Author: Greg Alexander

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Preventing Employee Fraud: A Guide for Boutique Professional Service Firms

Preventing Employee Fraud: A Guide for Boutique Professional Service Firms

Fraud, a word that sends shivers down the spine of business leaders, is not always committed by faceless outsiders. In most cases, the culprits are the very individuals we trust – our employees. As the founder of a boutique professional service firm, it’s paramount to understand that no organization is immune and take proactive steps to shield one’s venture. Here are six proven strategies to prevent employee fraud:

    1. Get an Audit:

What is an audit? An audit is an independent examination of financial statements, internal controls, and related operations to ensure accuracy and compliance with regulations and policies.

Who performs an audit? External certified public accountants or specialized auditing firms undertake this meticulous task.

Duration and Cost: An audit’s duration varies based on the firm’s size and complexity, usually ranging from a few days to several weeks. Costs can span from a few thousand to tens of thousands of dollars.

When and how often? Initially, when suspicious activities arise. Thereafter, annual or bi-annual audits act as strong deterrents to potential fraudsters.

    1. Founder’s Signature for Cash Disbursements:

       Within a boutique professional service firm, cash disbursements might include vendor payments, payroll, or reimbursements. Unscrupulous employees can inflate expenses, forge invoices, or manipulate payroll. Instituting a policy where the founder signs off on every cash disbursement drastically minimizes these risks, ensuring a higher level of scrutiny and oversight.

    2. Review the Vendor List:

What’s a vendor list? It’s a compilation of all external service providers and suppliers with whom the firm conducts business. Unfortunately, a deceptive employee might collude with a vendor, overbilling for services or even creating phantom vendors. Regularly reviewing the vendor list enables founders to spot irregularities, unfamiliar entities, or suspicious patterns.

    1. Issue Credit Cards in the Name of the Employee, Not the Firm:

      This simple yet effective measure transfers the risk from the firm to the individual. If a card is misused, it’s tied directly to the employee, discouraging unauthorized expenses. Furthermore, it eases the process of tracking and auditing individual transactions.

    2. No Cash or Checks – Go Digital:

      Handling cash and checks presents numerous opportunities for fraud. An employee might siphon off cash receipts or alter check amounts. To prevent such malfeasance, firms should adopt digital payment methods such as credit card payment, wire transfers, online banking, or electronic wallets. These methods offer transparency, traceability, and reduced manipulation risk.

    3. Sole Control of the Bank Account:

      The firm bank account, essentially the lifeblood of any firm, should remain under the stringent control of the founder. Granting multiple individuals access creates vulnerabilities. With sole control, a founder ensures that no unauthorized transactions occur, and oversight remains tight.

Conclusion: Preventing employee fraud requires a mix of vigilance, strategic policies, and an environment fostering integrity. By implementing these six steps, boutique professional service firms can significantly fortify their defenses, ensuring that their hard-earned success remains uncompromised.

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How to Catch a Wave of Demand and Ride it All the Way to the Bank

How to Catch a Wave of Demand and Ride it All the Way to the Bank

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Are you looking for opportunities to make big sales? If you can land in the sweet spot of a surge in demand, your firm will experience exponential growth. But how do identify the wave and position yourself to catch it?

This video reveals six steps to go through. From spotting the wave to getting off before it crashes, we’ll share some of the most important secrets to big sales and how you can prepare for maximum impact.

In this video, we discuss:

    • How to spot a hyper-growth market
    • Why tech firms need you
    • The importance of timing when it comes to demand
    • How to identify the tech firms and key players
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The Imperative of Employee Documentation in Professional Service Firms

The Imperative of Employee Documentation in Professional Service Firms

In the bustling world of modern business, the divide between product-driven and people-driven enterprises might seem subtle but carries with it profound implications. As a founder of a boutique professional service firm, I’ve learned firsthand that the latter – businesses where people, their skills, and their expertise form the bedrock – demands a different approach, especially in areas such as employee documentation.

Why the Difference?

In a product-driven business, the emphasis is often on tangible assets: inventory, machinery, real estate, and the like. In such an environment, while human talent is vital, the primary value lies within the products and the processes that bring them to market. Employee turnover, while unfortunate, doesn’t typically risk the erosion of the core business model.

However, for professional service firms, the situation is quite the opposite. Our strength, value, and market reputation hinge on our people. Their knowledge, creativity, and relationships form our most prized assets. Thus, safeguarding our relationship with them, establishing clarity on their roles, responsibilities, and entitlements, and mitigating potential conflicts is crucial. This makes employee documentation not just a procedural necessity but a strategic one.

Fundamentals of Employee Documentation:

    1. Offer Letter: This is the starting point of the formal relationship. It outlines the basics – position, department, reporting structure, and starting salary. It gives the candidate a snapshot of their role in the firm.

