The False Tradeoff Between Financial & Social Responsibility

There is a perception out there that there is a tradeoff between social responsibility and financial responsibility. You can’t do both, people say. You can’t have your cake and eat it too. Well, very fortunately the data just doesn’t support that perception.

Can you actually be more socially responsible and increase shareholder value at the same time?

The Only Social Responsibility of a Company Is To Increase Profits for Shareholders

In 1970, Chicago-school economist Milton Friedman proclaimed in an article for New York Times Magazine that a company’s only social responsibility is to increase profits for its shareholders. In the 1980s Ronald Reagan, Margaret Thatcher, George Bush, and the Ayn Rand star-pupil Alan Greenspan turned this credo into de facto policy gospel.

There is passionate and meaty debate whether externalizing environmental damage and exploiting a work force is okay if there is no law or regulation against it. There is another debate whether these practices actually maximize long-term profits or the present value of future cash flows.

For a moment, let’s take this 1970 proclamation at face value and assume that an executive’s responsibility is to increase returns for company shareholders. Let’s agree that executives and board members do have a fiduciary responsibility to seek to gain a return on the capital invested in their organization, particularly if they work for a publicly-owned company or a company that is not a wholly-owned private corporation.

So this begs the question, can you do both–increase social return and increase financial return?

Can You Be More Socially Responsible & Financially Responsible?

Raj Sisodia, David Wolfe, and Jag Sheth recently published “Firms of Endearment: How World-Class Companies Profit from Passion and Purpose.” In the book, they share the results of a study in which they looked at companies that were especially socially responsible–they call these firms “Firms of Endearment” or FoEs. They compared the shareholder returns of these socially responsible firms with the S&P 500. What they found was that the firms that were socially responsible outperformed the S&P 500 by 9x.

These Firms of Endearment grew shareholder value 1025% in the last ten years while the S&P 500 returned 122%. Even when you compare the Firms of Endearment vs. the blue chip success stories profiled in Jim Collins’ Good to Great, the Firms of Endearment win. The firms profiled in Good to Great returned 316% while the FoE’s returned 1025%.” Here’s the graph from their web site.

Financial Returns of Socially Responsible Firms Vs. S&P 500 and Good to Great

Now, by no means does this data prove conclusively that more socially responsible firms create higher shareholder returns. The data show only correlation, not causation. The reality could simply be that firms that happen to be socially responsible happen to be in more profitable industries and so they can afford to give more to the community and create better work environments. But nonetheless, the point is clear– investing in being a socially responsible company certainly does not by definition go against shareholder interests and in many cases enhances shareholder returns.

iContact Case Study

Earlier today, I published a case study of social responsibility at iContact. In it, I shared the why and the how behind our social and environmental efforts at iContact over the past year including examples of how iContact has reduced costs and increased employee engagement through our efforts. As I wrote in the case, the benefits to date from our social responsibility efforts included:

1. Vendor cost reductions of $40,000 driving estimated net savings of $19,000 per month.
2. Increased employee engagement and excitement to be working at our company (which we believe will lead to greater passion in people’s work, additional discretionary effort from team members, increased productivity, lower regret employee turnover, and an increased ability to attract the best and the brightest).
3. Increased customer acquisition and customer retention from customers who are coming to us and sticking with us because of our social responsibility programs.
4. Additional press coverage from Entrepreneur, INC, and the Raleigh News & Observer that is helping us recruit the best and brightest and gain additional customers and partners.

So in fact, at least so far, we have been able to show both tangible and intangible benefits that connect the investment we are making in social responsibility with direct economic net benefits to our financial results and thus to the increase of shareholder value.

A False Tradeoff

While it would be nice to have even better data and employee surveys comparing before and after our work at iContact, there is substantial anecdotal evidence supporting a conclusion that in the case of iContact, increasing investment in social and environmental responsibility so far has increased profits, and will contribute very positively to increasing shareholder value in the many years to come.

So does increasing social and environmental responsibility always increase shareholder value? No, it does not. But in many cases it can and does and the Firms of Endearment study provides a fascinating basis for a likely connection between the most socially responsible firms and those who produce the highest return for shareholders. Investing in being a socially responsible company certainly does not by definition go against shareholder interests and in many cases enhances shareholder returns.

There does seem to be substantive and significant evidence showing there the tradeoff between social responsibility and financial responsibility is false and in fact social responsibility in many cases aligns with increasing financial profitability.

Comments/Thoughts?

Thanks for reading. I’d love to know your thoughts in the comments on social responsibility, effective CSR programs, whether being more socially responsible helps or hurts a business,  and whether your shopping decisions could be influenced by whether a company is responsible or not.

Case Study: The Results of iContact’s Initial Foray Into Social Responsibility

Here is a case study sharing the initial results of of iContact’s efforts around social responsibility.

The post was first published earlier today on Change.org.

Wanting to Experience More Meaning at Work

In October 2009, I went through some challenging experiences that caused me to realize that life can be very short. Out of these experiences, I came to the conclusion that I wanted to align my values with my work at iContact to the extent possible. I wanted to see a direct connection between the work that iContact was doing and making a positive impact in our community and the world.

As Chip Conley writes in Peak, I wanted to be able to experience and see “meaning” at work and in my work. The humanity within me was dissatisfied with the comm only-held belief that the sole purpose of business is to maximize short-term profits, regardless of the impact on the world as long as one stays within the law.

I saw the purpose of business as creating value for humanity and profits a result of successfully pursuing this purpose but not the purpose itself. This extreme dissatisfaction with the Milton Friedmanesque view of the world could be a Gen-Y or Millennial phenomenon as our generation has grown up learning we cannot build a prosperous, stable, and secure world by externalizing environmental costs and exploiting other parts of the world.

While our generation may be particularly attuned to social and environmental issues, I think seeking meaning at work is a higher-order, but universal need. It is simply reality for the large majority of workers (particularly the smartest and most driven talent) that they want to be able to be part of something meaningful–in their contribution to the company, in what the company achieves with its business, as well as the ways in which their business goes about creating that value for society.

Helping small and mid-sized companies communicate more easily with their customers and reducing paper usage from direct mail had a positive value to society, but could we create meaning in other ways, perhaps in how we went about building our business, the culture we created, and how we gave back?

I could no longer compartmentalize my life between the for-profit financially-focused work I did and the not-for-profit charity-focused work I did.

And so, going into 2010 I made it one of my priorities to substantially expand our Corporate Social Responsibility (CSR) efforts at iContact.

Case Study: Social Responsibility at iContact

Since 2007, iContact has been giving away 1% of it’s payroll to 501(c)(3) non-profit organizations in our communities locally and globally, but just giving away money was the easiest thing to do–and not nearly enough. We also had an annual Habitat for Humanity company house building day each July and and we adopted a handful of foster children each winter to provide gifts for them. But again, this is the basics of what every company does–almost as a check-the-box whitewashing effort to just be able to say “well, we do something.”

These initial efforts were a start, but not enough. If we were going to make CSR a key differentiator for our company for attracting and retaining A+ talent and attracting customers who care about the world, we needed to do so much more. If our culture was going to be centered around creating a tangible direct connection between the work our employees did and true-meaning and value creation for the world, we needed an integrated CSR program.

iContact’s Corporate Social Responsibility Program

And so, taking a page from the playbook of Marc Benioff, we created the 4-1s CSR Program, modeled in part after the 1/1/1 Integrated CSR Program that Salesforce.com has so successfully implemented after Marc’s experiences at Oracle in the late 90s left something to be desired for corporate service.

The 4-1s CSR Program added giving 1% of product, 1% of time, and 1% of equity to our original program of giving 1% of payroll.

On January 8th, 2010 we rolled out the 4-1s program to our employees at our annual kickoff meeting. We explained that each team member would receive 2.5 extra days of Paid Time Off per year to volunteer in the local community which we would track via an AppExchange add-on called VolunteerForce, that we were taking 1% of the shares of the company and pledging them to the iContact Foundation, that we would give iContact away from free to any non-profit in North Carolina, and that we would continue our program of giving 1% of payroll away and matching employee contributions up to $300.

I was thrilled to have a formal CSR program in place. When Entrepreneur Magazine wrote an article about the 4-1s program in April giving us our first major press about the effort, I was careful to share that this was just the beginning for us. We have so much to learn about CSR.

