Five Tips for Protecting Your Best InterestsAs much as you may like to think other people are looking out for you, the reality is that you are the only person who is 100 percent focused on protecting your best interests. Thus, you’re the only one who can develop a strategy that keeps you safe from undue harm. Here are a few suggestions:
1. Develop a Sound Founders’ AgreementWhen starting a business with a cofounder, you should develop what’s known as a “founders’ agreement.” This is nothing more than a clear agreement between all founding partners about a number of key issues the company may face. It’s not necessarily a legally-binding contract, but it’s a nice baseline to keep everyone in check. Think of it as a negotiable document that provides a framework for the business, but that can be adjusted as time goes on.
2. Have a Strategy for Your BoardIt happens more often than we’d like to think. A couple of entrepreneurs create a product, start a company, and the business experiences tremendous growth. Eventually the business grows to a point where equity investors enter the picture and a board of directors is formed to help shape the direction of the company. All is well…or at least the founders think.
At some point, the board of directors gets together and decides that the founders, as innovative and creative as they are, no longer represent the best interests of the company. So they gather together and vote to remove the founders from the executive leadership team. They quite literally get fired from their own companies.
Successful entrepreneurs and founders like Steve Jobs, Jack Dorsey, George Zimmer, Daniel Zappin, David Neeleman, Jerry Yang, and Andrew Mason—just to name a few—were all fired from their companies at one point or another. And though many of them continued to hold important roles—or were even asked to return to their former positions at a later date and time—situations like these speak to the reality of entrepreneurship.
If you’re a “product guy”—an entrepreneur who innovates and creates, but doesn’t necessarily have the business leadership background that’s common in executive roles at large, successful companies—you face an especially high risk of being ousted in the future. Ryan Howard, former CEO of Practice Fusion, is a classic example of this. The self-proclaimed “product guy” was fired from his company not once, but twice.
This article isn’t meant to scare you, but should light a fire under your seat and convey the importance of being proactive in how you protect your best interests. And, thankfully, there are several steps you can take to lessen the risk (or at least soften the blow).
The first suggestion is to plan for these scenarios ahead of time. As awkward as these “what if” scenarios may be, it’s better to flesh them out now than deal with them later.
3. Take Equity SeriouslyEquity is a serious deal. Not only does it determine your financial standing, but it also says a great deal about your power and influence. While you should avoid being too heavily focused on equity—at the expense of ignoring the product and customer—it’s something that requires a great deal of attentiveness.
Be very careful with how you discuss equity with potential hires, investors, and outside partners. It’s also imperative that there are clear vesting rules in place to prevent founders or other key business partners from leaving the business and taking their substantial ownership in the company with them. This is a key factor to protect your best interest in your company.
4. Prepare for Life Without Your CofounderWhen you launch a business with a cofounder, there’s an additional layer of risk that must be accounted for. For example, what will you do if your cofounder suddenly and unexpectedly dies?
In many cases, the premature death of a founder causes the business to fall apart. But with the right agreements and provisions in place, you can keep the company together.
- The life insurance policy is coupled with an agreement that states the surviving partner will use the funds from the life insurance payout to buy the deceased partner’s shares (thereby avoiding the problem of having them spread out among people who have nothing to do with the business).
- In a case where each partner has a unique skill-set that’s critical to the operations of the business, the life insurance policy is structured to provide the surviving founder with enough money to hire an adequate replacement to keep the business running.
5. Make Yourself IndispensableMany entrepreneurs think that, once they start a business, they’re done proving themselves. As a business owner, you have to protect your best interests each and every day. After all, they now control the reins and can make all of the important decisions. But this isn’t necessarily true. As we’ve discussed rather extensively in this article, founders aren’t always immune to criticism and consequences. Thus, you have to continue proving yourself.
Even as a founder, you must set a goal of being indispensable. In other words, you should bring so much to the table that there’s no questioning your value. Thus, when a disagreement arises, or there’s a fork in the road where the board can go in one of two directions, decisions are made in your favor.
Be a Proactive FounderThere may be a time and place for being reactive, but this isn’t one of those areas. What starts as a small business in your basement can quickly scale up to a successful organization with dozens of investors and board members. If you aren’t careful, their collective voices can become louder than your individual voice—even if your voice is the one that’s been there from the beginning.
Whether it’s getting ousted by the board, having a disagreement with a business partner, or having your cofounder pass away prematurely, there are a myriad of risks that threaten to disrupt your role as you know it. By developing a proactive plan that accounts for each of these possible threats, you can set yourself up for success and stability for years to come. Don’t miss this!