    2. Employee Agreement: An in-depth document detailing the terms of employment, it’s the constitution of the employer-employee relationship.

    3. Explanation of Duties: This section clearly demarcates what is expected of the employee. In a professional setting, role clarity is paramount for efficiency and performance.

    4. Compensation and Benefits: Beyond the basic salary, this segment elaborates on the structure of bonuses, benefits, perks, and other financial incentives that the employee is entitled to.

    5. Equity Grants/Stock Options: If applicable, this section provides details about any equity positions or stock options provided to the employee, along with vesting schedules and other pertinent details.

    6. Duration and Termination: Details about the employment contract’s duration, grounds for termination, notice periods, and severance packages, if any, are essential to avoid potential conflicts.

    7. Non-disclosure Agreement: In a knowledge-driven business, protecting sensitive information is paramount. This clause safeguards the firm’s proprietary information, trade secrets, and client data.

    8. Intellectual Capital and Property Assignments: For roles that involve creation or innovation, this part ensures that any intellectual property developed during the tenure belongs to the firm.

    9. Non-compete Clause: This prohibits the employee from starting or joining a rival firm for a certain duration after leaving the company, ensuring the firm’s market position and client base remains secure.

    10. Non-solicitation Clause: Employees, especially in high positions, often develop deep client relationships. This clause ensures they don’t lure clients away after parting ways with the firm.

    11. Integration Clause: To avoid misunderstandings, it’s vital to have an integration clause. It ensures that the entire agreement between the employee and employer is encapsulated within the document, superseding any prior oral or written communications.

    12. Mandatory Arbitration: Legal battles are costly, time-consuming, and can tarnish the firm’s reputation. Thus, having a clause that mandates arbitration for any disputes related to employment can save time, money, and unnecessary publicity.

In conclusion, while every business should prioritize employee documentation, for professional service firms, it’s an imperative. The nature of our business makes it essential to establish clear, legally-sound, and comprehensive documentation from the get-go. Such proactive measures not only help in fostering a transparent and harmonious workplace but also safeguard the very essence of our business – our people.

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The 4 Types of Culture in a Professional Services Firm

The 4 Types of Culture in a Professional Services Firm

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A few bad apples can destroy morale, and cultural ambassadors can make your firm a wonderful place to work. So how do you establish the right culture for your firm?

In this video, we explore 4 types of culture that are seen in professional services. Join us as we dissect the goals and priorities of each culture type, how they work, and what industry we typically see each of them in. 

In this video, you’ll learn:

    • How to manage the culture of your professional services firm as you scale
    • 4 types of culture in a professional services firm
    • What to consider when building your culture
    • How to be intentional about your culture
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Understanding Employee Stock Options in Boutique Professional Service Firms

Understanding Employee Stock Options in Boutique Professional Service Firms

When the topic of employee stock options arises, thoughts usually gravitate towards tech startups and Silicon Valley’s golden handcuffs. However, the world of boutique professional service firms has its own unique landscape. In these firms, the granting of stock options is not common practice. Yet, in specific circumstances, they can provide valuable incentive and alignment between professionals and the firm’s objectives. This article delves into the basics of employee stock options within this niche, explaining why they’re less prevalent and the key considerations when they are implemented.

Why Stock Options are Rare in Professional Service Firms

Professional service firms, such as consulting, marketing agencies, and IT firms, are traditionally structured around partnership models. In these models, senior professionals work their way up the ranks and eventually buy into the partnership, sharing in profits rather than owning shares that appreciate in value. The unpredictability of client-driven revenues, coupled with a lack of scalable products, makes these firms less conducive to the traditional stock option model seen in product-based or tech companies. Furthermore, the valuation of professional service firms is often based on intangibles like client relationships and human capital, which are more challenging to quantify and forecast compared to tangible assets or predictable revenue streams.

Where Stock Options Make Sense

Despite the traditional partnership model, there are scenarios where stock options in boutique professional service firms can be beneficial. They can attract top-tier talent, incentivize long-term commitment, or facilitate succession planning. Especially in smaller, specialized firms where the expertise of a few individuals can significantly impact the firm’s value, stock options can create alignment between individual and company success.

Key Items to Consider:

    1. Number of Shares in the Pool: For boutique professional service firms considering stock options, it’s typical to allocate 15-20% of the firm’s total shares for the option pool. This ensures there’s a meaningful reward for employees without excessively diluting existing ownership.

    2. Exercise Price and Valuation: The exercise price is the cost an employee will pay to convert their option into an actual share. To avoid tax complications and ensure fairness, this price should equal the share’s fair market value at the grant date. Given the intangible assets in professional service firms, determining this valuation may require expert assistance.