Who knew if this was the right or best structure for integrate corporate philanthropy. What mattered is that we had something formal and significant in place and could learn and improve as we went.

Becoming a B Corporation

In May, we took our next major leap in our effort to turn iContact into a leader in social responsibility for venture-backed companies. After speaking with Drew Tulchin at Social Enterprise Associates, I knew if we really were going to be a Triple Bottom Line company, we had to have some type of external help putting in place a tracking system for our social and environmental impact. The next weekend I serendipitously met Matt Kopac at at Sunday brunch with a group of Durham friends. Matt had just finished up an MBA at Yale and was looking for work in the area with a non-profit or socially responsible enterprise. He had done work with VisionSpring and had been in the Peace Corps in Benin. We brought Matt on, initially as a half-time consultant.

Matt’s assignment was simple–put in place a measurement system for social and environmental impact, manage our 4-1s CSR program, and help us put in place the changes necessary to become a B Corp. B Corps are are a new type of corporation that use the power of business to create public benefit.

When we first took the B Corp assessment, we scored 67 points. The assessment graded us within five categories: accountability, consumers, environment, employees, and community.

We then underwent an eight week process that Matt led to conduct an environmental/energy audit and supplier audit and put in place some needed changes to policies and sustainable supplies.

On June 30th, we finally passed the 80 point threshold needed. B Lab officially certified iContact as a B Corp! We had reached the next milestone for our process of becoming a leader in social responsibility and creating company culture that tied the work each employee did every day with meaningful impact, and we received a signed Declaration of Interdependence.

Tracking our Social & Environmental Impact

Once we became a B Corp, we needed a way to be able to track our social and environmental impact. Matt Kopac worked with our internal Salesforce.com administrator to install PULSE into Salesforce AppExchange, which is free for B Corps.

Below is a screen shot of PULSE showing a few of the environmental metrics tracked within PULSE for iContact.

In Salesforce PULSE we track the following social and environmental metrics in beautiful graph format in a location that is accessible to every iContact Employee. You can imagine how much easier this system makes it to track and view our triple bottom line metrics.

Current PULSE Social Impact Metrics Tracked

• Total Energy Consumed
• Energy Consumption Per Employee
• Total Water Use (Liters)
• Total Water Use Per Employee
• Total Irrigation Liters Used
• Sheets of Paper Used
• Recycled Paper Used as % of Total

Current PULSE Environmental Impact Metrics Tracked

• Dollars Contributed to Non-Profits
• Number of Non-Profits Contributed To
• Value of In-Kind Contributions
• % of Sales of Giving
• Number of Jobs Created
• Staff Turnover Rate
• Number of Non-Profits Given Free Product
• % of 4-1s Non-Profits as Customers
• New 4-1s Non-Profits Per Month
• 4-1s Non-Profits Emails Sent
• Number of Non-Profits Trained
• Number of B Corps as Customers
• Monthly Employee volunteer Hours
• Cumulative Volunteer Hours

Building Employee Engagement With Changemakers

To further our connection to employee-driven change we created an employee-led group called Changemakers. We now have a Social Changemakers Committee and an Environmental Changemakers Committee that meet monthly and come together once per quarter to make their recommendations to the company.

While putting in place the structure initially needed coordination and buy-in at the highest levels of the organization, to expand our efforts and integrate the values and ethos of our company permanently into our culture we need the energy, support, and word of mouth of individuals at every level of the organization.

Making the Connection to Meaning at Work

Back in November 2009 I was speaking to an iContact employee who told me, “If you can connect the work I do at iContact to making an impact in the world I would be so much more passionate about coming to work everyday.” This was a key moment for me in making the immediate connection between ‘meaning’ at work and the incremental discretionary effort employees are willing to put into their jobs.

As Chip Conley wrote in Peak, If you can tie in “meaning” into the workplace you will get orders of magnitude more productivity our of your team. Too often companies are meaningful lifeless entities that are focused on short-term profit maximization rather than maximizing sustainable value creation for human beings, what actually maximizes long-term profits.

Meaning has three components to it–

1. Personal Meaning – how the job ties into to the individual’s life goals.
2. Work Meaning – the significance of what the individual is enabling the company to achieve and the understood connection between their work and company success.
3. Organizational Meaning – the significance of what the organization succeeding means for human society.

So in the “Employee Hierarchy of Needs” money is at the bottom which creates base motivation, recognition is in the middle which creates loyalty, and meaning is at the top which creates inspiration.

What iContact Employees Think About Social Responsibility

So, has the social responsibility initiatives we’ve undertaken so far created added meaning for our team members, and can it for yours?

Here are a few examples of the comments we received from our employees so far either via Salesforce Chatter (shown above) or via the Culture Committee Meetings…

• “It makes me more excited about the company I work for.”
• “It’s a rare opportunity to be a participant in a company such as iContact.”
• “iContact is a diverse group of individuals from all walks of life that come together as a team to both achieve and help others succeed.”
• “iContact is a dynamic team-centric company that effectively balances customers, employees, and the world.”
• “We have a holistic approach to business in terms of our impact on all stakeholders”
• “We do business differently, our employees are empowered, we work hard and play hard, and we are actively committed to helping others.”

But the impact is not only in increasing employee engagement, but also increasing customers and partners that expressly seek out wanting to work with socially responsible companies.

Here is an unsolicited email we received from one of our partners to illustrate this…

“I was impressed by the iContact’s commitment to reaching beyond themselves to serve their community. to work toward making a positive impact on our community. It made my decision easier knowing I had found a company to work with that was like minded.  As I work with my customers I make sure they know that we chose a company as a partner that would extend their reach.”

What We’ve Accomplished So Far

In the first eight months since we’ve expanded our efforts:

1. We’ve launched the 4-1s program (1% product, 1% payroll, 1% time, 1% equity)
2. Our employees have participated in 75 community service events logging 1,100 service hours tracked via VolunteerForce
3. We’ve installed Salesforce PULSE to track our environmental and social metrics
4. We were approved as a B Corporation
5. We conducted and published an environmental audit
6. We’ve hosted a non-profit workshop at our office
7. We’ve launched the Changemakers Group
8. We’ve launched the iContact Culture Committee

The Beneficial Economic Impact of Social Responsibility

So the hard-to-measure long term impact of improved employee retention and recruitment and customer growth and retention are no doubt positive factors in our long-term financial return models for our social responsibility program–but what about the hard-nosed measurable short-term economic analysis? Certainly this effort has to have cost us more money than it saved us, right?

In fact, this effort toward becoming a socially and environmentally responsible company will actually save us money, not cost us money.

SOCIAL RESPONSIBILITY = COST SAVINGS

One of the ways this has been possible is because B Labs has a network of over 300 B Corps and companies that want to access the economic buying power of B Corporations. Once our current contracts expire and we’re able to move to the discounted solutions, we expect to realize about $40,000 per month in savings from being a B Corporation while we are spending a total of $21,000 per month of all of 4-1s Program. Significant credit goes to Salesforce.com for offering a 75% discount off list price to B Corps.

In fact, in our five year financial analysis model of our social responsibility efforts, we came out with a five-year IRR of 54% for the conservative case model and 132% for the expected case model.

So we’ve gained a quadruple benefit from social responsibility efforts of:

1. Mid-term existing vendor cost reductions of $40,000 driving estimated net savings of $19,000 per month ($228,000 per year).
2. Increased employee engagement and excitement to be working at our company (which we believe will lead to greater passion in people’s work, additional discretionary effort from team members, increased productivity, lower regret employee turnover, and an increased ability to attract the best and the brightest).
3. Increased customer acquisition and customer retention from customers who are coming to us and sticking with us because of our social responsibility programs.
4. Additional press coverage from Entrepreneur, INC, and the Raleigh News & Observer that is helping us recruit the best and brightest and gain additional customers and partners.

Conclusion

We’ve got a long way to go still in working toward becoming an example for how other venture backed companies can invest in social responsibility. We’ve still got a lot to learn. It’s been a great start and we look forward to much learning to come.

Thoughts/Comments?

I’d love your thoughts and comments. How has your company implement Corporate Social Responsibility? What other programs have you seen that have been responsible? Do you wish your company were more socially responsible? What impact would that have on your desire to put in full effort at work?

