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MITCHELL D. WEISS

A Practical Guide to

Entrepreneurial Finance

for Small Businesses

and Professional

Practices

HappensBusiness

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M.D. Weiss LLC, Publisher

Business Happens A Practical Guide to Entrepreneurial Finance for Small Businesses

and Professional Practices

Mitchell D. Weiss

Cover Design: Ian Pamplona

Layout Design: Ronald Sequeira

Copyright 2013 M.D. Weiss LLC. All rights reserved. No part of this publication may be reproduced, stored

in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying,

recording, scanning or otherwise without the prior written permission of the Publisher. Requests for permission

or to purchase product should be emailed to [email protected].

ISBN 978-0-9848587-8-1

Published in the United States of America

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Preface

10

Part I Why the Big Deal about Small Business 12

Have You Thought It Through? 13

Do You Have What It Takes? 13

Do You Understand the Risks? 15

Do You Know Your Responsibilities? 16

Do You Have an Idea That Can Stand up to Pen and Paper?

18For Your Consideration 21

Topical Readings and Resources 21

Part II Organizing and Managing the Enterprise 26

Choosing the Right Advisors 26

Choosing an Appropriate Legal Structure 27

Sole Proprietorship 27

Partnership

28

C-Corporation/S-Corporation 28

Limited Liability Company/Limited Liability Partnership 28

Ownership Interest and Incentives 29

The Size o the Pool 30

How the Shares Will Be Allocated 30

Triggers and Transerability 30

Managing the Finances

31Accrual versus Cash Accounting 31

Financial Statements 32

Balance Sheet 32

Income Statement 35

Statement o Cash Flows 37

Statement o Shareholders Equity 38

Table of Contents

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Table of Content

Analyzing the Data 39

Cash-Conversion Cycle 39

Inventory-to-Sale Conversion Period 39

Sale-to-Cash Conversion Period

40Purchase-to-Payment Conversion Period 40

Liquidity Ratios 41

Current Ratio 41

Quick Ratio 42

Leverage Ratios 42

Total-Debt-to-Assets Ratio 42

Debt-to-Equity Ratio 42

Interest Coverage Ratio

43

Proftability and Efciency Ratios 43

Gross Proft Margin 43

Return on Assets 43

Financial Planning 43

Managing the Risks 45

Determining the Likelihood and Estimating the Costs 46

Commercial Property Insurance

46General Liability Insurance Products 46

Workers Compensation Insurance 46

Business Interruption Insurance 46

Developing Policies and Procedures 47

Reviewing and Revising 47

Protecting Intellectual Property 47

Managing Employee-Benefts Programs 48

Health Care Insurance

48

Other Employee Benefts 49

Organization Design and Process Management 49

Social Networking 50

For Your Consideration 51


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Table of Content

Part III Debt, Equity and Coping with

Financial Adversity 55

Raising Debt Capital 55

The Underwriting Process

56

Whether to Make the Loan: The 5 Cs o Credit 56

Capital 57

Capacity 57

Collateral 58

Conditions 58

Character 58

How Much to Lend 59

How Much to Charge 59

What Terms and Conditions to Require 59

Personal Guarantees 60

Additional Collateral 60

Cross-Collateralization/Cross-Deault 60

Afrmative Covenants 60

Restrictive Covenants 61

Material Adverse Change

61

Representations and Warranties 61

Events o Deault 61

Indemnifcation 62

Prepayments 62

Assignment 62

Preparing to Borrow 63

Purpose and Justifcation

63Identiying Leverageable Assets 63

Dierent Borrowing Needs and Dierent Borrowing Alternatives 64

Small Business Administration Programs 64

MicroLoan Program 64

7(a) Loan Program 64

CDC/504 Program 65

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Table of Content

Disaster-Assistance Loan 65

Industrial-Revenue Bonds 65

Bank and Nonbank Lending Institutions 65

Financing Products

66Lines o Credit 67

Asset-Based Lending (ABL) 68

Term Loans 69

Commercial and Industrial Real Estate Financing 69

Leasing 70

Vendor Financing 71

Credit Card Financing 72

Peer-to-Peer Financing

73

Transaction-Structuring Considerations 73

Simple versus Compound Interest 73

Fixed versus Variable Rates 74

Interest Rates versus Annual Percentage Rates 75

Even-Principal Reduction versus Mortgage-Style Amortization 75

Level Payments versus Uneven Revenue Streams 77

Financing Term versus Asset Useul Lie

77Responding to the Four Decisions Every Lender Makes 78

Raising Equity Capital 78

Debt, Equity and Dilution 79

Who and Why 79

Company Structure 80

Valuation 81

Subordinations and Disentanglements 82

Coping with Financial Adversity

82

Under the Microscope 83

Sel-Directed Restructures 83

Operational Restructure 84

Financial Restructure 84

Asset Restructure 84

