Would you make an investment in a start-up tech business knowing that the founder may be creating regulatory and compliance liabilities? Of course not!
Here is a classic example that we hear all too often. “One of our investors is a financial planner and offers 401(k) plans, so we decided to go with him.” Bad decision… as a fiduciary and plan sponsor, the entrepreneur has breached their responsibility by not acting in the best interest of plan participants. This kind of decision-making violates the principals of The Pension Protection Act and can allow the regulators to pierce the corporate shield.
Over the last several years, as a partner with the Ohio Business Incubators and venture capital groups, we have learned about what we started calling the “Entrepreneurial Effect” (EE). The EE is when a well-intentioned, yet uninformed entrepreneur creates numerous and potentially financially catastrophic consequences that can come back and bite the company far into the future.
This dynamic occurs when an entrepreneur crosses an imaginary line and becomes an employer.
When an entrepreneurial led emerging company begins to ramp up and hire employees, they have then inherited a significant administrative burden, an equally significant compliance burden, a set of corresponding employer liabilities as well as benefit plan sponsor and fiduciary liabilities. The ability to collectively mitigate these liabilities becomes critical to protect the investment, the investors, the company executives and the board members.
The EE manifests itself largely for two reasons:
- It is unrealistic and virtually impossible for any one person to stay current on all employer mandated compliance rules and regulations. This puts entrepreneurs in a situation where they don’t know, what they don’t know. Too often, this is when we see well-intentioned, uninformed entrepreneurs create potentially catastrophic consequences. They simply don’t know, what they don’t know when it comes to sponsoring employee benefits, payroll and compensation regulations, proper classification of employees and use of contractors as well as regulations around workplace policies, interviewing and terminations.
- They do not have the battle scars from having longevity in business, they have yet to experience any pain as an employer who has fallen short on their obligation and dealt with a regulatory body. Read Department of Labor, Internal Revenue Service, Bureau of Workers Compensation, Department of Job and Family Services etc…
So why would any investor enter into an arrangement that has not dealt with the Entrepreneurial Effect? This is a rhetorical question… The answer is that an investor would not have to if, in place is a business arrangement with Sequent that contractually assumes these employer responsibilities, eliminates or mitigates the liabilities and indemnifies its clients, investors, corporate officers and board members.
We applaud and wholly understand and support entrepreneurs. As a strategic partner, Sequent helps entrepreneurs to…
- Attract top talent with a great employment experience
- Frees them to focus on company growth
- Eliminates and mitigates employer liabilities
- Enhances the organization for their next round of funding or their exit event, sometimes increasing their valuation multiple
Don’t fall victim to the well-intentioned entrepreneur …. Sequent can help.
About the Author: Joe Cole, Executive VP Business Strategy, Sequent
Joe has been part of Sequent’s senior management team since 2002 and brings over 25 years of experience in business and entrepreneurial ventures. In his leadership role with Sequent’s business development team, and as a regional director, Joe’s extensive knowledge of the Professional Employer Services (PES) industry and the complex facets of the HR outsourcing industry serve him well in developing relationships and serving as a strategic business partner with clients.