Announcing iContact’s Series B Investment

Eight years ago when Aaron Houghton and I met at UNC, we never fathomed we’d have the opportunity to build the nascent iContact into a great global company based here in North Carolina. As iContact passes 225 employees and $40M in annualized sales, we see an opportunity to do something rare—to build a venture-backed IT company here in the Triangle from start-up to IPO. Today, we’re announcing a critical milestone on our journey.

I’m thrilled to share the wonderful news that iContact has closed on $40 million of Series B venture capital funding from JMI Equity of Baltimore, Maryland. We worked with Allen & Company out of New York as our investment bank advisor in this round.
This $40M comes in addition to the $13.3M we’ve raised so far from our investors IDEA Fund Partners, Updata Partners, and North Atlantic Capital.

We’ll be using these new funds to make significant investments in sales and marketing, back-end technology, our product features and usability, global expansion, and of course our people that drive all of our success.

Over the past eight years we have been on a growth spurt, increasing from $2M in annual sales when we raised our first round of funding in May 2006 from IDEA Fund Partners in Durham to $40M in annual sales today four years later. We have been fortunate to find great people to join us at iContact as employees and investors. We would not have been able to get to this point without the amazing team that is with us.

For us, this is just the beginning of building a company that will be here in North Carolina for many decades to come. iContact’s vision is to “build a great global company, based here in North Carolina, for our customers, employees, and community.”

Building a Unique Company, For the Long Term

We are working on building a unique company, one that sees social and environmental responsibility as additive to success not counter to it, one that invests heavily in building a fun and creative place to work, and one that cares about maximizing value created in the long term not profits generated in the short term.

Our business philosophy says “The purpose of business is to solve human problems and that if we focus on creating positive value for our customers, employees, and community we will maximize financial return for our investors and shareholders.”

We will use these new funds to invest in building iContact into a customer-focused socially responsible high-growth company with a wonderful work environment and company culture. We are glad to be part of the conscious capitalism movement that the B Corporation community is forwarding and wish to provide another example for what a socially responsible company with a great employee culture can become.

Our Three Promises

These new investment dollars will enable us to better fulfill what we call our Three Promises. Our Customer Promise is to “help SMBs succeed and grow.” Our Employee Promise is to “create a wonderful work environment that attracts A+ talent.” Our Community Promise is to “make a positive wake in our local and global communities.”

Our Customer Promise
Working toward our Customer Promise, we have recently rolled out our brand new MessageBuilder to our 65,000 customers and 700,000 users that has been under development for the last year. MessageBuilder makes it extremely easy for anyone to create a beautiful, professional, effective communication. We currently have 110 templates with the new MessageBuilder and will have hundreds more by year end.

We will also be rolling out the brand-new iContact for Salesforce next week, which has been in limited release for the last six months. We acquired Ettend.com in April to enable added event marketing capability for our customers. These product investments are in addition to an upgraded back-end infrastructure, an expanded QA team, and a six person in-house User Experience Team who talk to customers and users to help us design extremely easy to use features and functionality.

Our Employee Promise
Working toward our Employee Promise, we will be moving to brand new company headquarters on October 24th in Morrisville, North Carolina in Perimeter Park within the Lenovo Campus that will allow us to expand to 550 team members.
We have recently implemented on-site monthly massages to add to our list of unique employee benefits like on-site car washes, Bagel Mondays, monthly lunches, unlimited free sodas, and a culture that encourages Nerf gun battles, dressing up in drag, and creative expression.

Our Community Promise
Working toward our Community Promise, we rolled out our 4-1s Corporate Social Responsibility Program which includes giving 1% of payroll, 1% of product, 1% of equity, and 1% of time back to the community.

For 1% of payroll we will contribute $150,000 in 2010 to 501(c)(3) non-profit organizations. For 1% of product, iContact is now free of charge to any North Carolina non-profit to send newsletters up to 10,000 subscribers. For 1% of equity, we have committed 1% of the equity in iContact to the iContact Foundation to endow the foundation with funds to expand our ability to give back permanently.

For 1% of time, we have provided each employee 2.5 additional days off per year to volunteer in the community during business hours. When we started the year, I set a goal of 1000 hours of community service in our first year. iContact employees have already completed 1200 community volunteer hours and it is only August!

Special Thanks

We worked with Brad Wolosen, Jit Sinha, Bob Nye, and Krishna Potarazu from JMI Equity’s Baltimore Office on this fundraise. Brad and Jit will be joining Aaron, myself, and Carter Griffin from Updata on our Board of Directors.

We used Allen & Company to represent iContact as our investment bankers on this transaction, working with John Griffin, Dave Wehner, Kemp Webber, and Michael Melnitzky.

We worked with Joey Silver and Sarah Loya out of DLA Piper’s Atlanta office and Neil Bagchi of Bagchi Law, with Mark Burnett, Kathy Fields, and Maggie Wong representing JMI at Goodwin Proctor.

Special thanks go to our internal deal team of Tim Oakley, Ben Redding, Bryan Conner, Robert Plumley, and Susan Harrison and to our full Senior Leadership Team who endured two months of due diligence requests while still getting their day jobs done.

Our goal is simple—build a financially successful socially responsible company based right here in the Triangle that becomes the global leader in email marketing software and services for SMBs.

Thank you to all of our customers, employees, investors, mentors, advisors, and supporters who have helped us get iContact to this point and here’s to the road ahead!

How Do iContact Employees Describe Our Culture?

In my post Friday on the most important business lessons I’ve learned at iContact, lesson ten was:

“10. If you create a great culture (a fun work environment filled with people who are high performers and who care about their work and their impact on the world) you will be able to attract and retain better people who will be much more engaged and productive and create a much more financially successful company.”

Recently I’ve been reading four wonderful books that have helped me ‘go to school’ on the tremendous value of building company culture and the revenue growth than can be achieved when you can align profit, purpose, and meaning for your team. These are:

• Peak: How Great Companies Get their Mojo from Maslow by Chip Conley
• Firms of Endearment: How World Class Companies Profit from Passion and Purpose by Raj Sisodia, Jag Sheth, and David Wolfe
• The Dream Manager by Matthew Kelly
• The Future of Management by Gary Hamel

This post is to share a bit about what the iContact Culture is like today, in the words of our current employees. In future posts I’ll describe an effort we’re about to embark on to make the iContact Culture a core part of what differentiates our company, with the help these authors, many of which Tony Hsieh of Zappos turned me on to.

How iContact Employees Describe Our Current Culture

Last week we held our first ever Culture Committee Meeting at iContact over lunch one day. I started off by asking the group to write down words that described our culture.

The words that came up more than once from the group were:

1. Fun
2. Creative
3. Community-oriented
4. Energetic
5. Challenging

These were pretty powerful words.

Other words mentioned by employees to describe the iContact culture were:

Dynamic	Respectful	Socially Responsible	Diverse	Casual
Optimistic	Open	Service-oriented	Unique	Sustainable
Inclusive	Engaging	Encouraging	Ever-changing	Family-like
Motivated	Fast-moving	Compassionate	Growing	Helpful
Mission-focused	Intellectual	Professional yet wacky	Agile	Thoughtful

---

How Would You Describe the iContact Culture In a Sentence to a Friend?

I then asked the group to write a sentence they’d use to describe iContact Culture to a friend. Recently I’ve been describing the culture as a “high energy performance based culture that cares.” The group wrote:

• iContact is an open, supportive, and respectful place where employees can make their setting their own and have a say in influencing their own experience
• iContact is an organization that is driving forward the deliverance of a product surrounded by a team that shares their personal excellence with the world
• iContact is a diverse group of individuals from all walks of life that come together as a team to both achieve and help others succeed
• iContact is a company that consciously seeks uniqueness
• iContact is a dynamic team-centric company that effectively balances customers, employees, and the world
• iContact has a fun atmosphere where each individuals ideas and work are recognized
• iContact is comprised of interdependent teams working to solve problems together
• iContact is an exciting place to work due to the energy put forth by each employee every day
• iContact understands that individual and team growth equals company growth

What Makes the iContact Culture Unique?