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Table of Content

Forbearances and Modifcations 85

Payment Moratoriums 85

Interest-Only Payments 85

Abatements

85Negotiating Tactics 85

Bankruptcy 86

Chapter 11 86

Chapter 7 86



Part IV Buying, Selling and Calling It Quits

90

Mergers and Acquisitions 90

The Dierence between a Merger and an Acquisition 91

Valuation Methodologies 91

Payments and Protections 92

Graceul Exits 93

Succession Planning 94

Establishing and Prioritizing Goals

94Orderly Transitions 95

Orderly Liquidation 95

Final Notes 95



Epilogue: From One CEO to Another 98

Acknowledgments 103

About the Author 104

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iM a big Fan OF sMall business. I love the enthusiasm, drive, creativity. The ability to movrom idea to implementation in very ew steps. The challenge o solving puzzles on the y.

Having owned and operated companies that nanced commercial and proessional en

terprises, however, Ive seen too many well-intentioned people charge ahead with too littl

sense o the undamentals: legal structures that separate the personal rom the proession

al, nancial-management standards and techniques that help keep things on track and i

check, negotiating tactics that appropriately balance risks and rewards, and the steps to tak

i the venture ends up heading in the wrong direction.

But rest easy. As much as this book ocuses on the nancial side o starting and runnin

an enterprise, there is not a semesters worth o nance theory and mathematical calculations in the pages that ollow. My goal is to introduce you to the things you really need t

know about operating a business, especially i youre planning on having some letover cas

to show or your eforts.

The book is organized into ve sections. The rst encourages you to think about all tha

goes into a decision to launch an entrepreneurial venture: Do you have what it takes? D

you understand the risks? Do you know your responsibilities? Do you have an idea that ca

stand up to pen and paper?

The second section takes you through the step-by-step process o organizing and man

aging that venture, rom choosing the right advisors to settling on the right legal structurestablishing and sharing ownership interests, managing the nances, protecting the ente

prise rom harm, saeguarding intellectual property, selecting the right employee bene

programs and shaping an appropriate organizational design and process ow.

When you get to the third section, youll be ready or the meat and potatoes o the book

how to borrow the right amount o money or raise an appropriate amount o investmen

capital rom the right places at the right prices, structured in the right ways and subject t

the right contractual terms and conditions. The section ends with a discussion about copin

with nancial adversityin particular, what to do, how to do it and the way to negotiate o

what you need.

The ourth section addresses your nancial harvesting options, whether through a merg

er or acquisition, sale or transers to others (including amily members), or simply waiting o

the checks to come in as you methodically liquidate your holdings.

The nal part o the book is the epilogue, From One CEO to Anotherthe lessons Ive learne

ater more than 30 years worth o great and horrible decision making. I good judgment come

rom experience and experience comes rom bad judgment, I have a lot o experience.

Preface

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Prefac

Please take the time to explore the linked articles and resources sprinkled throughou

the text and at the ends o each o the sections (which is why the book is digitally ormatted!

as well as to ponder the questions that are intended to inspire you to do just that.

My hope is that youll leave with a little more knowledge and a lot more condence i

your ability to start, run and prosper rom the small business or proessional practice yo

have in mind or have already commenced.Youre welcome to contact me at [email protected] with questions or comment

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It may have somethIngto do with the act that small businesseswhich include sole pro

prietorships, single and multigenerational amily businesses, and proessional practices

account or more than 99 percent o all employers in the United States. Or maybe its becaus

more than hal o all private-sector workers are employed by these rms. Then again, it coulbe because small businesses are responsible or nearly two-thirds o all net-new jobs (open

ings versus closings) or most o the past two decades. (These statistics are rom the Sma

Business Administrations Oce o Advocacy.)

As awesome as these stats may be, its still the God, I wish Id thought of that!moment o

entrepreneurial wistulness that impresses and inspires us the most.

