During a recent round I saw a clause that was new (to me) inserted by a VC firm out of the US. They asked for the requirement that any founder or member of the group of ‘key employees’ that leaves the company had to to conduct a ‘third party’ exit interview with their Partner on the BOD, without management included. They also tried to put some teeth behind by making it a requirement for the employee to keep their earned out equity when leaving the company.
Usually there are clauses of some sort similar to this in ones shareholders agreement regarding the exiting of ‘key staff’ or founders etc. but never had I seen the process explicitly give this right to an investment firm outside of the usual BOD duties. This was in addition to the usual ‘processes of an employee leaving the group.’ I asked why it was there. The answer gave me some pause.
“We’ve all been entrepreneurs at our firm and the first sign of something not going in a positive direction is usually a key member of the technical staff leaving or a founder looking to leave. This is the symptom of something that we at the BOD level have a hard time identifying, we’d rather just goto the source and see if its something we should be aware of. Not have it from a secondary, biased person.’
For the most part I agree with this view that someone leaving a company is usually a sign of a problem, but it shouldn’t be the first sign. I’ve been pushing the companies I advise to conduct 360 Reviews once they get past eight to ten employees and I’m not the only one.
360 reviews conducted regularly can be a huge help for management, investors, the BOD and most importantly staff to identify problems early, before they lead to someone leaving the company. This is one of the takeaways from my MBA at Ivey, Lyn Purdy, the professor who introduced them to me deserves a prize. I probably would have dismissed them out of hand, had she not shown how they build employee morale and retention, with things like numbers and examples. And in these days when each hire is an expensive process of technical prowess and ‘fit’ a review process can save you money.
It was a 360 Review process that ultimately got the offending clause removed. The reviews would be conducted every six months, and be reviewed by management and the BOD – none of the other investors were particulalrly ecstatic about one investor group conducting exit interviews. I’d encourage founders to get out in front of this issue by having some thoughts around a process for employee feedback before it comes from your investors.