I then asked the group to share some of the things they felt made iContact unique as a company. They wrote:

• We are fast-growing while becoming open and more agile as we grow
• We believe in what we say and we act based on that belief
• We practice openness
  
• We have a holistic approach to business in terms of our impact on all stakeholders
• We are a socially responsible company
  
• We are transparent and have lots of giving back opportunities and a comfortable dress code
• We have unique wall murals
• We do business differently, our employees are empowered, we work hard and play hard, and we are actively committed to helping others
• We interview candidates to determine not if they are the best individual candidate but whether someone is going to fit in the team
• We have a commitment to the community and the 4-1s CSR program
• We have unique benefits like free unlimited sodas, monthly massages, annual car washes, Monday bagels, monthly lunches, monthly birthday cakes
• We produce a monthly YouTube company news video featuring sword fights between bees and knights, dancing, rapping, chocolate grasshopper eating, Batmen superhero fights, iron chef competitions, parades, and cross-dressing
• We have smoke machines and disco lights at monthly company meetings
• Our CFO has dressed up like a cheerleader and Michael Jackson
• Our CEO has shaved his head when we hit
  
• We have big anniversary celebrations with hot air balloons, dunk tanks, bouncy castles, inflatable slides, fire eaters, magicians, bluegrass music, and Carolina BBQ
  
• We go to the Durham Bulls baseball and Carolina Hurricanes hockey games as a company
• We have pot luck lunches, waffle and pancake parties, 3am code deploys, lots of plants and balloons, new hire donuts in technology, and Finance/HR annual ice cream socials, and summer picnics

So it’s fair to say we have a rather unique culture at iContact already.

But iContact is about to move into a new home in Morrisville, NC on October 23rd. We can use this opportunity to do even better.

I’ll be writing more about our company culture and our journey in the coming days and months.

Videos of the iContact Culture

Here are some of the videos that have been part of defining our unique culture over time, from the iContactTV YouTube Channel…

How We Do Meetings at iContact

Celebrating our 7th Anniversary at iContact

Celebrating 5th Anniversary at iContact

50,000 Customer Celebration Parade

Dressing Up as Tina Turner and Michael Jackson to Celebrate $2M in Monthly Sales

iNews Digital Short: Chocolate Covered Grasshoppers

July 2010 iContact iNews

The 10 Most Important Business Lessons I’ve Learned

Here are the most important business lessons I’ve learned building iContact from 2 to 220 employees over the last eight years.

1. Just get started, have a bias toward action, and don’t get stuck in analysis paralysis.
2. To grow your sales, it is critical to calculate the lifetime value of an average customer, calculate what you’re currently paying to acquire an average customer (total monthly ad spend divided by customers acquired in that month), determine the maximum you’re willing to pay to acquire an average customer, and scale your marketing scientifically by testing relentlessly and finding the channels in which you can acquire customers for less than your maximum acceptable customer acquisition cost and then growing spend within those channels.
3. Never raise more equity capital than 1x your current annualized revenue (monthly revenue x 12). If you raise too much money too soon you’ll give up too much ownership and control of your company and be tempted to spend the money in ways that aren’t carefully controlled. Wait to raise a large round until you have proven mathematically than $X amount of additional spending with generate $Y amount of additional revenue. (once you figure out #2 this is easy).
4. If you choose to raise money, raise it from investors you like and get along with well. You’ll have to hang out with these people for the next 3-7 years, make sure you enjoy spending time with them.
5. After the first year or two, your success is determined by the people you hire, not by you. Stop trying to do everything yourself. Scale yourself by hiring people more experienced than you in their field as soon as you can afford to.
6. Every member of the team should have a significant portion of their compensation based on the company’s success and their department’s success, quantified and communicated clearly in advance.
7. Your job as CEO is not to micromanage/tell your team members what to do, but rather to hire experienced people who can do their jobs better than you could, collaboratively set numerical goals, and hold your direct reports accountable for their performance individually and as a team.
8. Once you get past the start-up phase when you’re responsible for everything, the five parts of a CEOs role are 1) Set strategy and vision 2) Manage the senior team 3) Communicate with stakeholders 4) Oversee resource allocation and 5) Build the Culture.
9. It is possible to become more socially and environmentally responsible and increase your financial returns at the same time
10. If you create a great culture (a fun work environment filled with people who are high performers and who care about their work and their impact on the world) you will be able to attract and retain better people who will be much more engaged and productive and create a much more financially successful company.

I’ll be writing more about building a great company culture in the next post.

What lessons have you learned over the years in business? What do you think about these lessons?

Maximizing Social Return from The Giving Pledge

I originally wrote this post for the Social Entrepreneurship Section of Change.org. You can find the original Change.org post here or read below.

A Vision in a Time of Peril

It’s hard to see the big picture in times of turmoil. Let’s go back to Wednesday, March 4, 2009. That day, Bill Gates and Warren Buffet, the richest individuals in America, wrote a letter to David Rockefeller, President of the Rockefeller Foundation. The letter suggested a gathering of their billionaire friends to discuss giving.

The letter was mailed in the backdrop of a tumultuous week. By that Friday March 6th, the Dow Jones Industrial Average reached its lowest point in twelve years, free falling 52.9% from two years before in the good ‘ole days of 2007 prosperity.

March 6th, 2009 brings back vivid memories. I was visiting the White House with a group of young entrepreneurs with The Summit Series. The White House Office of Public Engagement had put together the session to discuss their plans for the Economic Recovery Act. As Jason Furman, the Deputy Director of the National Economic Council, spoke to our group, the market was in freefall.

While the media was anointing The Great Recession and debating whether it would become a depression, Gates and Buffet had the fortune and foresight, to bring together their friends for dinner in New York to discuss how to give back.

The Launch of The Giving Pledge

Out of this meeting in New York came an initiative called The Giving Pledge, “an effort to invite the wealthiest individuals and families in America to commit to giving the majority of their wealth to philanthropy.”

So through The Giving Pledge Mr. Gates and Mr. Buffet are encouraging other billionaires to give at least 50% of their net worth away.

In fact, instead of the recommended 50%, Warren Buffett has pledged to contribute 99% of his net worth to charity within 10 years after his death, all to be used for immediate need and none for endowments. Laudable indeed. Buffet writes in his usual matter-of-fact style,

“The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs.”

How Much Money Are We Talking About?

Mr. Buffet will perhaps give around $50 billion to philanthropy by the time of his death. Through The Giving Pledge, he and Gates have the opportunity to leverage their influence and connections to multiply their giving many times over and set the example for other billionaires, who can no longer give away just 10% of what they have and feel good about themselves.

The total net worth of the Forbes 400 in 2009 was $1.27 Trillion. If Gates and Buffet convince 20% of these billionaires to give half of their net worth away, they’d be able to drive another $120B into philanthropy, doubling the amount of they themselves can personally give away.

So let’s say The Giving Pledge is successful and it generates another $120B in giving over the next twenty years, or about $6B per year for the next twenty years.

While an additional $6 billion per year can certainly make an impact, this amount pales in comparison to the $3.8 trillion proposed spending in the U.S. Federal Budget for 2011. It also pales in comparison to the $303B in total annual private giving by U.S. citizens.

The Goal: Sustainable Economic Prosperity

The two issues in our world today that are causing the greatest threat to a secure and stable human society with access to opportunity for all are extreme poverty and environmental sustainability. Most people don’t know that 39% of the human beings on this planet live on under $2 per day. If our goal is global stability, not to mention justice, this cannot be allowed in our world. And most of us by now get the global economic and natural disaster that will be caused if we keep increasing our annual consumption of goods without decreasing our carbon emissions.

As an entrepreneur and social entrepreneur, I believe that our mission, challenge, and opportunity as a generation is to create sustainable economic prosperity for all. We will never have a truly secure or stable world until we do. So how can this extra $6 billion per year be used to get the maximum return toward this goal of sustainable economic prosperity?

While humanitarian aid is absolutely necessary and moral, providing funds with this extra private capital for short-term gap filling needs caused by the symptoms of these issues won’t solve the issues themselves.

How Can This Money Make The Biggest Positive Impact?

So how can these funds best be used to generate the highest Social Return on Investment (SROI) and work toward sustainable economic prosperity for all?

The funds of these Giving Billionaires can either be given to address immediate need or invested to change much bigger systemic issues that are at the root cause of so much human suffering. While I do not know which will generate the highest return, I believe that by investing in changing global public policy (in a few select areas mentioned below) to reduce the incentive structures that are at the root cause of much suffering, lack of access to opportunity, and environmental damage these new Billionaire Givers will generate the highest SROI.

