Most startups fail. We know that, but we roll the dice and join anyway for glory and potential riches. Plenty of mature companies also fail. Sharper Image lost out to Brookstone. PanAm lost out to runaway costs. Commodore Computers got crushed by IBM. Washington Mutual succumbed to the housing crisis. And Enron died due to fraud.
Back in 2008-2010, no financial firm was safe. All of us came into work each day for two years wondering whether we were next. My investment bank went through seven rounds of layoffs in 2009 that I know of, and probably several other “adjustments” as we adapted to the environment. One friend not only lost his job and all his Lehman stock, but also $14,000 because he failed to submit his expense report after three months of delay. $14,000! His expense report was the least of Lehman Brother’s worries.
As a finance person since the 90s, I’ve been conditioned to constantly be aware of trouble. Everything we do in finance is about risk and reward. I’d like to share with you some signs that your company is in trouble and also share some strategies to land on your feet. Perhaps you’ll share some of your thoughts as well.
SIGNS YOUR COMPANY IS IN TROUBLE
1) Your free fruit stops showing up. The number one thing every company in trouble does is cut costs. The first to go are all extraneous benefits such as free drinks, food, dry cleaning, and so forth. After a company has sucked out all the little things, they’ll start tackling the larger things.
2) Your company halts tuition reimbursement. My old firm had a great benefit of paying for your MBA if you dedicated at least two years after graduation to the firm. When I submitted my tuition reimbursement form for the first year, I was denied because the company had arbitrarily shut down the program “until further notice” in 2004. When colleagues were getting blown up left and right, I wasn’t about to make a fuss about not getting reimbursed $28,000, even though I applied with the understanding that I would be reimbursed. Two years later, my company did end up reimbursing me retroactively for 80% of my first year’s tuition, but it wasn’t without some gentle prodding.
3) Your company is constantly in the news. Bad press is not good press in this instance. When your company is constantly in the news based off rumors of acquisition, fines, regulation, subpoenas, and so forth, it’s best to watch out because the next step is usually major restructuring. Remember the adage, “When there’s smoke, there’s fire.”
4) Your company’s share price is in the dumps. The market is very efficient. If your company is a publicly traded firm, you will have countless Wall St. and buyside analysts examining the firm’s income statement, balance sheet, cash flow statement, and strategy. If your company’s share price is at 52-week lows, layoffs are for certain. If your company’s share price is in its second year of trading sideways, changes will be made. If your competitors are raising down-rounds, or shutting down, be very aware that your company could be next.
5) Senior management is aggressively selling stock. There was one company that IPOed at $10 and allowed only its senior management to sell a block of shares at $14 a year later. The stock is now under $5 and its employees have left in droves due to the inequality of the system. Asymmetric terms for senior management versus rank and file employee should sound tremendous alarm bells. Check the company’s 10-K, 8-K, and news to unearth insider selling. Bloomberg is particularly good at highlighting insider sales.
6) Financial metrics are no longer growing. For startups, top line growth is more important than anything. If you can’t gain market share and revenue as a startup, then how are there ever going to be profits? If the rate of growth is steadily declining or actually going in reverse for an extended period of time (three or more months), alarm bells should be ringing. For established companies, top line and bottom line growth are important. IBM, for example, has shown eight consecutive quarters of earnings decline. IBM is probably going to survive, but cost cutting is inevitable. Watch for operating margin contraction as well as a cut in dividends as well. When companies cut dividends, they are signaling to the market that they need cash.
7) Management no longer provides updates to employees. Proud management openly tell employees how great the company is doing. There will be milestone celebrations, announcements of revenue and/or profits during quarterly town halls, and so forth.
8) Your immediate supervisor and superstar colleagues start leaving. Watch what top performers in your company do because they have the most choices. Sure, they might be getting poached by other firms for mega bucks, but they also have the most to lose if they leave as well.
STRATEGIES FOR LANDING ON YOUR FEET
1) Turn into a financial analyst. If your firm is public, you should read all you can about the latest quarterly results and dial into the analyst call. Listen to what the analysts are asking and how the management is answering. It’s easy to quickly ascertain the sentiment on the street in terms of Buy, Hold, or Sell. If you work for a private company, consider asking your immediate supervisor about the latest results. If you have friends at a venture capital or private equity company who have made investments in your company, seek them out for a coffee or lunch.
2) Be the first to leave. If you don’t like what you find, it’s time to plan for an amicable exit. Those people who got laid off first during the 2008-2010 downturn got the largest severance packages. As layoff rounds proceeded, people got less and less. The sooner you can recognize your firm is in trouble, the sooner you should raise your hand to join the next round of layoffs because the sooner you’ll be able to find another job.
3) Befriend a head hunter. Despite spending 11 years with my old shop, I was always aware of the various job opportunities in my space because clients and competitors would talk. Furthermore, I became friends with the head hunter who placed me from NYC to SF. He always kept me in the loop on the latest job opportunities. It’s always a good idea to know your market worth. It’s an even better idea to cultivate relationships with competitors and headhunters when you don’t need anything.
4) Consider not exercising most of your options if you leave. The worst is if you leave your firm, exercise your options, pay taxes on the “profit” and watch the company go under later. The bright side is that even if your shares are worthless, they can be used to offset your income and taxes. You probably still want to leave with some options because there’s always a chance your firm still survives and makes it big. (Related: Your Equity Compensation Primer)
5) Moonlight until the sun comes up. Spend time moonlighting on a side project or hobby you really enjoy because you never know what might happen. Too often we get into this rut of doing the same thing over and over again. We wake up 10 years later and have this “oh shoot” moment where change might be too late. Imagine what spending an extra 10-20 hours a week for three years working on your side project could produce. That’s 1,560-to-3,120 hours of effort dedicated to your craft. Who knows? You might be able to start a little business that eclipses your day job income and allow you to do whatever your heart desires.
EVERY FIRM IS ONE BIG GAMBLE
Some of us join firms because we have no other choice. There is no gamble in this situation. Others have options of not only choosing between the stable route and the risky route, but also between various risky routes as well. Joining a startup could very well make you poorer over the long run than richer due to all the failures you never hear about. But that doesn’t mean you can’t parlay your experience into something greater down the road.
The last thing you want to do is start a family, buy a house, splurge on a car, and take a two-week European vacation before management says they’re liquidating the firm. Every employee should always think like an investor and ask themselves whether they’d put new money into their firm. If the answer is “no,” then why are you still there?
If you want to get a better grasp on your finances simply:
1) Sign up with Personal Capital to access our free financial planning tools.
2) Aggregate all your financial accounts in one place so you can develop a holistic view of your finances. It’s important to understand how your net worth is divided in order to properly asset allocate.
3) Run your 401k or retirement portfolio(s) through our Portfolio Fee Analyzer to see how much fees are robbing you of your retirement. I ran my 401k through Personal Capital’s 401k Fee Analyzer and discovered $1,700 a year in fees I had no idea I was paying.
4) Run your investment portfolios through our new Investment Checkup feature which analyzes your portfolios for sector exposure, stock concentration, and style to ascertain risk. Over time, your investments will become unbalanced due to gains and losses. Our tool makes it easy to rebalance.
5) Manage your cash flow by keeping track of your income and expenses over time using Personal Capital’s award-winning software. If your company is in trouble, now is the best time to really start managing and understanding your finances.
Photo: Sinking to the bottom of the ocean in Oahu, 2014.