, you also have
to look out for your employees at all times (because not
all employees are shareholders and they have some basic
protection under the law).
There are explicit corporate laws to guide a CEO that
are true for every incorporated company.
They are the basic guidelines for behaviour.
(Here it is for BC, The Company Act http://www.qp.gov.bc.ca/statreg/stat/C/,
the much maligned Employment Standards Act http://www.qp.gov.bc.ca/statreg/stat/E/,
and for good measure, read up on the Securities Act to
understand the laws around investment in your company http://www.qp.gov.bc.ca/statreg/stat/S/)
If you are a CEO or want to be a CEO, you had better
understand those laws.
If you don’t understand them, then be prepared
to check every action that you take with a lawyer that
does understand them.
But that can get expensive.
Some familiarity will help you save money and
Here’s another way to think about this.
As a CEO, you are like Jean Chretien in the
Liberal Party (your company).
The card holding Liberals in Canada are your
shareholders. You must act in their best interest all
the time. The rest of Canadians are your employees.
The law says that you need to look out for them,
too, but your real interest is in what the shareholders
Board is the Liberal caucus. They have the ability to
force you out. If
you put up a fight, they can ask the Liberal party
members to have a shareholder vote and turf you.
The employees (the rest of Canada), thought that
they elected you to the position, but in the end have
very little power to remove you.
Hey, it’s not a perfect analogy… but you get the point.
A company is like a democracy and there are
checks and balances to make sure that the CEO does not
try to run a dictatorship. Sort of.
Going way back to the start of the start-up, a very common
mistake made is that one person is given the title of
CEO, the founders split up the share pie on a napkin and
then the company starts to build its product and go to
much thinking goes into who the CEO needs to report to
and what the goals are.
Corporate record keeping, board meetings and
annual general meetings are not done and someone cooks
up a couple of fake meeting records to satisfy the
one signs an employment contract.
The Articles of the Company and shareholder’s
agreement are from a $13.95 kit found at the 7-11.
Does any of this ring a bell?
If you are lucky enough to get a sophisticated investor out
of the gate, or someone experienced in starting and
running a company properly OR if, God forbid, you
actually spent a couple of thousand dollars with a
lawyer, you will get your corporate house in order a lot
faster and save tons of headaches down the road.
But back to the CEO for a second.
Without a proper Board (at least 33% independent
outsiders… read 1 out of 3 members of your first Board
at start-up), the CEO is running recklessly.
With a Board made up of the three founders and
Uncle Pete, every decision made by the Board will be
full of conflict and subject to intense scrutiny in the
event of a shareholder lawsuit. Boards are supposed to approve things like share issuances,
changes to the rules of the company (articles,
shareholder’s agreement), financings, loans in and out
of the company, wind-up matters and hiring/firing of key
that the CEO makes the recommendations to the Board.
It’s all cozy, isn’t it?
Except that if you screw over a shareholder
(other founder, investor or other holder of shares of
any size) and they sue, they have the ability to expose
every decision made (remember those pesky laws I talked
about earlier?). And
if the decisions made weren’t in the best interest of
the shareholders… you fry.
And even if you don’t fry, you spend countless
hours with lawyers and you are not building your
shareholders are not good for business.
the end, if you have a moral compass that doesn’t
always point north, then nothing I say here will make
you be a responsible CEO.
Lord knows there are few of you morally
challenged folks that will always look for a way to
screw the shareholders. If you are good at what you do, then you probably know all
the laws anyway, because you are adept at skirting them. So you can stop reading now and get back to your scheming.}
Far too many inexperienced CEOs fly by the seat of their
pants and have no clue what is expected by them under
the law. Venture
capitalists, bankers and other sophisticated investors
will find “hair” in your deal with incomplete
records and shoddy governance.
In the diligence process, they will find out
about any shady or ill-conceived transactions.
They will walk away from things that can’t be
un-done or force you to change them as part of the
transaction. Actually, they will get you to sign reps
and warranties that say that you haven’t done anything
wacky even if they do not find it as part of the
once invested, they demand proper record keeping and
active Boards. They
understand the way a company works and what can and
cannot be done according to the law.
So they add new rules (by the bucketload) to
guide a CEO in the form of amendments to Company
many of these terms seem onerous, they have all been
developed according to bad previous experiences in
companies and, for the most part, these new rules make
firmer guidelines for management.
Think of it as narrowing the path that the CEO
walks, taking away any chance at waywardness.
I have seen good people with good products not get funded
due to bad advice or no advice in the early stages of
I have seen amazingly smart people do incredibly
unusual transactions that make it very tough to invest
(I mean, why raise the bar and make it harder to get
investment?). Here’s a tip if you intend to grow your company through
investment: don’t do debt deals with angel investors,
friends, co-founders or family.
Let them buy shares, according to the
Debt gets messy in the early stages when you have
no ability to pay people back from cash generated from
the business. It
is totally unrealistic to think that the next investor
will pay the debt of the previous investor.
you intend to keep the number of shareholders in your
company small (like less than 5) and not attract
investors at all and you have read all the way to this
point, well, you don’t need to listen to me.
Sorry about the waste of time.
Go have your Board approve some fat dividends to
your few shareholders and extract gobs of money from
your cash generating business.
Good for you. Be a dictator. See
if I care.}
For the rest of you thinking of going public, attracting
investors and having many shareholders, get your house
in order now. Think
like a bigger company and act as a proper CEO, keeping
your shareholders happy.
Otherwise you will get bitten down the road,
especially as this new economic world gets more and more
focused on proper company governance.
You want sweetheart deals from your enterprise,
go run a proprietorship.
It’s much cleaner that way.
But a CEO carries responsibility like an
albatross around the neck.
Don’t forget that.
What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
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