In order for this relatively small amount of additional capital to have the biggest positive impact, it must be leveraged. Philanthropic money can be leveraged by investing it in changing how other, larger, capital flows occur within our global system.

To effect real long term global change this $120B should be directed to:

1) Change U.S. domestic policy so we stop spending on the very expenditures that block access of the poorest countries to the market and creates need for more humanitarian aid and philanthropic giving in the first place (e.g. farm subsidies, trade tariffs, some military spending);

2) Influence a change in International Financial Reporting Standards and laws of nation-states so that companies can no longer off-balance sheet their negative environmental externalities;

3) As Nathaniel Whittemore has recommended, invest in social entrepreneurs who can leverage these dollars and markets (the largest capital flow of them all) to create sustainable change with dignity; and

4) Launch a campaign to encourage not just billionaires, but millionaires, to make a giving pledge and generate many trillions of additional dollars to invest in one through three.

Leverage Point 1: Invest in Domestic Policy Changes to Gain Social Return

Imagine the social good that could come from a concerted effort focused on lobbying to reduce the gargantuan $721B per year U.S. military budget (which as of 2008 was 48% of the world total military spending and larger than the next 45 countries combined) by 25% so that we could increase the salaries of every teacher in America by more than 50%.

There are 6.2 million elementary and secondary school teachers in the U.S. according to the U.S. Census Bureau’s 2000 Census. The average U.S. teacher salary was $51,009 according to American Federation of Teachers Survey and Analysis of Teacher Salary Trends 2007. So in total, the U.S. spends around $316 billion per year on teacher salaries. Hence a $180 billion re-allocation from defense to education would enable us to pay teachers 57% more.

Having this type of dollars and cents carrot might just enable Chancellors to negotiate out the single requirement of Teacher Unions that is the most damaging to our children’s education–the inability to fire a teacher who is not performing due to the tenure system, allowing the best teachers to be paid well above $80,000 per year.

Take a look at the below graph showing the allocation of 2009 U.S. Federal Taxes and you’ll see where our priorities seem to lie as a nation (of course noting that most funds for education come from State Taxes). A few billion dollars per year spent on influencing our Government to re-allocate this pie a bit more toward butter and a little less toward guns might just provide a huge return.

Source: Friends Committee on National Legislation Budget Chart for FY 2009

Leverage Point 2: Invest in Global Policy Changes to Gain Social Return

If these giving billionaires that join The Giving Pledge really wanted to get a large social return they would allocate dollars to change the public policies that drive the economic incentive structures that are the source causes of many of the issues.

One of the biggest problems in the world today is of course environmental sustainability. Six billion dollars per year, if the funds were focused, might just be enough to lobby the largest world governments to make a change to their accounting principles.

If companies across the world were required by law (that was enforced) to pay for the replacement of any environmental resource that they utilize such that each company had a net neutral impact on the environment, we’d remove much of the incentive structure that causes investors to seek out companies with the highest returns, which often are companies that unethically but legally have off-balance sheet environmental externalities that are simply passed on to all human beings.

Any philanthropist who can begin to create a tipping point for governments to stop accepting off-balance sheet negative environmental externalities that are not reported in GAAP or IFRS statements would enable the return on their investment to be leveraged many times over.

Change the economic incentive structure and you’ve changed the flow of trillions of dollars of private capital that billions of dollars of philanthropic capital simply cannot compete with.

Leverage Point 3: Create an Investment Fund for Triple-Bottom Line Entrepreneurs

As Nathaniel Whittemore suggested two weeks ago, some of the funds from The Giving Pledge should be directed to a Social Private Equity Fund. Nathaniel writes,

“What I can imagine is an institutional actor whose specialty is helping great social businesses with good revenues get even bigger while retaining their social and environmental missions. These types of firms would bring companies into their portfolio by acquiring some of the stock that had previously been held by investors and founders, in that way providing that liquidity that is missing from the current social finance system without compromising the social mission. This would create more incentives for early stage social investors, and provide social entrepreneurs more plausible returns that could increase the variety of the people thinking about social businesses.”

I agree with Nathaniel that late-stage capital for socially responsible businesses would be a help to provide liquidity, and thus returns, to the early stage investment funds already investing in triple-bottom line entrepreneurial companies.

I would add however, that any company that gets to $30M or $40M in EBITDA positive revenues, regardless of whether it has a core social mission or not, will be able to raise private equity and provide liquidity to shareholders. I don’t think the gap in the market is lack of funding for profitable at-scale social ventures.

The gap in the market is lack of funding and assistance for small-scale socially-responsible businesses that have the desire and dream to grow their impact and their revenues but don’t know how–both in the developed world and the developing world.

The biggest market gap I see is investment dollars in for-profit businesses in the developing world, where “microequity” investments of $5,000 to $50,000 along with some guidance and incubation can generate huge returns for a local entrepreneur who requires capital greater than a microfinance organization can provide but isn’t able to take on the $50,000 to $300,000 that organizations like Acumen Fund are able to invest.

And so, to maximize both financial return and social return for the Billionaire Givers, I would recommend not just a late-stage PE firm for social ventures, but also expanding capital investments in existing or new growth stage funds for socially responsible companies, particularly those in the developing world.

The second area of leverage I see within the world of private capital markets, is to invest in putting pressure on publicly-traded companies to implement strong CSR programs and actually live up to them. A few billion dollars spent buying mass media advertising to publicly encourage (read:shame) large MNCs so they live up to global CSR standards would be dollars well spent for social return.

Leverage Point 4: Invest in The Giving Pledge for Millionaires

While I applaud Gates and Buffet’s effort on The Giving Pledge, in order to enable this pledge to truly make a substantial impact, part of the funds should be directed to extend the effort beyond billionaires and create a new social norm where it is simply expected that anyone who makes way more than they need will contribute half of their net worth by the time they die to making the world a better place.

For the millionaires out there, it will just screw up your kids if you leave too much money to them. So why not ensure your legacy by committing now, publicly, to giving at least 50% away?

There are 10 million millionaires in the world, with a total net worth of $39 trillion according to the 2010 Merrill Lynch and Cap Gemini World Wealth Report. The average millionaire has $3.9 million.

Excluding the $1.3 trillion of the Forbes 400 from this $39 trillion, there is $37.7 trillion in assets among millionaires globally. What if there were a Millionaire Pledge?

If through a directed effort we can get 20% of global millionaires to commit to give half of their wealth, instead of an extra $120B for philanthropy, we’d have an extra $3.8 trillion. If we invest much of this $3.8 trillion in the three key leverage areas to fundamentally change our global economic and public policy system and use the rest to invest in filling short-term societal needs we can make a truly meaningful impact in the world.

Every multi-millionaire should commit to giving at least 90% of their wealth away by the time of their death. I made a commitment to do this in 2008 (in my book Zero to One Million) and will uphold this commitment. You can’t take money with you.

So who will take up this charge? And what do you think about these four areas of recommended investment?

The Brand New iContact.com – Oh My How Design Standards Have Changed!

In late 2002 I met my business partner Aaron Houghton at the October meeting of the Carolina Entrepreneurship Club on the UNC campus over Chic-Fil-A nuggets. At the time, Aaron ran Preation and I ran Virante. We partnered to launch IntelliContact Pro, which became IntelliContact in 2005 and then just iContact in 2007.

Today, iContact is a 205 employee company here in Durham, NC with 64,000 customers and 700,000 users. Our marketing and IT teams launched a brand new web site today on icontact.com. As a former web site designer myself, it’s been fascinating to see the site evolve as design standards have changed.

Let’s take a trip down memory lane to show how the web site has evolved over time…

Which one was the worst? Which one was the best? What do you think of the new site?

2002

2003

2004

2005

2006 2007 2008 2009 2010 http://img692.imageshack.us/img692/4256/125j.png

Raj Sisodia on Conscious Capitalism (Awesome)

Session 10, Raj Sisodia on Conscious Capitalism
EO/MIT Entrepreneurial Masters Program
Year Two, June 19, 2010

I am getting so much value from this session by Raj Sisodia on Conscious Capitalism. Wow this was awesome!

I’ve tried to go to school on this in the last year, working to redefine the iContact Culture, roll-out new company values (WOWME), launch a formal CSR program (4-1s), and work on becoming a B Corp.

