The Downside of Being Upfront with Employees

One of the core principles of creating a more valuable business is ensuring it can run  without you by getting managers to think like owners.  

The theory goes that empowered employees are the best positioned to solve your  company’s thorniest issues, as they are the ones closest to the problems. In theory,  people feel more like they are part of a bigger cause and this has the potential to  contribute positively to a company’s culture. 

American Data Company  

Potential is used because being too open with employees can also backfire. To  illustrate, let’s look at the example of American Data Company, founded by Josh  Holtzman in 2003. Holtzman had built his consulting business up to more than $3  million in revenue by 2011, when he came up with the goal of building it to be a $15- million business. Holtzman knew that a $15-million business would have the scale to  provide his employees with more opportunities and a better exit multiple if he ever  wanted to sell.  

Fifteen Cubed—The Goal of Getting to $15 Million  

To galvanize his team around the idea of getting to $15 million, Holtzman came up with  a catchy concept he dubbed “Fifteen Cubed”. The idea was that his team would help  him build American Data to $15 million in annual revenue by the year 2015 and, if  successful, he would share 15% of the proceeds of the sale with his staff as part of a  phantom stock option program. 

Holtzman announced the goal and bought Fifteen Cubed bracelets for each of his  employees to wear as a reminder of their collective goal and how they stood to gain  personally if they were able to achieve their common goal. 

Initially, the program was received positively, but a year after the announcement,  American Data had failed to grow. Another year went by and still American Data was  stuck at $3 million to $4 million in revenue. 

Suddenly, the prospect of hitting $15 million looked like a long shot. Ultimately, the  only way Holtzman could hit the goal was to merge his company with a much larger  one, which is what he did when he swapped his equity in American Data for a minority  stake in Magnet 360, a consulting company about five times bigger.

The merged companies exceeded $15 million in combined sales and Holtzman’s  employees were able to participate in Magnet 360’s phantom stock option program, even though their portion of the proceeds was diluted when American Data merged  with Magnet 360. It was a good outcome for all involved, but not quite the home run  Holtzman had imagined when he first announced the $15 million revenue goal. 

Keeping Employees in the Know  

Being open with employees can be a great energy boost when things are going well.  Employees see the charts and graphs all moving up and to the right and that can  contribute to a positive vibe in the office. But just like using leverage when buying a  house can boost results in a good market and magnify mistakes when things turn  down, being open has the potential to backfire dramatically if you don’t reach your  projected numbers. 

As an entrepreneur, you can handle a high degree of ambiguity and you probably have  an abnormally high degree of optimism. Just remember the people who work for you  have chosen not to be entrepreneurs and for some of them, there may be such a thing  as too much information.

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