What Are The Four Steps For Managing Your Startup Crisis?

“Whatever you do, don’t react,” Gill, one of our investors, told me. Gill, (we’ll call him the good investor) was driving to our office, and he was going to be a little late to the board meeting.

Our other investor, “Raul”, (we’ll call him the bad investor) had asked to have the “closed session” of the board meeting first. We usually had the open session with the VP’s presenting at the start. Then we would have the closed session second with just the board of directors.

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Today was different. I had presented an update about the company earlier in the week to Raul’s partners. The company was doing well. Revenue was growing and we were adding customers at a high rate.

To say the meeting didn’t go well would be an understatement. In fact, it felt like Raul and I were ambushed by an angry mob during the meeting.

So, I knew something bad was coming, but I didn’t know what it was. I just knew, whatever it was, I wasn’t going to like it.

The board meeting began, and Raul started speaking. His partners suddenly had many misgivings about my company.

In an instant, the funding that Raul’s firm had promised was gone. We now were going to have to live off of bridge loans and find other sources of funding.

That meeting marked the beginning of a yearlong fight with the bad investor and his firm over the company’s future.

Your company will likely have some crisis that will push you to the brink.

And, how you handle the crisis will be critical in determining your future.

So let’s start with the sage advice Gill, our good investor, gave to me:

“Whatever you do, don’t react.”

In other words, process the information and take your time. Now, I’m not saying you should take weeks to determine what to do, but you need take a little time to let your emotions settle.

Your world has just been rocked, after all. Everything that was good is now bad. And your initial fight or flight instincts might not lead you in the right direction. This bring us to…

The first step of startup crisis management: Whatever you do, don’t react.

The board meeting ended. I didn’t react to Raul. But inside I was really pissed, and I was scared.

What were we going to do?

Gill stayed behind to talk to me. His firm was just as much at risk as I was. They had millions of dollars at stake.

“Let’s wipe him (Raul) out!” I said to Gill.

“It’s too early for that,” he said. “We’re stronger trying to work with him.”

Gill was right. He’d been through many situations like this before. And that brings up…

The second step of startup crisis management: Have a council of elders to lean on.

Gill, one of the other board members (my friend Cathal), and my advisor Dave were my council of elders. Fortunately, I had built these relationships over several years, so I could trust the advice I was getting.

Each member of my council of elders played a key role in helping me navigate the crisis over the next year.

We quickly developed a strategy for what needed to be done to overcome the crisis. This leads to…

The third step of startup crisis management: Quickly develop your plan, set your priorities, and execute.

It was clear what we needed to do. In our case, there were two key actions:

  1. We needed to hire a chairman of the board. Raul was insistent we needed a chairman, so the quicker we hired someone, the better off we would be.
  2. Raise money. We needed a new investor, and fast, with Raul’s fund’s lack of support.

Finding the chairman was quick. Raul suggested someone, but there was no way I was going to work with anyone he suggested. No way!

However, Gill suggested someone we had considered previously for the board. I quickly set up a meeting with Barry, and we met later in the week. Within two weeks, Barry had met the other board members including Raul. Within three weeks he was on-board as our new chairman.

Barry and I then set about finding a new outside investor. Barry had a network, Gill had a network, and I had a network. We immediately started pitching potential investors.

The employees would quickly know something was going on because I was going to be out of the office a lot meeting with potential investors. There was no way to hide what was going on. This leads to…

The fourth step of startup crisis management: Be as transparent as possible with your team.

This rule of crisis management may be the most important of all.

Your employees are smart. That’s why you hired them. Your employees are going to know quickly that something is up. So, you’re much better off just telling them:

  • You build trust when you are open and honest with your employees, and…
  • Your employees become part of the solution, and…
  • The trust you’ve built with your employees can build tremendous loyalty

It’s scary. I know it is because you believe your employees are going to leave when they find out what’s going on. They likely will not leave from my experience.

We quickly (for a semiconductor company) found a new investor in three months. But, as I said earlier, our crisis lasted over one year because of Raul’s dirty tricks.

At one point, all the employees (myself included) had to go on minimum wage for six weeks to save the company. Do you know how many employees we lost?

Zero.

In fact, the employees applauded when I told them we were going on minimum wage. We had been honest and transparent with the team. And the team rewarded us with their loyalty.

We lost our health care at one point, and we missed payroll too. Do you know how many employees we lost?

Zero.

We had no money and we had no other options. We had a term sheet (the fourth we received) on the table. It was either accept this term sheet or shut down the company.

Raul’s fund still would not agree. He blocked the investment from going through.

We were out of time. It looked like we were going to have to shut the company down.

The only card we have left to play was a bank loan we had with Silicon Valley Bank. I got on the phone with SVB and told them they were going to lose their money for no good reason.

SVB said they would contact Raul. I was not hopeful.

We had an emergency board call scheduled for the next day. Amazingly, during the call, Raul called and backed down.

We could now close our funding.

There’s more to this story. A lot more in fact. But, I’ll never forget the damage this one person, and his fund, caused.

At some point, you will likely have a crisis that will push your company to the edge too.

That’s when you need to remember the four steps I’ve outlined. You’re going to need to stay calm. You’re going to need a council of elders. You’re going to need to develop your plan, set your priorities, and execute. And you’re going to need to be as transparent as possible with your team.

For more, read: http://www.brettjfox.com/what-are-the-five-skills-you-need-to-be-a-great-ceo/

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I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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