Consider thecuisine on wheels concept: seriously delicious rolling nosheries, jockeyin

or space on busy city streets as they compete or our appetites and a bite out o our wallet

and purses along the way. Or the armers markets that are as much at home in the countr

as they are on tiny inner-city lots. Or the brilliantly original graphic design work, earlesslposted by reelancing artists on such sites as crowdSpring in the hope that at least one o the

concepts will put them in the running or a project that a restaurant chain, medical grou

practice or amily arm has put out or bid. Perhaps its a machinist who has come up with a

ingenious idea or a tool that promises to earn a place in every do-it-yourselers toolbox.

Entrepreneurs need only a moment to see things as they are beore theyre of, spendin

more time than theyd ever admit, thinking about and planning or what they could becom

I only. We sketch out our concepts on scraps o paper pulled rom nightstand drawers a

three in the morning, ne-tune them on sagging Ping-Pong tables in dimly lit basements,

nance them with rainy-day saving accounts and happily obsess about them orever.Whether youre launching a new venture, acquiring an existing practice, taking over th

reins o the amily store or rening something else you may have already started, being you

own boss is a rush. That is, until the wheels all of your entrepreneurial wagon and the u

weight o the responsibilities youve shouldered becomes jarringly obvious.

Why the Big

Deal aboutSmall Business?
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Why the Big Deal about Small Business

Have You Thought It Through?According to the SBA, approximately 30 percent o all new businesses ail within the r

two years; 50 percent disappear by year ve. And while there are many reasons or thos

statisticsincluding just plain good or bad luckit oten boils down to the wrong answers t

these our oundational questions:

D Yu Hv Wht It Tk?Anyone can decide to go into business or himsel. I the plan is to have it grow into somethin

thats more than a weekend hobby, however, consider this list o entrepreneurial traits tha

distinguish posers, as my students would characterize them, rom those who play or keep

as I would say:

VIsIon Are you clear about what you want, how you plan to get it and what youll do wit

it once its yours? Good ideas can turn into great businesses when specics outweig

generalities.

MoTIVaTIonAre you doing it or the money? The ame? A rsum bullet? Its best i its b

cause you enjoy the work and youre up or the challenge. Otherwise it will get old ast an

your employees will stop caring around the same time you do.

CoMMITMenTWhether your plan is to make a killing on an opportunity thats short-lived o

to build a business thatll endure or years to come, its important that the people you brin

aboard know your intentions and the certainty o your engagement. Ater all, youre askin

them to bet their livelihoods on you.

D yu hv wht it tk?

D yu udrtd th rik?

D yu kw yur rpibiliti?

D yu hv id tht c td up t p d ppr?

Vision

Motivation

Commitment

Focus

Drive

Ethics and morals

Objectivity

Attention to detail

Presence

Realistic expectations

Limits

Social awareness
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Now that you have a seNse of the basics, its time to talk about the nuts and bolts o ma

ing your ownership aspirations a reality. In particular:

Coosng Rg AdvsorsNo doubt youve heard the old adage A physician who treats himsel has a ool or a patient

Whether youre a physician, accountant, attorney, shopkeeper, plumber or owner o a lon

haul trucking company, its important to have competent proessional advice when your

establishing your business and reporting earnings. Sites such as Martindale, Lawyers.comCPAdirectory.com, and the Zimmermans Research Guide (which links to review sites o

attorneys and certifed public accountants) are all good resources. But what it really boi

down to are reputation, chemistry and cost.

Many years ago, one o my partners and I went shopping or a law rm to handle a com

plicated nancial transaction we were contemplating. He did the legwork by targeting the law

rms he knew, asking his colleagues or recommendations and thoroughly researching them

all. Ultimately, he put together a list o ve or six practices and scheduled meetings with each

Organizing

and Managingthe Enterprise

Coosng rg advsors

Coosng an appropra lgal srucur

Ownrsp nrss and ncnvs

Managng nancs

Managng rsks

Procng nllcual propry

Managng mploy bns programs

Managng organzaonal dsgn and procss fowSocal nworkng
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Organizing and Managing the Enterpris

2

The interviewing process was really important to us, not only because it aforded valu

able insight into each rms experience and expertise but also because it gave us an appre

ciation or the personalities behind the suits and smiles. We also wanted to eel conden

our advisors understood our objectives, respected our concerns and knew how to walk u

through complex issues. And, o course, we needed to be satised that their ee schedule

were reasonable and competitive.We went on our little road trip and met with each o the rms over the course o tw

or three weeks. All the law practices had great reputations, and the proessionals we inte

viewed had impressive backgrounds and pertinent experience. To be sure, we liked som

more than others, but by and large, we knew any one o them could meet our needs.