Raj an annual conference on Conscious Capitalism called the International Research Conference on Concious Capitalism. The next one is coming up May 24-25, 2010. This is focused more on thought leadership than the C3- Catalyzing Conscious Capitalism in Lake Arrowhead October 19-22, 2010.

Here are my notes from the session…

Raj’s book is Firms of Endearment: How World-Class Companies Profit from Passion and Purpose with co-authors Jag Sheth and David Wolfe. I just ordered 8 copies for my senior team to read in July.

Double Bottom Line Means a Bigger Bottom Line

He has data showing companies get a better financial bottom line when you focus on getting a double bottom line (social and financial) and create an awesomely engaging work environment. Companies with humanistic profiles are outperforming the S&P by 9 to 1 over 10 years.

Example companies from the data set are: Google, Southwest, WholeFoods, Costco, CommerceBank, Amazon, Ebay, Johnson and Johnson, Timberland, UPS, Carmax, JetBlue, HarleyDavidson, CAT, Honda, Starbucks, Toyota, BMW

Good to Great companies that have suffered:

• Circuit City
• Fannie Mae (got involved in mortgage crisis)
• Phillip-Morris (this year 6 million people will die directly from tobacco and this is growing)

He says don’t define greatness only by financial performance, but by the net impact of the business on the world.

“The majority of the public believe that executives are bent on destroying the environment, cooking the books and lining their own pockets.” New York Times

There’s a collective price we pay for the cynicism and mistrust of business.

“The dogmas of the quiet past are inadequate to the stormy preset.” – Abraham Lincoln

The Case of Whole Foods

100 years ago: 16% on food and 8% on healthcare
Today: 8% on food and 18% on healthcare

Whole Foods have 1800% return to investors in 10 year period.

John Mackey, the CEO of Whole Foods, took salary down to $1 in 2006 and decided to donate future options to foundation. Signed letter ‘Much Love. Here’s the actual letter.

John Mackey wanted to build a business based on love not fear.

No one at Whole Foods gets paid more than 19x the average employee (average $40,000 highest $750,000). Typical ratio at publicly traded company in 500 to 1.

Make your employees live for the work week not just for the weekends.

You are most alive when you are in a state of flow. Create a work environment where the team can enter a state of flow.

Link your personal passion and your corporate purpose.

Get rid of people who infect an atmosphere with negativity.

At end of training at Zappos, they offer employees $2000 to quit if they don’t want to be there.

Business is more and more about caring. If you don’t care you won’t be in business.

Book Recommendations

• The Future of Management by Gary Hamel.
• Peak: How Great Companies Get Their Mojo by Chip Conley
• Delivering Happiness by Tony Hsieh
• Thank God’s It’s Monday by Roxeanne Emmerich
• It’s Not What You Sell, It’s What You Stand For, Why Every Extraordinary Business is Driven By Purpose by Roy Spence
• The Dream Manager by Matthew Kelly  (class recommendation)
• Man’s Search for Meaning by Viktor E. Frankl
• The Theory of Moral Sentiments by Adam Smith

What is a Great Business?

A great business maximizes “total value created” on a sustained basis and distributes that value in an equitable and enlightened manner among all its stakeholders.

Be  a company that is on the right side of society, that is good for the world.

Businesses create or and destroy many kinds of wealth.

• Financial
• Intellectual
• Social
• Emotional
• Spiritual
• Cultural
• Natural

What is Concious Capitalism?

It’s about a higher purpose (not just profits), stakeholder orientation (not just shareholders), conscious leadership (not command-and-control), and conscious culture (you can feel it/see it).

Be about mission and values and purpose. Why? Employee engagement.

Concious Capitalism is: relationship-driven, holistic, characterized by compassion, empathy, love, authenticity, and transparency, and reflective of more feminine energies and competencies.

Women are often better leaders. See this Atlantic piece on The End of Men.

From the Book ‘It’s Not What You Sell, It’s What You Stand For’ by Roy Spence

• Purpose is a definitive statement about the difference you’re trying to make in the world.
• It drives everything you do
• It matters to all stakeholders
• It is your reason for being that goes beyond making money
• Yet… it almost always results in making more money than you ever thought possible

Examples of Companies with Purpose

• Johnson & Johnson – Alleviate pain and suffering
• Southwest Airlines – Give people freedom to fly
• Whole Foods – Make people, the food system, and the planet more healthy
• Google – Organize the world’s information and make it accessible
• REI – Reconnect people with nature (kids spend 55 hrs per week in front of a screen and 1 hour per week out in nature)

Four Company Purpose Archetypes

• The Good – Service to other ethical evolved
• The True – Based on science, analytics
• The Beautiful – Excellence and perfection, aesthetics, delight
• The Heroic – Changing and improving the world

The Purpose Motive: Compensated engagement is going down, uncompensated effort going up, volunteer work is nourishing people in a way that paid work simply is not. Need to shift the focus from profit maximization to purpose maximization.

Be about doing something meaningful in the world.

The Search for Meaning

From ‘Man’s Search for Meaning’ by Viktor E. Frankl

“Happiness is the outcome of living a life that has meaning and purpose.

“Happiness cannot be pursued; it ensues from living a life of meaning and purpose.” – Viktor E. Frankl

Meaning comes from:

1. Doing work that matters
2. Selfless love
3. Finding meaning in suffering

The formula: Despair = Suffering – Meaning

Conscious Leaders

• “Leading by intimidation, by rank, or even by charisma alone is insufficiency because those who are supposed to follow are becoming self actualized and they won’t accept this outmoded style of leadership any more.
• The more self-actualized people become, the more we’ll need seal-realized leaders who demonstrate mastery at serving some higher purpose and choose the right action.

To Build a Conscious Culture

Make it tactile (visible and touchable). Transparency, authenticity, caring, trust, integrity, learning, empowerment.

Paraphrasing a video from Gary Hamel shown by Raj: The management model from the industrial age is outdated. Create an environment the preserves passion. This will drive value creation in the creative economy. The question is how to reinvent management to enable team members to bring passion to work. Create companies where employees can bring all of themselves to work. Build companies that are fit for human beings.

“You can’t command imagination, creativity, or passion!” – Gary Hamel

Stakeholder Acronym: SPICEE = Society, Partners, Investors, Customers, Employees, Environment

In our world, we are all in the same boat.

In the future, you will have to operate with all stakeholders in mind to be successful.

A Historical Look

1776 – Same year Wealth of Nations and Declaration of Independence published. For the first time in human history man was in charge of their own destiny within a world of law. Age of Empowerment.

1850 – Age of Industrialization

1900 – Technology breakthroughs. Einstein, electricity, Marconi, telephone, radio, television. The birth of modern marketing. Age of Knowledge.

1989 – Berlin Wall collapses, Tienanmen square, Exxon-Valdez spill, Fatwah against Salman Rusdie. Fukayama’s essay “The End of History” The debate was what type of free market, what type of democracy. A new cultural age has emerged in which the consuming focus on materialistic gain that marked the Age of Knowledge is ebbing. Now we are in the Age of Transcendence.

The Zeitgest is Shifting

The zeitgeist is shifting from the strong self-indulgent me orientation of the 20th century society toward a stronger sense of interdependence with others.

In USA, there are now more adults over 40 than under 40. The Internet was invested by Tim Berners-Lee in 1990, which has shifted balance of power and making the world more transparent.

We are moving up Maslow’s hierarchy from survival, to success, to meaning.

Why New Balance is growing faster than Nike. Nike appeals to self-centered masculine-dominated youth. New Balance appeals to self-actualized older more feminine oriented individuals.

Human beings are not a resource. Coal is a resource. Turned on, a human being is like the sun. A source of regenerating energy.

“I would not give a fig for simplicity on this side of complexity, but I would give my life for the simplicity on the other side of complexity.” – Oliver Wendell Holmes, Jr. US Supreme Court Justice.

Humanity is one spirit. Natural resources are finite. Our inner resources are infinite.

Brette Simon on Legal Issues for VC Backed Firms

Session 5, Brette Simon on Legal Issues for VC Backed Firms
EO/MIT Entrepreneurial Masters Program
Year Two, June 18, 2010

Brette Simon of Jones Day is talking about legal issues for VC backed firms. She did a great job and this was a really good refresher. Here are my notes from the session…

Part I – Dos and Don’t for VC Backed Companies
(or Companies that want to be Venture Backed)

Not having these things buttoned up can cause investors to not want to invest or provide lower valuations.

