A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

In June we learned the right way to close a company and last month we got a lesson in the wrong way to do it.

Right, wrong; what’s left?

(Allegedly) crooked.

How crooked?

Penny Kim is a marketing professional who relocated from Dallas in July to work for WrkRiot (formerly known as 1for.one and apparently also known as JobSonic) for $135,000 a year plus equity and a $10,000 signing bonus for relocation expenses,

It ended with her dismissal in August after she filed a complaint with the Division of Labor Standards Enforcement over failure to properly pay her

If you wonder whether she’s just another disgruntled employee, she’s not.

Not when the CEO gives everyone faked documentation of wage payment.

“Thursday, August 4th was D-Day … That afternoon in the office, Michael emailed each employee a personalized PDF receipt of a Wells Fargo wire transfer with the message: ‘Here is the receipt. It has been calculated for the taxes on your semi-monthly salary and signing bonus. The money is arriving either today or tomorrow. I am sorry about the delay.'”

But the receipts were fake.

Al Brown, former CTO and one of the founders, confirmed much of her account, even the most outrageous accusation: The CEO she dubbed “Michael,” whose LinkedIn profile identifies him as Isaac Choi, gave employees fake receipts for money wire transfers to convince them the company had paid their back wages when in fact it hadn’t.

Not even a good fake, since the photoshopped receipts said 2014.

Even after that two employees lent the company an additional $65K.

All told, Choi burned through $695,000 (his own initial $400,000, Brown’s $230,000 and the borrowed $65,000) in less than a year.

A comment on Hacker News should serve as a bona fide caveat emptor for everyone in the global startup world, not just in Silicon Valley.

“Welcome to the club. It’s pretty much a rite of passage here to spend some time with a psychopath VC, a completely self absorbed CTO with a rich investor dad that fuels his fantasies, or an idiotic CEO with an ego problem, and to pay the price for it (just time if you’re lucky, time+money if you’re not).”

This isn’t a warning not to join, just a note to do so with your eyes open.

There’s a reason it’s called “due diligence” and it’s as much for employees as it is for founders and investors.

Image credit: HikingArtist

Yesterday I asked if you would hire someone who had been fired.

If you’re a smart boss your response is “absolutely!”

That’s because the reason someone is fired is far more important than the act itself.

Here are some of the more common reasons people are fired — often under the guise of poor performance, bad attitude, etc.

• Disagreeing with the boss, whether publicly or privately.
• New boss wants his own team.
• Not complying with the boss’ requests, including sexual ones.
• Doing [whatever] differently than the boss.
• Standing up for another employee.

While there are many valid terminations for cause, the validity often depends on your point of view.

Years ago, when I was a recruiter, I presented a hardware test tech, who had been fired, to a favorite client. I told the VP that according to his boss, the tech was fired for creating problems in the lab and talking back to his boss — both of which were true.

However, in talking to his peers I learned that the boss in question had a habit of eating while walking around the test lab and scattering crumbs on the boards being tested.

The tech had asked him several times privately not to eat near the bench and, when the eating continued, brought it up in a department meeting, which led to his being fired for insubordination.

My VP was delighted; he said that was the kind of person he wanted on his team (the tech was hired).

It’s a smart boss who personally checks references (above, peer and subordinate) on all candidates before making an offer, instead of delegating the task to someone else, including HR (which usually checks with HR).

After all, the whole point is to acquire great talent, meaning talent who will be great for you.

Flickr image credit: Michael Mandiberg

Continued from last week

Reference checking is where a lot of bad hires happen.

The three major factors that negatively affect reference checking are

• unskilled or inept reference checking;
• assumptive reference checking; and
• procrastination.

The first is the easiest to overcome, since reference checking is a learnable skill.

The second is a matter of overcoming selective hearing.

The third is more difficult, because procrastination is part of MAP.

It is also of critical importance to check all levels, not just bosses.

Some managers completely skip reference checking or delegate the responsibility to a third party either because they can’t be bothered or consider the time spent wasted; others may do it, but they are careless or sloppy for the same reasons.

Believe it or not, I know of managers who check “likes” and “followers” rather than references.

Yet these managers are usually the biggest complainers when a hire goes wrong.

In short, just as preparation is the key to most things it is definitely the key to successful hiring.

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A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

It happens to founders with a strong creative streak, those who are focused on doing good, and the ones of any age, but often young, who “know [whatever].”

It happens most often to those who trust; who honestly believe that investors care about them as opposed to a 3X+ return on their investment.

Founders are often dazzled in the presence of success and so thrilled at the thought of funding they forget that part of due diligence is checking references.

They assume diligence and reference checks are a one-way street—checking on them.

They also forget that experience, objectivity and specialized training may be worth more than peer review and networking.

The story of Kari Sigerson and Miranda Morrison and their experience with Marc Fisher, heir to the 9 West discount-shoe fortune, should serve as a cautionary tale.

Not only have the women lost their company and even the right to use their names, but they have also been sued for almost $2 million by their former angel. Theirs is a story that may dissuade other young designers from seeking financial saviors.

