Excerpt From "What Entrepreneurs Need to Know "

In speeches and presentations I’ve given to groups of entrepreneurs, would-be entrepreneurs and advisors to entrepreneurial companies, one of my favorite topics has been mistakes made by development-stage companies. I usually list more than 50 mistakes, each of which can cause serious problems.

Whenever I give this talk, members of the audiences shake their heads and laugh as I go through each mistake. Inevitably, several people approach me later to say they’ve either experienced these mistakes or have observed companies that committed them.

When I started this book, I thought I’d simply go through a long list of mistakes I’ve observed. As I began writing, I realized the book needed to focus on mistakes that threaten the success of a company.

I introduce each chapter with a “war story” I’ve experienced to illustrate the mistake in the context of a real business situation. I’ve disguised the name and product of each company involved, but the essence of each story is real. If you recognize the product or service in a war story, you can be sure the story is not about the company you think it is. I’ve used real products or services in most of the war stories to add context to the message of the chapter. None of the names or products or services in these war stories belongs to the real story behind the message.

The mistakes I address apply to most companies that have raised capital. Since my experience has been primarily with early stage or development-stage companies, most of this book is written from that perspective. However, I’ve been general counsel to a number of publicly held companies, most of which went public after raising a significant amount of capital from venture capital firms or from experienced angel investors. I believe companies at this level can also benefit from the advice in this book.

I haven’t written this book in the form of an academic paper or as an article for a law review. I’ve tried to write this in plain English. This is very hard for a lawyer.

Who can benefit from reading this book? All would-be entrepreneurs as well as current members of the management teams and boards of directors of development-stage companies. When I use the term “development-stage” in this book, I’m speaking of companies from start-up through the stage immediately before going public that have raised or intend to raise at least $1 million by selling equity securities. I often refer to the “products” of the company, but these principles apply equally to companies that offer services. I also frequently refer to company founders and entrepreneurs. These are interchangeable terms.

Most individual investors don’t understand what takes place in the boardroom of privately held or publicly held companies. Investors who are tempted to put money into young technology companies can benefit from my observations.

Men and women who are considering joining the management team of a development-stage company or a small-cap publicly held company could benefit from reading this book. It’s surprising to me that many CEOs hired to replace founders have never attended a meeting of the board of directors of any company. When they attend their first board meetings, these CEOs are usually shocked by the lack of knowledge about their companies displayed by almost all outside board members. I often “hold the hand” of a new CEO for the first 12 months, coaching him or her on how to work with the board. Although every group is different, the dynamics at work at the board level are the same for almost all boards of directors.

Most development-stage companies have outside directors. I use this term to differentiate these directors from those who are members of the company’s management team. Not all outside directors are “independent” as defined by the New York Stock Exchange, the American Stock Exchange, Nasdaq or the Securities and Exchange Commission. Some have relationships with the company that disqualify them from being independent directors.

Sometimes companies insist on having a director who is well-known or even famous, such as a retired general or someone who has held a high-level political position. My observation is that these directors seldom make a contribution to the business of the company since, generally, they know nothing about the actual business of the company – or, often, business in general.  However, they can bring high integrity to the board of directors – which, by itself, can be a great contribution to the board.

Outside directors from within the company’s industry often bring with them relationships that are valuable, but they seldom make a contribution to the board’s strategic decision-making. I’ve known a number of retired CEOs of technology companies who have become board members of other technology companies. They were extraordinarily dynamic and forceful as CEOs of their own companies but became incredibly passive after joining the new boards. I attribute most of this to not having a significant economic stake in the company and not wanting to cross the CEO, who undoubtedly chose them to serve as board members.

Partners in venture capital firms are very, very smart people. When times are good, they make an incredible amount of money. They perform significant due diligence on a company before making an investment, smoking out all material facts concerning the company and problems that might be lurking, whether the company is aware of them or not. A company that goes through the venture capital financing process is initiated into the financial and business reporting practices it will have to go through someday as a publicly held company.

Every venture capital-financed company I’ve represented wanted to have an IPO as soon as the stock market would permit. During the dot-com bubble, it was easy for a venture capital-financed company to go public, often as a pure start-up. Those days are over. As the stock market returns to normalcy, the IPO market will rebound, but only for companies with significant revenues that are on a clear success path.

Companies that avoid the mistakes I cover in this book – or, hopefully, recover from them – are more likely than not to be good candidates for IPOs. I hope you take away some of the lessons learned by many real companies that have experienced these mistakes.

    

About the Author

William A. Grimm is a partner in the law firm of Gray Robinson, Orlando, Florida and is the Chair of the Technology Team, a group of 20 lawyers that advises technology companies in the areas of law specific to technology companies. Mr.Grimm has an engineering degree and an MBA. He has served as general counsel to numerous high technology companies, both privately and publicly held as well as a member of the board of directors of several companies.

He is the Chair of the Advisory Board for the Center of Entrepreneurship for the Rollins College, Crummer Graduate School of Business and an adjunct professor in the MBA program, teaching Entrepreneurial Finance.

Prior to attending law school, he served as the CFO of a publicly held technology company and a vice-president of corporate finance for an investment banking firm. After receiving his engineering degree, he served in the U.S.Navy as the Supply Officer of the USS Strong DD-758 and the assistant to the director of data processing at the Navy Aviation Supply Office.