EP30 The three hats you wear as a founder

In this conversation, Mike  discusses the three different roles that entrepreneurs play in a small and mid-sized business: shareholder/investor, director, and employee. He emphasizes the importance of understanding and separating these roles to avoid overwhelm and maximize productivity. Scott provides a delegation framework, the 70% rule, and introduces the Eisenhower matrix as tools to prioritize tasks and focus on high-value activities. He also encourages entrepreneurs to determine the value of their time and delegate tasks that can be done at least 70% as well by someone else.

Takeaways

Entrepreneurs in small and mid-sized businesses play three different roles: shareholder/investor, director, and employee.
Understanding and separating these roles is crucial to avoid overwhelm and maximize productivity.
The 70% rule can help entrepreneurs determine which tasks to delegate by asking if someone else can do it at least 70% as well.
The Eisenhower matrix is a useful tool for prioritizing tasks based on urgency and importance.
Entrepreneurs should determine the value of their time and focus on high-value activities.

Chapters

00:00 Introduction
08:08 Shareholder/Investor Role
14:15 Director Role
19:23 Determining the Value of Your Time
25:32 Delegating and Prioritizing Tasks
28:07 Conclusion

Find out more about working with me. mike@smbmastery.com.au or https://www.linkedin.com/in/mikeadamscott/

Transcript

Mike Scott (00:02.478)
Hello guys and girls, good to be back. So this morning I had a one -on -one session with one of my clients. He's a CEO and founder of a very cool business that's grown quite a lot. He's probably got somewhere between 20 and 30 staff and he's going through some really nice maturing phases. One of the phases that he's going through is as many people realize, is they sort of grow their business to probably 15, 20 people somewhere around there.

revenue dependent that, you know, they need an operator. They need a general manager, a managing director, whatever you want to call it. But like the person that runs the business so that the founder, the entrepreneur can focus on the really high leverage activities that they are so exceptionally good at doing. So he's gone through this process. It's going really well, but it sort of highlighted a bunch of things. And we started talking about something in the session that I want to go into today. So this is not.

pertaining to his business necessarily directly, but it just sort of jogged the thinking. And what it is, is I want to talk about the three different hats that we wear or the three different sort of roles that we play as an entrepreneur in a small and mid -sized business. And these three hats might have slightly different names, but the way I think about them is you've got the investor or the shareholder hat. You know, this is where you own shares in the business.

but you don't have any day -to -day duties, right? That's the one hat. The second hat is the director. So that is a legally responsible individual in the business. And then you have the employee, which can range across a whole lot of things. So you have the investor or the shareholder, the director, and the employee. And I want to unpack these a little bit today because my observation, both in myself and in a lot of people that I come into contact with, whether it's through coaching or just conversations,

is that they don't think of their roles in these three distinct buckets. They merge them into one and it creates a lot of overwhelm, a lot of tension, a lot of stress, and actually ends up resulting in pretty poor output. So let's start with the shareholder or the investor hat. So you'll all know this, but just on the off chance you don't, when you are a shareholder of the business, you don't have any day -to -day obligations.

Mike Scott (02:24.782)
You own equity, you own shares in the business, you are entitled to dividends in the proportion that you own shares. When the business gets sold, you're entitled to your percentage of the proceeds of the sale because of your stock, your shares. So technically speaking, you don't have a legal or even sort of fiduciary responsibility by default. However, in a smaller mid -sized business, unless you're just trying to get cash from investors, which you...

probably shouldn't be, you should be looking for cash plus strategic benefit. But in a smaller business, we're not talking in the context here of listed companies and very large corporates. In a smaller mid -sized business, generally speaking, the shareholders or the investors are going to have an interest in the business. You're either going to be a founder, or you're going to be a key staff, or you're going to be an investor that brings some sort of strategic value, et cetera. So in the construct of sort of smaller mid -sized businesses,

While technically speaking, the shareholder doesn't necessarily have any responsibilities. You as the founder, you are a shareholder, right? In many cases, you're probably a hundred percent shareholder or a majority shareholder, but you're definitely a shareholder unless you've done something very weird and somehow worked yourself out of owning equity in your own company. So, so what do you have to focus on here? What, like, what are the things in this bucket wearing this hat? What are the things that you really need to be thinking about here? So there's a bunch.