    3. Type of Option: Options come in various forms, including Incentive Stock Options (ISOs), Non-Qualified Stock Options (NSOs), and Restricted Stock. Each has its tax implications, benefits, and constraints, so it’s essential to choose the one that aligns best with both the firm’s and employee’s goals.

    4. Duration: The maximum duration for most stock options is 10 years, after which they expire. However, if an employee owns more than 10% of the firm, this reduces to 5 years. This encourages timely exercise and prevents indefinite uncertainty in ownership structure.

    5. Permissible Forms of Payment: When employees exercise their options, they can do so using cash, by surrendering other shares (net of exercise price), through cashless exercises, or even via promissory notes. The firm needs to define and communicate acceptable payment methods.

    6. Vesting and Early Exercise: Vesting schedules determine when options can be exercised. A common approach sees 0% vested in the first year (a one-year cliff), 25% vested at the end of year one, and then pro-rata monthly vesting up to the end of year four. This structure incentivizes longer-term commitment.

    7. Restrictions on the Transfer of Shares: Even after options are exercised, firms often retain some control over the shares. A common restriction is the “first right of refusal,” which requires the employee to offer the shares back to the firm or existing shareholders before selling to an outside party. This ensures the firm’s ability to maintain its ownership structure.

In conclusion, while stock options are not the norm in boutique professional service firms, they can be a valuable tool in certain circumstances. It’s crucial for firms considering this route to understand the unique challenges and considerations in their industry and design an option plan that aligns with their strategic objectives.

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How Do I Make My Firm More Valuable to My Clients?

How Do I Make My Firm More Valuable to My Clients?

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How can you make your firm more valuable to your clients? It’s a strategic question that, when answered, tells you where to allocate your resources.

This video unravels 3 steps that founders should take to make their firms more valuable to clients. Tune in to find out how you can identify where to allocate your resources and tips on how to analyze your data and act on it.

In this video, you’ll learn:

    • 5 simple questions to help you pinpoint growth opportunities
    • A framework for efficient strategy development
    • Best practices for collecting and utilizing data
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Eight Key Questions to Ask and Answer When Structuring Ownership: A Perspective from Three Co-Founders

Eight Key Questions to Ask and Answer When Structuring Ownership: A Perspective from Three Co-Founders

Starting a boutique professional service firm is an exciting journey. Here, we’ve distilled our collective experiences into eight key questions every founder team should ask and answer when structuring ownership:

    1. Who owns what percentage?

Answer: Ownership stakes reflect the value each founder brings. When deciding percentages, consider factors like capital investment, skills, connections, and previous experience. It is crucial to have candid discussions about these elements and recognize where each founder adds unique value. The ownership distribution should be based on a mix of these attributes and future commitments.

    1. Who is in control?

Answer: Control can be different from ownership percentage. In most firms, co-founders opt for a unanimous decision-making model for major decisions. This way, despite any differences in ownership percentages, each co-founder feels their voice is heard and respected.

    1. Who has contributed money, how much, and when?

Answer: Keeping transparent records is paramount. Document every monetary contribution and link it to specific milestones or business needs. This approach makes it easy to see who contributed, when, and why, fostering trust and clarity among co-founders.

    1. Who is going to contribute time, how much, and when?

Answer: Not every founder can commit full-time initially. Discuss your individual commitments, both present and future, and noted any anticipated changes (e.g., moving from part-time to full-time). Clear agreements prevent potential resentment or misunderstandings.

    1. What is the incentive compensation plan for each co-founder?

Answer: Besides equity, it’s essential to consider salaries or other compensation, especially if founders have varying levels of financial commitments outside of the business. Adopt a model where early salaries are modest but are combined with performance bonuses and future equity vesting.

    1. What happens when a co-founder quits?

Answer: A founder leaving can be unsettling. Agree that if a founder decides to quit, their shares would undergo a vesting schedule, allowing them to retain only a portion of their equity based on the time committed. This strategy ensures that founders are incentivized to stay and contribute to the firm’s growth.

    1. What happens when a co-founder is forced to leave?

Answer: This is a tough but necessary discussion. Establish a framework detailing specific scenarios where a founder could be asked to leave (e.g., misconduct, not meeting agreed-upon commitments). In such cases, a buyback clause at a predetermined valuation would be triggered.

    1. How is a “forgotten founder” handled?

Answer: “Forgotten founders” are individuals who may have contributed in the early stages but weren’t formalized as part of the founding team. Addressing this proactively, Agree to acknowledge any early contributors either with a smaller equity stake or a one-time compensation, ensuring they’re recognized but without long-term firm obligations.

In conclusion, structuring ownership isn’t just about equity distribution. It’s about crafting a relationship framework that will endure challenges and maximize collaboration. By confronting these questions head-on and forging transparent, fair agreements, will lay a strong foundation for your collective future.

If you find this article helpful, come join us at Collective 54. Apply here.

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