1. Shareholder Agreement – Have a shareholders agreement (buy/sell agreement)
2. Corporate Records - Maintain corporate records (make sure you keep Board meeting records, Board approvals, a copy of stock certificates)
3. Board Minutes - If you hold a Board meeting, take minutes, put the minutes in the record book
4. Shareholder Loans - If you loan money to shareholders, paper them (interest rate, amount, maturity date)
5. Buy-back rights - Make sure the company has the right to buy back options or restricted stock if they leave the company (repurchase right).
6. Series of Shares - Minimize the number of series of shares (Series A-H might scare investors)
7. Types of Options – There are Incentive Stock Options and Non-Qualified Stock Options. Each has different tax treatment.
8. Phantom Stock – Consider using Phantom Stock – gives economic value without giving away voting rights (no exercise price and can be better than options as easier to exercise prior to liquidity event)
9. Intellectual Property Protection – use proprietary information and assignment of inventions agreement to ensure the company owns everything employees created. Without it being signed, original investor can come back and claim right to royalties to assets of the company. Have each employee sign when they start.
10. Personal Expenses - Do not run your personal expenses through the business. It’s not good for investors to see. You don’t want things coming out of due diligence that don’t look right. Can allow the IRS or a creditor to pierce the corporate veil and go after shareholders individually if you co-mingle personal and business because you didn’t honor and respect the corporate entity. Travel & Entertainment line item is getting attention from IRS right now.
11. Staff Classifications – Proper classification of overtime and 1099 contractors vs. employees. If you’re controlling what time folks show up and they’re working 40 hrs/week, likely need to be treated as employees.
12. Employee Handbook - Have an employee manual and handbook that sets forth the rules and regulations and protocols, and have it signed by each employee. Have each new hire verify in writing they have not taken any IP from their former employer.
13. Termination Release – When employees leave/quit/are fired have them sign a release. You have to give consideration for the release (some severance).
14. Employment Contracts – Avoid long term employment contracts (use at-will employment letter)
15. Insurance – Get EPLI insurance (employment practice liability insurance), difference from Errors and Omissions (E&O) and Director & Officers (D&O) insurance. EPLI protects against sexual harassment claims and wrongful termination.
16. Long-Term Contracts - avoid long term contracts without ability to terminate relatively quickly. Negotiate in 60 day termination clauses into 12 month contracts.
17. Rights of First Refusal (ROFR) - Make sure people don’t have the right of first refusal to buy your company as this can block the sale of a business even if they are minority.
18. Integration & Merger Clause – make sure in all your agreements. Says anything we talked about before this final agreement (oral agreements, etc.) is gone and all that matters is what is in this document.
19. Attorney Fees – In contracts have attorney fee provision that says loser pays attorney fees in any litigation.
20. Arbitration vs. Litigation - Benefit of arbitration is all private. Everything in a court is public. Litigation is more expensive. Arbitrators tend to split the baby and meet in the middle. ‘Mediation’ can be good to put in document prior to binding arbitration, which is non-binding and less expensive.
21. Financial Reporting Systems – critical for investors. A good controller or CFOs is worth their weight in gold. Investors what to know revenue and profit data broken out as much as possible (by product, region, SKU, etc.). You need to close your books once per year and give monthly data. Clean up your old bad receivables.
22. Audits – Investors preferred audited financials once the company reaches any scale (>$1M/yr in revenue). Can cost around $15k-$30k. If you don’t have audited financials, need really solid CFO. Without these investors will look for things that are wrong and give a haircut to the price. Minimize reasons investors can haircut valuation.
23. SAS 115 letter – Make sure the auditor gives you this after audit if you do one to tell you about your financial controls (aka management letter)
24. Management Team & Succession Planning – The company needs to be able to succeed without you. Make yourself irrelevant over time. Don’t have ‘founderitis’ where it is all you that has the operational control or critical sales relationships. Try leaving for 3 weeks and see what happens.
25. Customer Concentration – Make sure your largest customer is no more than 20% of your total revenue to reduce investor concern. Particularly of concern to a financial buyer who raises debt to buy your business. They lever the acquisition using debt capital. Not as concerned to a strategic buyer.

Part II – Raising Capital

1. Friends and family round – often sell common stock to instead of preferred stock. Likely the only money you can get pre-prototype when you’re just getting started. If you can self-finance through this stage, do it.
2. Angel/seed round – Between $25k and $500k. Invest at early stage.
3. VCs – Invest sometimes pre-revenue but usually when firm is generating $500k-$50M of annual revenue.
4. Private Equity – Investing in companies at a later stage when they have positive EBITDA. Looking for $2M+ annual EBITDA. PE firms use debt. In an Leveraged Buy Out (LBO), put in as little equity as possible and as much debt as possible.
5. Types of stock – Common stock and preferred stock. Investors get preferred stock usually.

Key VC Terms

Work to get multiple term sheets at the same time so you have much more leverage in the negotiation. Run a disciplined process with a target timeline for each stage and give investors who express interest a target date for receiving term sheets so you get them close to the same time (same day ideally and definitely same week) and can negotiate.

1. Participating preferred – Double-dipping for investors and very anti-entrepreneur. Investors get all their money back first then participate equally in the upside. Avoid in term sheets if possible and look for ’straight preferred’ (aka ‘vanilla preferred’). If you have to do participating preferred, say OK but cap it at 3x or 4x return and leave the rest to the common.
2. Liquidation preferences – Also avoid liquidation preferences above 1x.
3. Dividends – Sometimes there are dividends (~8%) in preferred stock that compound and accrue. Avoid this if possible.
4. Anti-dilution protection – Comes into play when in a down round. Better to have a weighted average than a full-ratchet anti-dilution protection. Full-ratchet would give investor shares at the new lower price instead of something in the middle. Broadbased weighted average better than the narrow base for the entrepreneur.
5. Mandatory Redemption – Forces company to buy-out investors shares at some point in the future.
6. Right of First Refusal – If you are trying to sell your shares to someone else, the investor has the first right to buy those shares.
7. Right of First Offer – If you issue new shares in a future round, the original investor has the right to buy in pro-rata to maintain their ownership percentage. You can put in a play-to-play position to flip on head and require investor to invest pro-rate or they may lose rights (like convert their shares to common).
8. Investor Rights Agreement - Says that investors can force an IPO
9. Board Composition - Usually investors will have seat on Board. Initially shoot for 3 person board with 2 internally members (founders or CEO/CFO) and investor. If have to go to 5 person board with 2 internal, 2 investors, and 1 independent nominated by common shareholders.
10. Drag Along Rights – Helps investors get out if they are the majority shareholder. Investors have an end-game. In 3-5 years they usually want to be out. This is a right that enables majority shareholder to force minority shareholder to allow the sale of the company.
11. Reverse Vesting – Investors can unvest shares you already own and force you to vest shares over additional years. A customary term, be aware of it.

Stages of raising capital (4-6 months)

Adding this in from my own experience. Brette only mentioned this timeline lightly. This is for running a competitive process and getting multiple term sheets, which is ideal but not always possible.

1. Decide whether to hire an investment banker or not to help raise the funds (usually costs 4-5% of the funds raised). Usually best to do yourself if early stage. Investors prefer non-ibanked deals. Investment banks can help a lot if later stage (post $25M in annual revenue) or if raising large round of more than $20M.
2. Create executive summary (3-4 pages) and teaser deck (~25 slides)
3. Determine firms who would be good investors
4. Reach outs with teaser/exec summary
5. Schedule calls with investors who are interested
6. Schedule meetings (at their office usually or on-site at your office for later stage firms)
7. Ask for indications of interest
8. Execute NDAs/Confidentiality Agreements if later stage. Make sure you can assign/transfer NDAs to any buyer of your business. Early stage investors often won’t sign NDAs.
9. Allow access to data room of initial diligence materials if there is one
10. Set date target for receiving term sheets with interested parties
11. Receive term sheets. Get them to be as detailed as possible.
12. Negotiate term sheets
13. Sign term sheet with investor you select, go exclusive with them
14. Complete final diligence items (30-45 days ideally)
15. Sign final documents
16. Get funds wired

Recommendation reading on investing is book Growth Company Guide 4.0 by Clinton Richardson. Remember the specific person who will be joining your board is just as important as the firm itself.