It all came down to chemistry. And cookies. The rm we ultimately selected was the onl

one to ofer us something more than a bottle o water! Seriously, as good as the cookies wer

the people were that much better. They counseled and protected us in a rst-class manne

or which I am grateul to this day.

Coosng an Appropra Lgal SrucurOnce your lawyers and accountants are in place, your discussions with them should the

turn to the legal structure that will deliver the best economic outcome with the least amoun

o risk, given the type o enterprise you have in mind, the work you plan to do and you

longer-term objectives.

There are our basic types o legal structure, each with its own advantages and disad

vantages:

SOLe PROPRietORShiP These are the simplest and least costly entities to create becaus

rom both a legal and tax standpoint, there is no distinction between the business and itowner. The owner is the business, and consequently the income he or she earns will b

taxed only onceat the personal level. It also means the owner is directly responsible o

what the business does or doesnt do. In other words, i you are sued, your proessional an

personal assets will be at risk.

As you might expect, a sole proprietorship will be around or only as long as the sol

practitioner is. The structure will also limit your ability to raise equity (investment) cap

tal because those who invest in sole proprietorships becomegeneral partners in thes

Sole proprietorship

Partnership

C-corporation/S-corporation

Limited liability company/Limited liability partnership
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At the stArt of the book, I wrote, Successul, enduring businesses are run by leader

who understand and ully embrace the responsibilities they have to the ve constituen

who helped make their achievements possible Two o these ve constituents are repr

sented by the enterprises lenders and investorswhich oten include amily membersanthe responsibilities entrepreneurs have to them are obvious: to use their loaned and investe

capital appropriately, as well as to repay or adequately return on it. Doing so also meet

the responsibilities entrepreneurs have to their other core constituentscustomers, vendor

employeesbecause it helps ensure the continuity o the enterprise.

The equity capital you raise and the ater-tax income you earn enhance the ventures boo

value as well as its ability to be opportunistic. It also unds the rms continuing growth and d

velopment. However, when start-up investments and internally generated unds arent enough

as is oten the case or rapidly growing rmsthe business will need debt (borrowing) and ad

ditional investment capital (equity) to ll the void. The question is, whats the right mix betweethe two: one part equity to one part debt (50:50); one to two (33:67); or one to three (25:75)?

This is yet another reason why corporate nancial literacy is so important. Without a so

id appreciation or your businesss current nancial capabilities and reasonable econom

prospects, youll nd it hard to know which tact to take.

Lets begin by exploring how lending works or raising debt capital, move on to equit

capital and, last, analyze how to work through nancial diculties.

Raising Debt CapitalThere are several types o lenders. The most traditional o these include banks andnonbancommercial-fnance companies. From largest to smallest, banks may be national, region

or community in scope, and chartered as commercial, thrit (savings bank) or credit unio

(nonprot) enterprises. They may also have specic lending areas o interest and expertis

such as commercial real estate nancing (including or construction projects), equipmen

nancing and leasing, and so-called asset-based lending specialtiesnancing secured b

the borrowers accounts receivable or inventory.

Debt, Equity and

Coping withFinancial Adversity
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Debt, Equity and Coping with Financial Adversit

5

Nonbank lenders may be national, regional or community-centric as well. They may als

specialize in narrower bands o nancing products, and some may even be aliated wit

entities that sell products that are being nanced, in which case they operate as so-calle

captive nance companies o the seller.

Theres also the advent ocrowdunding, or peer-to-peer, nancing, where ventures an

small businesses that may not yet bebankable can still obtain the debt and equity capitathey need.

There are pluses and minuses to each o these lending institutions. Banks represent th

most traditional and, generally speaking, reasonably priced orm o nancing; however, the

credit-underwriting standards can be restrictive and their approval processes slow. As o

the nonbank alternatives, what they may lack in the ability to compete on price (in terms o

interest rates and ees), they oten make up or in shorter turnaround times and, perhap

more exible loan structuring and credit-underwriting requirements. And when it comes t

crowdunding, i social lending or small businesses turns out to be anything like what wev

seen with microlending or home-based ventures, then total cost, turnaround time and thease with which loan restructurings and modications may be accomplished will be impo

tant issues to explore.