What founders need to recognize is that the business side of any enterprise is critical to success and that, sadly, trust without contractual backup is prone to whims and change.

That’s the good news.

The bad news is that investors, who often know little and care less about topics such as moral, culture and intangible motivation, frequently dump successful founders.

Venture capitalists exhibit some strange behaviors, but none is more bizarre than the near-inevitable scheming to remove a company’s founder-CEO. Odder still is that these plans are often hatched just as the company begins to really perform. (…)Not every founder goes the distance, but it’s important that founder-led companies perform significantly better — a suggestive metric is that companies retaining their founders have produced substantially better returns than the S&P. There’s nothing surprising about this because thoughtful investors see no reason to interrupt a successful run and successful founders see no reason to leave their companies.

The key here is “thoughtful investors,” which brings us back to the importance of due diligence before you take the money.

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Office politics has many definitions, but one characteristic remains constant—your ‘voice’ is positional. In other words, your ability to be heard is based on your position in the pecking order. Ideas below X level are ignored, between X and Y are acknowledged, Y to Z are heard and sometimes implemented.

But to have a full voice you either need to be part of the C suite or a “star” (stars below the Y level are scarce as hen’s teeth). Some argue that star systems are merit-based, but that argument falls flat if only those at a certain level are heard.

Few people like office politics and its presence has always been responsible for a large percentage of turnover.

One way to substantially reduce office politics in your organization by making sure that everyone has a voice.

Even in highly political corporations individual managers can improve their team’s performance and retention by making sure ideas receive a fair hearing no matter who thinks of them.

It’s easier when you are a first line manager, because you have only yourself to blame if a pecking order establishes itself in your group. If it does happen have a candid talk with the mirror and decide what’s important to you and what you want your ‘management brand’ to be known for.

As you move up, with one or more layers of management below you, it becomes more difficult because you are working to propagate an attitude that may not be wholly shared by those who report to you.

Your success depends partly on how consistent your own actions are and partly on what procedures you create to reinforce the desired behavior.

One of the most successful approaches is to tie bonus compensation to measurable results for soliciting suggestions from all levels and let VSI do the rest.

Of course, as with health, it is better route to prevent office politics than it is to cure it once it gets a toe-hold.

Simply put, that means not hiring managers at any level whose past behavior reflects the wrong attitude. You have two methods to accomplishing this. Obviously, it is something to discuss when doing reference checks.

But more importantly, if you make it clear during interviews that part of the candidate’s compensation depends upon it. It’s amazing how quickly a candidate will withdraw when her pay depends on a behavior with which she doesn’t agree.

Image credit: Svadilfari on flickr

The scandal at Satyam in India brings forth an interesting thought. In an article by him, Jitendra Singh, a Wharton management professor who is currently dean of the Nanyang Business School in Singapore says, “…companies with “the bluest of blue-chip reputations [such as] Infosys and TCS” could actually gain in the current environment, because of a potential “flight to quality” among client companies.” The third-tier and weaker companies will probably undergo a lot more scrutiny.”

Why does it make sense to do in-depth due diligence on third-or-lower tier companies, while taking top tier companies on faith and accepting their reputations with only cursory review.

Until their dirty linen came to light. Bernard Madoff’s hedge fund, Jeff Skilling’s Enron, WorldCom and Tyco were all considered top-tier.

This attitude of blindly accepting what is said by the top and increasing due diligence on lower levels is found everywhere, but it really permeates the hiring process.

I’ve lost count of the executives and managers I’ve known who went with cursory or no reference checks because the candidate

• was a C-level executive;
• graduated from a top-tier school;
• earned over $100K;
• had a PhD;
• was referred by an executive or board member;
• etc.

but ran exhaustive reference checks on every candidate below VP or director, including credit and criminal checks.

Does that make any sense to you?

Image credit: flickr

I received a number of calls after my selective hearing post Friday. (I think they were surprised to reach me on the weekend:) They wondered why I think that

• managers should do their own reference checking;
  
• what kind of information should they be after;
  
• should they check even if the referring party (search firms, HR) said they had checked;
• who were the best references; to check; and
  
• how to get info from them.

There were enough calls that I thought it was worth a post and that I’d include a couple of war stories with the names changed to protect me.

The best use of reference checking is to confirm the team’s interviewing opinions and impressions as well as to protect the company from potential liability. References are not a substitute for skilled interviewing.

Smart managers check most references themselves. This is especially true in fields where there is specialized knowledge such as engineering, software, IT, biotechnical, finance, marketing, technical and other sales, etc. It’s practically impossible for HR or a headhunter to perform a technical reference check requiring technical knowledge of the company’s needs. Even when the recruiter is also technical in that field, there is no way that their knowledge is the equal of the manager, plus, every human has preferences and you don’t want to hire someone else’s!

You may think that when you are absolutely positive about the person’s technical skills, and are checking only to confirm character and general work habits, that a nontechnical outsider can stand in for you, however, there is no way that an outsider is able to evaluate the candidate’s fit from a cultural and chemistry perspective.

