The Downside of Being Upfront with Employees
One of the core
principles of creating a more valuable business is ensuring it can run without
you by getting managers to think like owners.
The theory goes that
empowered employees are the best positioned to solve your company’s thorniest
issues, as they are the ones closest to the problems. In theory, people feel
more like they are part of a bigger cause and this has the potential to
contribute positively to a company’s culture.
American Data Company
Potential is used
because being too open with employees can also backfire. To illustrate, let’s
look at the example of American Data Company, founded by Josh Holtzman in 2003.
Holtzman had built his consulting business up to more than $3 million in
revenue by 2011, when he came up with the goal of building it to be a $15-
million business. Holtzman knew that a $15-million business would have the
scale to provide his employees with more opportunities and a better exit
multiple if he ever wanted to sell.
Fifteen Cubed—The
Goal of Getting to $15 Million
To galvanize his
team around the idea of getting to $15 million, Holtzman came up with a catchy
concept he dubbed “Fifteen Cubed”. The idea was that his team would help him
build American Data to $15 million in annual revenue by the year 2015 and, if
successful, he would share 15% of the proceeds of the sale with his staff as
part of a phantom stock option program.
Holtzman announced
the goal and bought Fifteen Cubed bracelets for each of his employees to wear
as a reminder of their collective goal and how they stood to gain personally if
they were able to achieve their common goal.
Initially, the
program was received positively, but a year after the announcement, American
Data had failed to grow. Another year went by and still American Data was stuck
at $3 million to $4 million in revenue.
Suddenly, the
prospect of hitting $15 million looked like a long shot. Ultimately, the only
way Holtzman could hit the goal was to merge his company with a much larger
one, which is what he did when he swapped his equity in American Data for a
minority stake in Magnet 360, a consulting company about five times bigger.
The merged companies
exceeded $15 million in combined sales and Holtzman’s employees were able to
participate in Magnet 360’s phantom stock option program, even though their
portion of the proceeds was diluted when American Data merged with Magnet 360.
It was a good outcome for all involved, but not quite the home run Holtzman had
imagined when he first announced the $15 million revenue goal.
Being open with employees can be a great energy boost when things are
going well. Employees see the charts
and graphs all moving up and to the right and that can contribute to a positive
vibe in the office. But just like using leverage when buying a house can boost
results in a good market and magnify mistakes when things turn down, being open
has the potential to backfire dramatically if you don’t reach your projected
numbers.
As an entrepreneur, you can handle a high degree of ambiguity and you probably have an abnormally high degree of optimism. Just remember the people who work for you have chosen not to be entrepreneurs and for some of them, there may be such a thing as too much information.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