The Underwriting ProcessYou contact your bank or a loan. A loan ocer sets up a meeting to learn about your bus

ness and the nancing need that inspired your call. Following that meeting, the loan oce

may ofer some preliminary guidance about your chances or approval, along with a reque

or detailed nancial inormation, which the bank would use in its credit-evaluation (unde

writing) process as it attempts to make our undamental decisions:

Whether to Make the Loan: The 5 Cs of CreditThe rst o these decisions hinges on creditworthiness, which lenders boil down to the v

credit-underwriting precepts:

Whether to make the loan

How much to lend

How much to charge

What terms and conditions to require
http://www.sba.gov/community/blogs/p2p-lending-and-crowdfunding-%E2%80%93-explore-new-frontier-small-business-lendinghttp://www.sba.gov/community/blogs/p2p-lending-and-crowdfunding-%E2%80%93-explore-new-frontier-small-business-lendinghttp://www.sba.gov/community/blogs/p2p-lending-and-crowdfunding-%E2%80%93-explore-new-frontier-small-business-lendinghttp://www.sba.gov/community/blogs/p2p-lending-and-crowdfunding-%E2%80%93-explore-new-frontier-small-business-lendinghttp://www.businessdictionary.com/definition/bankable.htmlhttp://www.businessdictionary.com/definition/bankable.htmlhttp://www.businessdictionary.com/definition/bankable.htmlhttp://www.sba.gov/community/blogs/p2p-lending-and-crowdfunding-%E2%80%93-explore-new-frontier-small-business-lendinghttp://www.businessdictionary.com/definition/bankable.html

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In the precedIng chapter, I discussed business valuations within the context o an entre

preneurs investment-raising eorts. Now Ill ask you to ip that around a bit when the oppo

tunity to merge with or acquire another enterprise presents itsel. Ill also talk about what t

take into consideration when it comes time to pass the torch to the next generation.

Once again, its important to have good counsel on call. For example, lenders require bo

rowers to make certain representations and warranties or the loans they seek. Sellers an

buyers will also be asked to make certain reps and warrants to one another regarding thentitysgood standing, to provide disclosure schedules that explain exceptions to certai

representations (which may include unresolved disputes that have the potential to have

negative impact on value) as well as other inormation thats pertinent to the deal. Your adv

sors will guide you in this regard.

Your advisors will help you with the valuation process and guide you on the reps yo

can and should make, those you should require rom the other party and the disclosure

that need to be documented, and theyll suggest strategies or overcoming the objection

that may result.

Although your advisors are there to help you with contract terms and valuation stratgies, its up to you to choose the right merger partners and acquisition targets. I urge you t

ocus on the dollars only ater youve thoroughly researched and objectively assessed th

integrity o the people with whom youll be negotiating and those with whom your sta wi

be interacting once the deal is fnalized. Thats because sales o closely held business are o

ten structured with multiyear earn-out agreements, which can represent hal the value o th

transaction. With so much at stake, its important to eel confdent about the intentions o th

olks on the other side o the table. For example, the last thing youd want is or an acquirin

company to change your frms accounting methodologies or sales-incentive compensatio

programs ater the act.

Mergers and AcquisitionsIs the contemplated action intended to grow the business or proessional practice in a wa

it would otherwise be unable to achieve on its own? Is it a fnancial play or a strategic one

As important, what will the resultant entity look like organizationally, operationally and f

nancially? And what protections would be built into the deal to ensure that your plans an

projections come to ruition?

Buying, Selling

and Calling It Quits
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Buying, Selling and Calling It Quit

The need or clearly defned objectives is obvious, i not or the sake o those leading th

charge then or those whose support youll need to make the prospective combination work

your lenders, investors, vendors, customers and employeesthe same good people withou

whom you wouldnt be in business in the frst place.

The Difference between a Merger andan AcquisitionTwo companies merge when each brings something special to the party on their way t

orming an entirely new entity in the process. In this case, the merging companies hav

either determined they can no longer aord to go it alone, or that the ensuing cost saving

broader market reach and cross-selling opportunities have the potential to yield even grea

er shareholder value.

The transaction may take the orm o a horizontal merger, where direct competitor

agree to blend their customers and product lines; a vertical merger, where a supplier com

bines with its customer; a market-extension merger, where two companies with comparab

products sold in dierent regions decide to combine; a product-extension merger, where th

parties are selling dierent products and services in the same geographical region; or a con

glomeration, where the combining businesses are entirely unrelated.

By contrast, when one company acquires the other, the acquiring company is the surviv

ing entity because the acquired companys unique identity is eliminated aterward.

You can read more about mergers and acquisitions hereand here.

Valuation MethodologiesThe valuation process is oten quite contentious because the two parties are on oppositsides o the same table: owners want high valuations in order to limit the dilution o the

ownership interests while investors want just the opposite. The same holds true or buyer

and sellers, which is why business-valuation methodologies are a major ocal point.

