The Good, the Bad, and the Ugly about Startups and Entrepreneurship


ImageEveryone hears about the good things about startups – both as a founder or working in any capacity in one.  Yes – if you hit the right team and the timing is right, one can hit unexpected riches. However, that is a good experience, suffered by a minority few.  Let me relate to you the many bad and ugly things about startups and entrepreneurship.

 

The Bad

I recently received an email from a young entrepreneur which asked when do you hire a lawyer?  I replied simply and quickly – whenever a firm is investing in your company. Lawyers, by nature and training, are adversarial.  If any investment document has been drafted by the other side, expect that document to benefit the other party — not you.  Once, I had a former colleague contact me with a sense of urgency: we are closing a $150 million round, the lawyers representing the company sent me a bunch of papers to be signed.  “My partner and I started this project and are now formalizing the documents.” By “partner”, I thought immediately both partners would be sharing 50% equally.  When I reviewed those corporate papers requiring his signature, I noted one large gaping hole: no equity and no salary for this partner.  I certainly did not see a split in the middle.  The lawyers representing a party are searching for means to earn brownie points – “this is the clause where you have control or earn the most”. Here, the lawyers kept the so-called partner out of the picture, very similar to what happened to Facebook’s co-founder when he signed documents without having his own lawyer review the work in the movie, Social Network.  In fact, I have noticed many founders accept complex, obfuscating documents without understanding what the documents serve.

Another bad situation is an entrepreneur hooking up with the wrong investor. When both are not aligned, that is a recipe for disaster. I dealt with a technology startup which did not do its due diligence on its investor. The investor would mandate a consolidation or merger with the technology company with another without conferring with the technology entrepreneur. The investor had his agenda, the entrepreneur, another. Friction grew to such a degree that the investor would bring his own attorney to company meetings – further antagonizing the founders. Nothing seem right. After the founder hit his employment cliff, he bolted leaving with the investor with a useless patent.

 

The Ugly

There are lot of unscrupulous founders and executives out there. I have noticed software engineers work for startups without a W-2 or even any contractual pay with vague promises that they will be awarded salaries and generous stock options.  I did work for such a company where the CEO made such verbal promises of huge stock options package and salary. During my tenure, I was only an employee at will.  Verbal promises are exactly that – worth nothing and not even enforceable as a matter of law. Just prior to the IPO, the CEO can terminate any employee at will and never be held accountable for the verbal promises. That is the reality. And such disreputable executives know that as well. They do it quite consistently.

These so-called serial entrepreneurs are difficult to spot. One evidence whether that person is unscrupulous is by finding out how many managers or colleagues stay with him since inception. In the 3-4 years prior to my joining the team, I discovered that the company had 2 CFOs, revolving door of senior managers including those who joined on the first day, etc.  That alone should had warned me that no one stays with this CEO or president beyond one or two years. They regret accepting the position. It takes another year to find another job, which explains the annual turnarounds And these executives tend to be so mendacious and good at it, that it is hard to believe otherwise.

The only evidence you have to determine the character of that startup CEO or President for a private company is determining how many senior people stay beyond a year.  Unfortunately, former employees are reluctant to bad-mouth such an employer, concerned about legal ramifications. The only determinative facts will be finding out how many senior managers change every year.

Another ugly startup is the vicious despot. Noyes and etc. of Intel fame encountered that scenario with their former employer, which led in large part to the founding of Intel. In a large company, there are many HR controls that mitigate that problem. In a small startup environment, there is no corner where any new employee can hide. I recently met a CEO who stated in the conference that he doesn’t hire jerks. There are ugly working environments. One senior executive of a gaming company told me that the current CEO was so “difficult” that the minute his ISO cliff was effective, he resigned the next day.  As he related to me, that CEO had a bad tendency of criticizing employees or executives with personal invectives. Not a way to run a company.

 

I will continue to add more to the Good, Bad, and Ugly about Startups and Entrepreneurship.

 

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About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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