Strangely, the lower the position, the more carefully the references are checked. Frequently, as positions move up the ladder, the reference checks move to a higher plane also, and basic skills and competency aren’t even questioned. This often gets much worse on the executive level, after all, if the person has been a VP, CFO or CEO before then they must know what they are doing, right?

Likewise, just because a candidate comes from a headhunter, or even a retained search firm, it’s not wise to assume the references have been checked as thoroughly as needed.

Carol was a Board member, and on the selection committee, of Immersion, Inc. The company had retained a well-known search firm to find a new CEO. Christine, the candidate they sent, seemed perfect—she had excellent credentials and enormous charm, but Carol was unsure. Although she knew nothing definite, she just wasn’t comfortable with some of Christine’s answers, so she decided do some checking herself. It didn’t take long and what she learned was appalling.

Christine claimed to have been responsible for the sale of one of her previous employers. It had been sold, all right—by the Court’s Chapter 11 bankruptcy proceedings. Worse yet, there were two class-action lawsuits against two other ex-employers charging stock manipulation—one of which charged Christine personally with breach of fiduciary responsibility!

All of this was public knowledge, but Carol got an additional earful from the people she talked to. Christine had a reputation of being arrogant, unwilling to listen to anybody else, a micromanager, manipulator, and a de-motivator.

Carol shared her information with the rest of the Selection Committee and they asked for an explanation from the search firm. After sorting through the umms, ahhs, and various excuses, it became apparent that the firm had only talked to Christine’s carefully chosen references and and run a quick Net search (the legal problems predated the Net), but had not checked her out beyond that.

How do you get “real” references in today’s reference-shy world? First, a manager can usually get more information than can an “outsider”—especially when talking to another manager, a rapport of trust can be developed fairly quickly. No matter the company policy, on a person-to-person basis people will talk.

Ask your candidate for three each of the following references, if possible:

• Supervisors
• Peers
• Subordinates (if applicable)

Call at least two of each, including at least one “set,” i.e., supervisor and peer from the same company, if possible; this is valuable because it gives you the opportunity to compare specific knowledge and comments and get a more well-rounded picture of the person.

In many cases, you will be given people who have also changed employment. That’s a positive because they are much more likely to open up with you. References should be current, within the last several years of employment. If you are not given a current supervisor or there are no references of any type from a particular company, ask why.

Some of the best references you get are from the candidate’s peers and subordinates. First, they are frequently more willing to talk. More importantly, they are in a position to know the person’s actual work more intimately than many managers. Even if the first person you talk to is negative, call all the references. This is important because the other references will round out your view of the candidate and often offset the negative one.

Ian, VP of engineering, wanted to hire an engineer whose old boss called him a trouble-maker and terminated him. That situation didn’t agree with the impressions formed by the interviewing team so Ian started checking peer references. They confirmed the comment and the termination but added the reason. The engineer had refused to sign off on a flawed design that his boss wanted to send on to manufacturing in order to meet a deadline.

Ian hired him because he saw that attitude as a positive, not a negative.

Reference checks should be approached in the same way as phone interviews By asking well-phrased, open-ended questions and turning the call into a conversation, you can learn a tremendous amount. It’s easiest if you have a written form to follow (included at end) and think through any specific information you’re after. This allows you to work it into the conversation in a non threatening way that is more likely to yield results—a stream-of-consciousness as opposed to Q&A. As with interviewing, what is not said is as important as what is said, so listen carefully to the pauses, hesitations and silences.

All information you get in the reference check is confidential—even when it’s positive don’t discuss it with your candidate. If you don’t hire after checking references you must have a plausible reason, one that won’t backfire sometime in the future, but under no circumstances pass on negative information or even indicate that that’s why you aren’t making an offer.

It’s difficult to back-pedal once you start checking references. That’s another reason to check all the references, since, if you don’t hire, it’s nearly impossible to pinpoint the sources of the negative reference. Sure, when you turn down a candidate after checking, the candidate may assume that something was negative, but assumptions don’t mean anything. The problem comes only if you let the candidate stampede you into sharing reference information.

You already know it’s unlikely that you’ll be given the names of people who will say negative things, so it’s up to you, through skillful, relaxed interviewing, to elicit the information you need.

As with any other management function, all it takes is the right mindset and a bit of practice to get the results you want.

Finally, here’s the reference checking form mentioned earlier.

Reference Check

Date: _________________________Date of Interview:____________________________

Candidate: ________________________________________________________________

Position: __________________________________________________________________

General, open-ended questions to get the conversation going:

Specific technical things to check on:

Specific human things to check on:

Person’s greatest strength and why:

** Area for improvement (you may need to reassure the reference—everybody needs to
improve something) and why:

Would you like to work with this person again in the future?

Additional comments:

** One of the best approaches to this area is as follows: If you were advising this person, what would be the single most significant advice you could give him on what behavior to modify (or ability to enhance) to improve himself?