The goal here is not to burden you with the intricacies o the various approaches an

their underlying calculations but to make you aware o their existence, so youre able to hav

a more productive (and less costly) conversation with your legal and fnancial advisors.

The valuation methodologies most commonly used include:

Adjusted-book valuation, where the economic value o the companys assets

is expressed in current market terms (which may dier rom their carrying

values on the balance sheet) and rom which the enterprises fnancial obligations

(liabilities) are subtracted. This approach is also used or asset-based valuation

purposes, where the pathway to a bigger number may be the dierence bet-

ween retail and wholesale values. I youre on the acquiring side, youll want a

conservative asset valuation not only to control the cost but also to help secure
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As I stArted to construct my outlIne orBusiness Happens, I wondered about how t

blend more than 30 years o experience, opinions and anecdotes into a book that would a

ready be covering a daunting list o topics.

Then it came to me: this is why God invented epilogues! What ollows are a ew more the lessons Ive learned and the ideals I believe are important and true.

Downturns Are OpportunitiesMy proessional career spans the equivalent o more than six ocial business contraction

the nal three occurred when I owned or ran two dierent companies. What I ound mo

interesting about these downturns were the opportunities they yielded. Recessions are th

equivalent o a three-ngered saluteCtrl/Alt/Dela chance to test undamental busine

models, execution strategies, organizational designs and process ows. Theyre also a terri

time to acquire new talent and expand market share because, to paraphrase Louis Pasteu

ortune avors the prepared (not to mention the less distracted) and also because the be

people are usually the rst to leave.

Plan B, C, D Even though I mentioned this a ew times in the book, its important enough to reiterate. I tru

believe in having more than one way out o the room. In act, I would never have succeede

with my last acquisition had I relied on a single path. The key is to be thorough and objectiv

about identiying and ranking all alternatives by taking into account their likely outcomeseconomic and otherwiseand requisite eorts in terms o cost, time or what you may give u

in the process. Youll then know whether to press orward or regroup.

Employee TurnoverI once had a polite but intense argument with a senior executive at a large company wh

advocated or Jack Welchs re the bottom 10 percent view o managing or excellenc

Epilogue:

From One CEOto Another
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Epilogue: From One CEO to Anothe

As those o us whove actually signed payroll checks know, it costs real money to hire, trai

and properly support a new employee. Thats why I eel strongly about two things. First, ai

ing employees that deserve the chance should be considered or alternative assignmen

Second, were all accountable in these situationsthe managers who did the hiring as well a

those who manage the managers.

My son, who works on the investment side o the nancial-services industry, once madan interesting observation in this regard. When he evaluates a company or investment pu

poses, one o the things he considers is something he describes as the velocity o turnove

under the CEO. In his view, i the number is high (lots o turnover), its because the CE

doesnt know how to hire or is impossible to work withand, either way, the board o direc

tors is complicit because it hasnt done anything about that. Consequently, he declines th

investment opportunity. Speaking as a lender and as a private investor, I agree with him.

Succession Management = Upward MobilityThis one took a while or me to appreciate when I became a rst-time manager. The mor

I tried to control my direct reports perormance and the less I decided to delegate to him

the more I ended up limiting my own advancement in the process. Successul hiring is,

eect, replacement hiring. Managers that are concerned about the people they bring aboar

shouldnt have hired them, or perhaps the managers shouldnt have been considered o

management in the rst place.

Encourage Proprietary Interest

Entrepreneurs prod their employees to take an ownership interest in the company. Buthe truth is, its hard or employees at every level to really eel as i they have a stake that

worth protecting. Ive tried to express this concept a little dierently by putting it in terms o

personal dollars and cents. For example, my management team once had a lengthy deba

about outtting our new ofces. My chie nancial ofcer and I wanted middle-o-the-road

utilitarian urnitureour own ofces included. Others petitioned or something more elegan

or, as they described it, commensurate with the successul company weve become. So

presented the options to my sta in the ollowing terms: Would you rather sit on your mone

or have it in your pocket? Guess what we ended up doing.

Hierarchy versus CollegialityI enjoy being able to move rom idea to implementation in as ew steps as possible, whic

is why I preer the inormality thats inspired by ew organizational layers. And beore yo

say, Thats ne or small companies, but what about big ones? let me add that our rm

grew to more than $1 billion in size with no more than ve layers o hierarchy at its steepe

point. Thisfat organizational design had other benets as well. It helped us control ove
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