I recently talked a female founder and CEO, we’ll call her Sandra, through a very crucial point in entrepreneurship: getting ousted. Yes, it happens, and recognizing this possibility will only help you to manage it if it does.
Sandra, unfortunately, learned a harsh reality of business: no one will look out for your interests, so you have to.
Sandra was negotiating leaving her role as the company’s CEO. A large investor came in and they didn’t see eye to eye. Frankly, after four years of hard work that saved the company from ruin and sacrificing all of herself to it, she was ready to leave.
Here’s the problem: she sacrificed all of herself. Instead of making sure she put protective measures in place for herself before she needed them, she worried about her employees.
It’s a problem that I see with women, in particular. We’re "nice." We will hire better people than us, pay them more, and generally put the company first—all great traits of successful entrepreneurs. But very few companies actually make it to a liquidity event and there are a lot of rough spots and decisions between founding and then. Women have to protect themselves.
So what to do? Here are three steps to take to make sure you are taken care of.
- Pay yourself a market salary. Now that’s a tough one when you’re just starting out, but once you have even a hint of money coming in the door, pay yourself. If you decide to pay everyone else but yourself, at least put an agreement in writing with the company for deferred compensation. You may agree to eventually waive it, but at least you’ll have a record of what you’ve been giving up. This can help in any future negotiations.
- Put a severance agreement for yourself in place. It’s a fact of life that at some point, many founding CEOs will be replaced. So it’s better to put one in place either before investment or when investment is new and everyone loves each other.
- Vest yourself. Today entrepreneurs will go a lot longer before they close that initial investment round. Be sure to have put a stock purchase agreement in place and vest yourself for the time you’ve already put in. Most investors won’t want to fund a company where the founder is fully vested, but most will allow for partial vesting based on time already served. For bonus points, be sure to include vesting acceleration upon a change of control or termination without cause in your stock agreement.
One thing you should note about these three items is that all three require documentation. Many a startup founder has told herself she can leave the paperwork until she has more money or the company is further along, only to find later that people have different memories about the business terms. I can understand wanting to save on lawyer bills. But please ladies, at least write down what you believe the business terms are and get it signed. If you have a board, there’s no excuse: spend the money to have a lawyer get it in print.
Sandra didn’t put any of these items into place and figured everything would work itself out. Trouble is, it didn’t, and she nearly walked away empty-handed after years of giving it everything she had. Don’t let this happen to you.
You can find Alicia at www.AliciaMorga.com or on Twitter @AliciaMorga
[Image: Flickr user gcoldironjr2003]