Stock Advice: Startup Companies: Look at Management Pay

Here is a pretty quick tip.

I've bantered about the importance of bad management vs. good management.

In good times, this might only be partially important.

In rougher times, only places with good management survive downturns--usually. I'm not looking to discuss exceptions here. I'm only setting up my point.

Without sitting beside a company's management every day, you can only speculate whether the management of a particular company is good or bad.

However, what is, at least, one major flag?

Management of Startup Companies Should not get rich before YOU do!

If you truly believe in your company, you do not pay yourself until the business can pay you.

This seems silly. Of course, I can't pay myself until there is money to pay me.

If you're using your own cash, this IS true.

If you borrowed (raised) money to start your company, now there is a decision to make.

Good management does not expect to get paid when it is not running a profitable company.

Where is the fire? What made me think of this?

I violated several of my own rules of investing with a pharmaceutical company, and I paid the price.

Take a look at the things I overlooked/ignored:

• The management of this particular company kept raising funds.
• There are fewer than 10 employees total.
• There are five (or so) members on the board.
• Top board members made over $300K compensation this past year.
• Total sales for past year was barely over $100K--not profit, sales.

Does this seem like a group that would likely be motivated to make sure the company gets sales soon?

I lost about half of my investment, but it could have been worse. I kept ignoring this warning sign (and others). This past week, this company defaulted on its loan repayment terms. Luckily, I sold this about a 1-1/2 months ago. It's dropped another 25% since, and it will likely fall further.

I don't blame them for my loss. I blame myself. I didn't check management's compensation compared to company sales.

Bad management (often) equals a bad investment.

Moral: It's tough for management to be good when it doesn't NEED to be good. Check its compensation, especially if it just a startup company.

(More lessons to follow...from this same company.)