M&A

If you’re considering selling the company, recommended to hire an investment banker to help you focus on running the business and making sure the results come in. They know what market terms on. They do it for a living. They help create an auction process. You’ll usually pay between 2%-5% of the sale price to the banker. Get a lawyer involved to help.

Questions?

• Restricted Stock Units (RSUs) vs. Options
• 83(b) elections
• When you exercise Incentive Stock Options (ISOs), when do you pay cap gains and when do you pay ordinary income tax?
• When is Alternative Minimum Tax (AMT) triggered?

Don Hutson on High Performance Selling

Session 2, Don Hutson, High Performance Selling
EO/MIT Entrepreneurial Masters Program
Year Two, June 17, 2010

Don Hutson is now talking about how to increase performance in a sales organization. Here are the notes…

The Evolution of the Process Selling Over Time

1. The Product Pitch (Snake Oil in the 18 Century)
   not recommended, for historical perspective only
2. The Hard Sell (1960s)
   Doesn’t work today. Today selling relationships have to be built on trust. Not recommended, for historical perspective only
3. Relationship Selling (1970s)
   A high level of trust is enjoyed by both partners
   Relationship stress is kept at a minimum
   Strive to sell the customer as they like to be sold
4. Needs Analysis Selling (1980s)
   Listen before you talk. Never give a sales presentation before doing a needs analysis assessment. Information gathering is the cornerstone. Customer’s agenda is ever present. Constant monitoring for pertinent changes.
5. Symbiotic Selling (Created by Don)
   Importance is attached to the relationship. Client and salesperson are both energized to work together by common goals. Unique benefits are enjoyed by both.

Don’t be devoid of integrity. No one buys more than one time from a snake oil salesman. Don’t ask people to buy until there is trust.

Trust Based Selling

Don’t ask people to buy until there is trust. Speed up trust with referrals from existing customers and trust symbols. Make trust high and stress low to drive conversion up and sales cycle down.

Great sales professionals believe in themselves and their product. Few things are more contagious than an enthusiastic personality.

“The most remarkable discovery of our time is that we can alter our results by altering out attitude of mind.” Dr James Allen

Attitude in Sales

Attitude definition: The demeanor and spirit we choose to adopt and display from a given stimulus. Most people are just about as happy as they decide to be. Great sales people get over rejection quickly and are resilient. The attitude is the key.

If you’re doing great, notify your face. Smile on the outside. This displays confidence, optimism, and pleasant demeanor.

Motivation in Sales & Fire in the Belly

Motivation definition: “The pull of anticipation and the push of discipline.” Henry David Thoreau

All other things being equal, make more calls. If you have a sales person whose having a slump, their call count is likely deficient. And when the call happens, don’t throw up product info on the customer, do a needs analysis!

Motivation is also known as fire in the belly. Fire in the belly is “Passion for Results.” Therefore motivation is “passion for results.”

Current & Future Self-Image

The source of fire in the belly is the deviation between present and projected self-images. We are inspired when we see people with goals (who have a deviation between their projected self-image and the current self-image).

Narrow the gap between your team’s actual performance and potential performance by enabling them to improve their projected self-image and understand what it will take to get there. Most people haven’t scratched the surface of their own potential.

Ask for the MAB (minimum acceptable bottom) for sales unit expectations instead of what reps are hoping for. Get them to commit to themselves their own MAB each month.

The greatest salespeople today are analytical.

Great sales people ask great questions, are great listeners, and they learn from what they hear.

Coaching is “getting your people to develop the habit of doing the things which must be done to Succeed.”

Behavioral Interviewing

“The best recruiters and interviews are those who utilize a structured interviewing process in which they ask questions, the answers to which reveal some predictability about the applicant’s probability of success.”
- Dr Paul Green, Industrial Psychologist

Enhancing Customer Loyalty

“Helping a customer should always take priority over any other task!” Shep Hyken

Four ways to increase business:

1. Increase customer count
2. Increase average sale
3. Improve customer retention
4. Increase customer quality

It is six times more expensive to get a new customer than to keep an existing one.

The Loyalty Ladder (more loyal as goes down)

1. Suspects
2. Prospects
3. Customers (anyone whose purchased anything from you one time)
4. Clients (people that used to be just customers who buy from you multiple times and see your salespeople as a resource who provides solutions)
5. Advocates (people who used to be clients that  refer you to others unsolicited)
6. Confidants (people who buy from your company you know something personally about where trust is maximized. Can’t do for all but can do for 5-10)

The job of the sales person is to move individuals through this process and go from suspects to customers to client to advocate.

High performance sales people have an innate ability to compress more achievement in the same amount of time—because they have the ability to develop relationships better than low performance sales people. These high performance sales reps spend most of their time in relations with confidants, advocates, and clients–where the ROI of time invested in communicating with people is much higher.

Never ever violate the rules of integrity to move suspects into confidants.

Market share must be preceded by mindshare. It’s OK to over communicate but not OK to under communicate.

Four Step Formula for Success With the Loyalty Ladder

1. Make a List of 100 leads
2. Categorize each entry by labeling each
3. Place an asterisk next to each name that represents the greatest potential
4. Move asterisked entry to the next level on the loyalty ladder (by asking the right questions, building trust)

Needs-Analysis Selling

“Prescription before diagnosis is malpractice!” – Jim Cathcart

Personally perform period miracles for your customers. Make your customers say Wow!

You only need a good heart and a keen eye to perform customer service miracles. A miracle is anything that gets a customer to say wow.

Find congruent goals (overlapping needs).

Need analysis is an information gathering process. You use it every time you talk to the customer as needs change.

Needs analysis gives your prospects some authorship over what you ultimately present to them. Authorship is when you give another person the respectful right to be heard. Their opportunity to influence outcomes will greatly enhance their buy-in and eagerness to gain the desired results. Give your prospects a presentation in which your prospect helped design.

How to do a needs analysis with a prospect or customer

1. Be sure to talk to the key decision influencers as well as the key decision makers (they often have veto power)
2. Be consciousness in your approach
3. Impress them with the quality of your questions
4. Always take notes (and store them)
5. Ask probing questions
6. Clarify all substantive points; related not only to their needs but to their goals and objectives
7. Seek clear understanding

Great sales people are great at needs analysis.

Sales Negotiations

A negotiation is the (often ongoing) process through which two or more parties who positions are not consistent work in an effort to reach an agreement. – From The One Minute Negotiator

“Negotiaphobia is a fear of negotiating based on limited experience, discomfort with uncertainty and a lack of skill.”

Many people see negotiations as combat or conflict and they would rather just go along and get along.

Only ‘meet in the middle’ when it’s late in the negotiation and the spread is narrow and when you can tie it to a resolution to get the deal done.

Collaboration is the best type of negotiation as it is most conducive to the ongoing relationship and allows you to cook a better pie.

Going to Market

Make gathering competitive intelligence a constant project. Identify what competitors are doing that is giving them an edge. Differentiate value through the eyes of your customer. To sell value, make discovery a core competency personally and organizationally. Anytime someone wants to talk price, talk value.

Train your sales people to be value builders not price cutters.

Commodity – products w/o discernible difference that are available from multiple outlets.

7 Types of Differentiation

1. Product
2. Experiential
3. Relationship
4. Process (how you do what you do)
5. Technological
6. Marketing
7. Price (go last if you go there at all, unless you’re focused on volume)

Your value proposition is the complete, compelling value your offering is perceived as having to a prospective buyer.

Random Q&A:

It is best to have a compensation structure that has a mix between base salary and variable comp.

A draw on commission (paid in advance) is better than straight commission for the first year.

Presenter Bio
Don Hutson´s careers in speaking, management and sales have brought him many honors. He successfully worked his way through the University of Memphis, graduating with a degree in Sales. After becoming the #1 salesperson in a national training organization, he established his own training firm and shortly thereafter was in demand as a professional speaker.

Don has addressed over two-thirds of the Fortune 500 Companies and is featured in over 80 training films. Today he is Chairman & CEO of U.S. Learning, Inc. [Full Bio]

« Previous Page — Next Page »