7 Habits of Highly Effective CEOs

    CEOs of startup and emerging growth companies regularly face any number of challenges and tough decisions in the daily operation of their businesses. The pressures and potential liability for CEOs can be enormous, and these chief executives should take appropriate steps to maximize success for their business and mitigate liability risk to themselves.

    Here are seven rules of success for startup CEOs:

    1. Effective CEOS are in Continual Fundraising Mode

    Raising angel, seed, or venture capital financing for a company is often difficult and time consuming. Savvy CEOs know they must be in continual fundraising mode, or at least always be fundraising ready. Being ready entails a number of things, including:

    • Having a complete up-to-date investor pitch deck available to be sent to prospective investors
    • Being open and responsive to investor inquiries (even if you have recently closed a round of financing)
    • Having an ongoing PR and marketing campaign that can reach potential investors
    • Being introduced to new investors by Board members, company lawyers, and existing investors
    • Having a great 30-second elevator pitch ready to give at any time
    • Having an online data room housing the company’s key contracts, corporate documents, intellectual property information, employment agreements, and other documents that an investor will want to review for due diligence purposes
    • Not being overly concerned about dilution—having enough cash to continue funding and growing the business is more important than optimizing stock percentage ownership

    2. Effective CEOs Monitor the Company’s Key Financial Metrics

    Even if you do not have a financial or accounting background, as CEO it is imperative that you constantly monitor and analyze the company’s key financial metrics. Failure to do so can have serious negative consequences for the business. While having a great CFO or VP of Finance will help, you should always have a solid understanding of the company’s finances. Depending on the nature of the business, the following monthly key metrics will be important:

    • Cash burn (or monthly positive cash flow)
    • Gross revenues (and key components thereof)
    • Gross expenses (and key components thereof)
    • Gross margin (the difference between revenue and costs of goods sold divided by revenue, expressed as a percentage)
    • Lifetime value of a customer
    • Customer acquisition cost
    • Customer funnel metrics/pipeline
    • EBITDA (earnings before interest, taxes, depreciation, and amortization)
    • Customer churn
    • Accounts payable
    • Accounts receivable
    • Cash in the bank

    SaaS companies have additional important metrics to consider, such as monthly recurring revenue, annual recurring revenue, and annual contract value. See 12 Key Issues for SaaS Startups Seeking Financing.

    3. Effective CEOs Keep the Board of Directors and Investors Updated

    Board members can be a great resource for challenges and problems faced by a CEO or founder. Keep in mind that Board members hate to be surprised at Board meetings with bad news.

    One useful strategy is for you have a 30-minute call with each Board member individually before a Board meeting, previewing what will be presented at the meeting. This will allow you to inform the members in advance and obtain advice that might impact what is eventually presented at the Board meeting.

    As CEO you should also contact each Board member promptly when material developments occur. Depending on the nature of the matter, such contact should typically be done by phone versus email, especially if potential litigation is involved (to avoid litigation discovery issues). Material developments could include:

    • Loss of a major customer
    • Litigation or threat thereof
    • Claims of sexual harassment or discrimination
    • Material deviations from the Board-approved budget, especially if it affects cash on hand
    • Proposed hiring or firing of executive officers
    • Inquiries from potential acquirers
    • Governmental or regulatory inquiries
    • Data breach or cybersecurity issues

    It’s also good practice to keep your investors updated periodically via email. The updates don’t need to be incredibly detailed, but here are some general items you should consider including in your updates:

    • Summary of the progress of the company
    • Summary of product development
    • Team and recruiting update
    • Recent press or PR
    • Key metrics you are paying attention to
    • Financials, including monthly burn rate and current cash position
    • Strategic issues you are facing
    • Request for help by introduction to prospective investors, partners, and customers (you want to leverage their networks)

    You should strive to maintain great relationships and connections with your investors. And you don’t want them to be surprised when you need to go back to them for additional financing.

    4. Effective CEOs Have a Good Employment Agreement

    You should attempt to negotiate an employment agreement for yourself with favorable terms. This will give you some peace of mind. A good employment agreement will often cover the following items:

    • Base compensation and bonus (and the bonus provision or bonus plan should be clearly spelled out so that there is no doubt as to whether you will entitled to a bonus)
    • Health, dental, 401(k), and other benefits
    • Right to a Board seat
    • Grant of stock options or other equity incentive plans/reasonable vesting schedule
    • Severance payment/continuation of health benefits, in the event of termination by the company without good “cause” or termination by you for “good reason” (and how these terms will be defined)
    • Accelerated vesting of equity incentives upon a sale or change in control of the company
    • Accelerated vesting of equity incentives upon a termination of employment without cause by the Board
    • Arbitration in the event of any dispute under the employment agreement, to avoid costly public litigation
    • Vacation/PTO
    • Protections in the event of disability or death
    • Limits on post-employment covenants (non-solicit of employees; non-competes to the extent legally enforceable, etc.)

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