Posts from March 2010

Rolling Up Your Sleeves and Getting Your Hands Dirty

Charlie O'Donnell asked me last week about lessons I learned on my first venture capital investment. I'm not entirely sure what my first investment was but I know what my first board seat was. It was a company called Upgrade Corporation of America (UCA), founded by Jordan Levy and Ron Schreiber and located in Buffalo, NY.

 UCA was in the business of providing outsourced sales, fulfillment and tech support services to the desktop software business. Ron and Jordy had previously built the largest software distribution business and had sold it to Ingram. They saw their former customers like Lotus and Microsoft starting to offer upgrades to new versions of their software programs directly via telesales. And since those upgrade campaigns happened once a year, it was ideal to outsource the upgrade sales and fulfillment to a third party. That third party was UCA. It became a large business and was eventually sold to SOFTBANK Corporation of Japan. It was a very good investment.

I was in my early 30s at the time and the classic "wet behind the ears" VC. Ron and Jordy were concerned that I was going to give them all kinds of worthless advice because I didn't really understand the business like they did. I told this story a long time ago on this blog, so I'll just cut and paste the rest of it from the original post.

I went to the first board meeting. It was in Buffalo, NY and the two entrepreneurs were Ron Schreiber and Jordan Levy, both of whom have become good friends and great VCs.

After the meeting, Jordan took me aside and said "Freddy (he still calls me that), if you want us to listen to anything you say in these meetings, you are going to have to spend some serious time getting to know our business".

I guess Jordan and Ron didn't like the idea of some wet behind the ear VC trying to tell them how to run their business.

I quickly recognized that I had to earn the right to tell them what I thought they should do.

So a couple weeks later, I cleared my calendar for 2-3 days and flew to Buffalo.

Jordan had arranged for me to spend time in every part of the business, from help desk to finance to sales and everything else.

I rolled up my sleeves and got my hands dirty.

I met almost every employee and learned what each job entailed. I even did some of the jobs.

By the end of my stay in Buffalo that week, I had a much better idea of what the business was all about.

And it made me a much better Board member.

I have Jordan Levy to thank for that lesson. He forced me to really understand the business. And I've taken that lesson to heart in my career. I don't like to invest in businesses unless I really understand them. And when I invest in a business that I do understand, I like to "roll up my sleeves and get my hands dirty." I like to engage with the management team and help them build the business.

There is a fine line between "getting your hands dirty" and meddling. You have to let the entrepreneurs and management team operate the business and make all the key decisions. But that doesn't mean you can't help them. And to help them you need to understand the business. So roll up your sleeves and get your hands dirty and you'll be a better investor.

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#VC & Technology

Piercing The Corporate Veil

Yet another MBA Monday topic comes from the comments of last week’s post. This series is turning into a conversation which makes me very pleased.

Mr Shawn Yeager said:

As a recovering lawyer, and a serial entrepreneur, I constantly have associates, friends, and family coming to me for advice on formation issues (amongst other things). I think your high level overview leaves out something that always comes as a surprise to these people: the concept of “Piercing the Corporate Veil” of liability protection.

As you know there are certain rules, forms and procedures which must be followed as a liability shielded entity, be it S Corp, LLC, C Corp (or even as a limited partner). To not follow these forms strips the liability protection away from the company and exposes the person to personal liability as if they were a sole proprietor. For some reason, people are always surprised by this. Situations arise where records are not kept, annual meetings are not held, control is exerted, or personal funds are co-mingled with the business. When the company is involved in litigation, the owners find themselves on the hook. Depending upon the jurisdiction, any of a laundry list of things could wind up stripping the protection away.

I said last week that forming a company is the best way to “putting a buffer between you and the business.” But as Shawn and others point out in last week’s comment thread, you can’t just pretend to be a business, you have to be a business.

“Being a business” means separating your personal and business records, separating your personal and business bank accounts, treating the business as a real entity, having board meetings, taking board minutes, doing major activities via board resolutions, following “due process.”

If you don’t behave as a real business, you could find yourself in a situation where someone, most commonly someone who is suing your business, can come after you (and your business partners) personally. And then you are going to say “but what about the liability limitation the business provides?”  It may not be there for you. 

That’s called “piercing the corporate veil”. And you should take that threat seriously. So once you create a company, treat it seriously, follow the rules, and do it right. Once again, if you have a good lawyer, he or she will lay this all out for you and even give you many of the tools to do this stuff right.

#MBA Mondays