I think of this scene when I am in a meeting and a client or prospect raises a question and prefaces it by saying “this might seem like a dumb question, but . . .” So, let me be clear; as an owner you have the right – I might even say the obligation – to ask whatever questions are on your mind about any issue being discussed. This is particularly true when you are dealing with any of your professional advisors. You should feel very comfortable being open and honest about any doubts you have and if you are not, find a new advisor. The response to that simple question may prove to be the most important point of the discussion. Let me give you a few examples to get you more comfortable with the idea.
We work with many of the companies at ERA in New York and TechLaunch in New Jersey. They feel free to ask us all types of questions. They have ranged from, “Is the investment ERA or TechLaunch makes in us taxable income?” to “Is my product taxable?” Some are pure business basics (should my people be employees or independent contractors) and some are just nagging concerns (I promised my people some ownership, but, I am not sure how or when to give it.) Trust me, there is no professional worth their salt that does not live to answer questions their clients may have… so, please take advantage of this relationship.
I can think of loads of situations over the years where audit staff thought something did not make sense and they asked a question that they thought reflected poorly on them since they thought it indicated a lack of knowledge, only to find their observation uncovered a significant problem. I was consulting on an IPO and the CEO, who had his doctorate in engineering plotted certain items on the P & L only to find the graph of one of the amounts did not make sense. The result was “counter intuitive” in his words. Well, guess what – in the last draft, someone had dropped the brackets around a rather large expense and proofreaders had failed to pick up the error.
But, what prompts raising this subject now? Well, I recently had a meeting with a new client who had a term sheet they were considering signing. I asked a few basic questions and then the obvious one – did they know the terms of the deal? The two owners looked at me in a sheepish way and admitted they relied heavily on their attorney. The deal had a participating preferred and also indicated it would contain “standard” antidilution provisions. While not always bad, these are red flags to professional advisors. We decided to call the attorney for clarification and while one provision was fine, the other was definitely not what they thought. We managed to get it changed and the deal went on. The entrepreneurs conceded they had talked to some fellow owners who admitted they, too, had relied on legal advice for deal terms. I had heard of this before, but this was my first live encounter.
So, please keep in mind that if something does not seem right, ask to get clarification. I cringe when I think of the trouble entrepreneurs have gotten into by abandoning this basic instinct. A clarification trumps a giant “oops” every time. Good luck.