At Edison, we talk about transparency A LOT; we value it and pride ourselves on it. So, let me be honest here – there are times that we are transparent only within reason. For example, you may not get specific numbers from us, rather we’ll give you a range (and maybe one that you can drive a truck through). The reality is that sometimes it can be counterproductive to share too much detail. Our CFOs face this very same reality. At our 11th annual CFO Roundtable earlier this month, transparency was a popular topic, which got me to thinking, How can CFOs promote transparency without compromising confidentiality?
Following are four common questions directed at CFOs with some considerations and recommendations:
1. How much are my options worth?
As a growth-stage, investor-backed company, every employee should be granted options. When employees are owners, they are motivated to not only stay with the company, but also perform. But, as an owner, naturally, employees want to know what their options are worth. As such, CFOs are regularly faced with the challenge of communicating the value of stock options -- and not only to existing employees, but to prospective employees, too.
In this case, transparency can create more questions than answers. There are too many variables at play over time between company performance and rounds of funding. As such, I like the approach one Edison CFO takes, using an analogy instead of specifics to frame potential outcomes for every level of the organization upon a successful sale of the company:
- The founders/CEO could retire
- The rest of executive team could pay off their mortgages
- The VP/Director level could receive roughly their salary
- The rest of the company could receive double their annual bonus
2. When will there be an exit?
Speaking of a sale of the company..… Employees may want to know a general timeline for exit and
whether the goal is to IPO or be bought. For executive hires, this is not an unreasonable ask, but anyone asking the question knows the answer will likely be vague and a moving target (unless an exit is imminent). For executives, it is not unreasonable to provide a rough range - whether a revenue range, or an expected timeline based on investor expectations. For the broader employee base otherwise, there is nothing to gain by setting any kind of exit timeline expectations with existing or prospective employees. That said, sharing the potential options is appropriate, i.e., IPO, strategic buyer (give examples), financial buyer.
And when an exit is imminent, mum's the word. I worked alongside the Operative Finance department for two months in preparation for the company to be bought by SintecMedia in December. For several weeks, I periodically asked the CFO “who can I talk to about this?” The answer was "no one." It is not uncommon for the buyer to want to control the message. As such, Operative's internal communication was held until SintecMedia was ready to officially announce the pending transaction externally. On that day of the official announcement, the company held an all-employee meeting. While most employees were surprised, not surprising was the thunderous applause when the CEO reminded everyone that they’d be able to cash in their options!
3. Are we fundraising?
In our world (growth equity), when a company is fundraising, they are doing so because they have proven product-market fit, have been growing at a rapid pace, and are looking to put more gas in the tank to fuel continued growth. This is an exciting time for the business, so don't be shy about sharing with your team the fact that you are fundraising, and even any feedback received from prospective investors during the process.
Another reason for fundraising is when cash is low due to under-performance, over-spending or both. It’s stressful enough when sales isn’t hitting their numbers, or the product isn’t working, and/or budgets need to be cut, so this is a time when, as one Edison CEO puts it, "the CFO needs to be coolest cat in the company." (I paraphrased; he definitely didn’t say “cat.”) If the CFO does not appear panicked about the state of the business, then employees will not panic. So, in situations like this, best to limit any talk of funding to the executive ranks. As a general rule, keep any cash balance discussion to Finance and the executive team. And, if your company is committed to full transparency up and down the organization, perhaps limit communication by simply providing a range (just make sure there’s room for that truck).
4. Are we hitting our financial targets?
While cash balance is generally not one of a company’s key growth metrics, revenue and profitability are. And not only should these goals be shared with the entire organization, but each and every employee should know exactly how he/she will contribute to them (and their year-end bonus should depend on it).
In order to do this effectively, there needs to be shared vocabulary with crystal-clear metric definitions. Revenue can mean a lot of different things to anyone who isn’t a CPA: there’s GAAP, ARR, MRR, bookings - any of which may be how sales, marketing and operations are thinking about revenue. And don’t get me started on profitability! How many times have you witnessed a sales team celebrate a newly closed deal, only to find out the company is going to lose money fulfilling the customer requirements? Helping every department understand their impact on the P&L is essential to aligning the organization. Clear financial definitions that create a shared vocabulary across the organization is the first step and the basis for any regular cadence of employee communication about financial performance.
While these are just a handful of the difficult questions Edison CFOs are often asked, the list is endless. Be prepared to address just about any type of question, and more importantly, know the level of transparency to provide.