In Startup Management

A couple of weeks ago I posted a blog entitled A Hard Lesson: Getting the best out of Professional Advisors.  This has provoked more response than anything else I have written, and I thought it was worth collecting some of those responses in a separate post for everyone’s benefit – especially as a number of clear themes emerged.

I also want to apologise to those who felt they weren’t represented appropriately, and to those who felt I was attacking their profession as a whole.  Neither was ever my intention, and I am sorry.

I said I was posting from the perspective of the founders as it was the perspective I was closest to, and I felt it would be most useful to others this way.  I had the permission of the people I worked with to post (I NEVER post client stories otherwise).  Of course I also had to anonymise it and leave out some detail to make a blog out of it.

With all these compromises needed, perhaps attempting to write the story was unwise.

Given that I posted the piece and got back many helpful comments and thoughts, I hope that sharing them will prove instructive.

Most Releationships are Good

I wrote the post because I had come across a few young companies with similar stories, but I’ve also had a lot of feedback from founders and advisers who haven’t experienced anything like this.

An example from Jordan Fleming (a prolific advisor to startups) came in via LinkedIn:

Jordan Fleming Oof. Quite a story mate. Thankfully I’ve not met many businesses that have suffered from this kind of poor professional services. But this is a good note of caution that should be shared.

It’s good to know that most relationships go a lot better, and the examples I have encountered are very clearly the rare exception rather than the rule.

Startups Expect Too Much

A general theme I got from a number of progessional advisers was that startups can be very hard to work with because of two pressing conflicts.

The first is that startups are often looking for fixed-price, bargain basement, rates.  This is natural given startups tend to be cash-poor and that legal and accounting work tends to be value-protecting rather than value-creating.  All too often the costs of appropriate professional advice are forgotten, and have to be shoe-horned into budgets and plans at the last minute.

The other side of the coin is that founders are inexperienced consumers of professional services.  Very often a founder will never have taken part in a similar transaction before, therefore they need everything explained.  This is much more time-consuming for professional advisors than working for more lucrative corporate clients who already understand the nature of the transactions they are undertaking.  While corporate clients will know what to expect of “standard terms”, founders often won’t.  This means there is much more liklihood that, after agreeing to a fixed-fee deal for standard terms, founders will find things they want to change in a contract.

Stick to Standard Terms

A number of my colleagues who are professional advisers, and some investors, responded that sticking to standard terms was very important.  Anne is a silicon valley investor who has also invested in Scottish companies, and commented:

Anne Johnson says:

Reading this, it makes a very strong argument for the founder to stick to standard terms – and putting in the work to find a set of standard terms which will do what he wants, or think very hard about why he wants to deviate.

In general I agree sticking to standard terms is a good idea, but in this case and at this particular stage of company development there were very compelling reasons to think about changing them.  In fact, the founder of the company in question also commented on the blog post with a heartfelt argument that standard terms were not appropriate:

The standard terms, which require shares to be sold immediately to the other shareholders on shareholder death, mental incapacity etc., don’t make much sense for a young start-up company for which the whole point of share ownership is potential future value rather than current value. So when I die of overwork before my company takes off, my heirs don’t get the benefit of all my hard work. The lawyers and accountants didn’t understand this but my advisors and founders of other start-ups I consulted did. I believe the lawyers and accountants are used to dealing with more mature companies and not start-ups. Maybe there are different standard terms for start-ups but the lawyers and accountants didn’t know about them.

With the benefit of hindsight I wouldn’t post the story in quite the same way if I could start over.  However, I think the lessons I drew from it in the “top tips” section remain valid, and none of the feedback I have received has questioned them:

Top Tips when using Professionals

  • Ensure you understand the complete package of work and any dependencies.  Always check, check and check again whether work from other professionals (lawyers, accountants, patent attorneys etc) will be needed in addition to the work you have been quoted for.  Also ensure that you understand where there might be any specific order in which work needs to be done.
  • Check who will actually carry out the work.  The experienced professional you meet and talk to in the first instance may not be the person who you have to deal with in doing the work.
  • Don’t believe everything professionals tell you.  If what you are told contradicts your experience and common sense, challenge it.  Any apparent inconsistency could easily be caused by an important misunderstanding, or it could just be an error – even professionals do not always get it right.
  • Don’t accept terms just because they are “standard”.  Most professionals will start contract or accounting work from a template they already have.  If you don’t like the terms when you read them (ask for help understanding them if necessary)  then make sure you either understand why they are necessary or get them changed.  Professionals should help to make sure that terms fit the needs of the participants in the transaction, and should make an effort to understand what those needs are.
  • Work with people who understand your business.  An accountant used to working with start-ups should have realised that a founder might not understand the complete process included legal work as well.  A solicitor used to working with start-ups will understand how get work done effectively with founders who do not have a detailed knowledge of the law.

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