Loyalty is a hard-earned commodity.

There are several times when stakeholder loyalty is tested to the limit. For employees, a late or missed payroll is the ultimate test of corporate loyalty, divorced even from an employee’s ability to make do without a paycheck.

For investors, a subsequent down round at a lower valuation than the last, or an exit opportunity at a loss are all opportunities for the affected stakeholder to show a side that can sometimes shock an entrepreneur or CEO.

The chasm between management and employees

Managers almost always believe that stakeholders understand the pressures of the business and the circumstance of the present. The truth is that many employees merely make a simple pact: timely pay for time in service. If there is no closer connection to the corporation, when times are tough for any reason, it is these employees that make it tough for management to gain understanding and consent for actions that must be made such as missing payrolls, making layoffs, or abandoning pre-announced plans. And it is that disconnected employee, usually one or more of the better performers, that starts looking for a job when times look bad for a company.

Investor loyalty is most tenuous of all

Sometimes a secondary fund-raising effort leads to a lower valuation than the last. Although the investment documents from the previous round call for each investor group to vote as a class for or against new rounds of funding, in a contentious environment even a company in desperate need of new funding may find itself warring with its investors. I have seen investors allow a company to die, rather than suffer the massive dilution of an offer by a new investor.

And I have seen good offers from buyers of a company blocked by investors whose vote is needed to enable any such transaction, usually because these later investors would have a less-than-stellar exit with the sale, even if the founders would make out extremely well. That one hurts early investors and founders more than perhaps any other action by investors.

Simple building blocks for difficult times

The message here is simple. By keeping stakeholders close with constant information as to the progress and even stressful setbacks, and by never withholding bad news, stakeholders will be in a much better position to understand necessary actions by senior management and accede to decisions made in the best interest of the company, even at the expense of self. This kind of loyalty is never created during the bad times when everyone is thinking only of protecting self. Take advantage of the good times to build such loyalty.

SOURCEBerkonomics
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Dave Berkus
Dave Berkus is a noted speaker, author and early stage private equity investor. He is acknowledged as one of the most active angel investors in the country, having made and actively participated in over 87 technology investments during the past decade. He currently manages two angel VC funds (Berkus Technology Ventures, LLC and Kodiak Ventures, L.P.) Dave is past Chairman of the Tech Coast Angels, one of the largest angel networks in the United States. Dave is author of “Basic Berkonomics,” “Berkonomics,” “Advanced Berkonomics,” “Extending the Runway,” and the Small Business Success Collection. Find out more at Berkus.com or contact Dave at dberkus@berkus.com

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