But to make this quite simple, the first one you need to be thinking about is capital provision. Does the business have the necessary financial resources for the growth and the operations? The second one is, the risk of signing like a super capitalist, at the end of the day, you're looking for shareholder returns. There has been value and money put into a business. The reason you've put that money into a business is because you believe or hope or want for there to be a return on that capital.

put into the business. It may have come in the form of capital, it may have come in the form of sweat equity, it may have come in the form of strategic introductions, but you've made an investment and you want to return on that investment. So like the simplest way to talk about this is the shareholder is optimizing for returns on invested capital. We need to be careful here, however, though, that we don't over optimize on return on investment because that can destroy cultures, that can distract the company, that can actually make the founders make

Mike Scott (04:50.03)
bad decisions when you're only optimizing for shareholder return. So, you know, not to derail too much here, this is sort of why we talk about the purpose of a business being beyond making a profit. What is the reason for this business? But we need to acknowledge that first it needs to make a profit. If a business is not profitable, it is not sustainable. And if the entity is not sustainable, we don't have an entity through which we can realize a purpose. Then as a shareholder investor, assuming you're sitting on some kind of a board in a small business,

There's strategic oversight. So you may influence the strategic decision of the business. You won't necessarily set the strategy of the business, but you will influence the strategic direction of the business. You want to manage risk, right? So you want to have governance on and around the board, but also you want to be managing the risk and mitigating the risks of the business. You want to be looking at the long -term vision of the business. You want to be stress testing it. You want to make sure that where we going as a business makes sense and that we're not just in the weeds day to day.

There's an element here as well that if you think of the shareholders in a small and mid -sized business as sort of forming the board, whether it's formal or informal, there's an element of holding the operators accountable. So even though it might be the same person, but you sort of want this board environment that holds the founder accountable for growing the business. And this is something that often doesn't happen in a small or mid -sized business is you've got the founder, they're high -performance individuals, but nobody's actually holding them accountable.

So I always believe that it's a really good thing to put measures in place, to actively hold yourself accountable, to drive better standards, drive better performance. So the sort of shareholder hat in a smaller mid -size business often will form part of a formal or informal board. And one of the primary roles of that is to hold the main, the key operator of the business, the CEO or the MD, the founder, usually accountable. And then there's sort of, there's lighter things like...

like ethical standards and those sorts of things. Probably more relevant sort of corporate social responsibility and that sort of stuff generally at a larger size business. But that's certainly this is where it would be spoken about. The other thing that this board wants to be talking about in the shareholder hat that you're wearing is potential exit strategy. So when you're thinking about people that you may or may not take money from to invest in your business, you know, there's various things you should be asking yourself.

Mike Scott (07:12.046)
you know, not just do we take money, but who do we take money from? We get money plus what? When we're thinking about the business long term, we probably want to be thinking about an exit strategy. You know, is there a plan? Do we see a world in which we could be acquired? If we do, who might be, might be, might we be acquired by? What does the business need to look like in order for us to get acquired at the highest possible rate at some point? All of these things are things that you'll be thinking about with.

your shareholder or your investor hat on. So that's one hat that you hold as a founder of a smaller room and size business. That's a lot, right? Just that in and of itself can be quite overwhelming and difficult, right? And a lot of that stuff, almost by definition, you probably won't be naturally very good at because you probably wouldn't have had the experience because typically I would be so bold as to say that small business sort of...

operators don't generally have a lot of experience at this level, but I really believe that if we can actively and deliberately build our experience and treat our business a little bit more seriously, even if it's still very small, it's just really good for the longterm of the business. You know, this is a good example here is like at Nona, my previous business, we had a version of a data room ready for years before we actually got acquired. And that was a piece of advice given to me. And a data room is basically, I mean, you can go and Google it, but...

It's effectively the group of documents and artifacts that a potential acquirer would want to see as part of their due diligence for them acquiring your business. Typically, a business would only create a data room once there's an engagement going with a potential acquirer. But we started a data room way years before we even thought we wanted to be acquired. And it does a couple of things. It gets you to look at parts of your business that you generally just wouldn't look at in the day to day, which are really important.

It asks you the really tough questions that you generally probably wouldn't be asking yourself. It has you clean up things like your shareholders agreements. You probably don't even have them in place unless you've been forced to do them. Your cap tables, your legal agreements, your insurances, things that often small and mid -sized businesses just don't really pay attention to until they have to and often that's too late. So this is all kind of shareholder hat stuff on, right?

Mike Scott (09:29.294)
If you're listening to this and going, Jesus, that's a lot of stuff, you would be right, which is why it might be a good idea to start considering an advisory board or even a formal board, depending on the administrative and the financial overhead. So that's one hat, right? That's a separate bucket. None of that stuff is necessarily linked to what you get paid for every month. Then we move on to the second hat, which is probably now starting to talk more about like what you're actually doing in the day to day.

This is what I call the director hat. Now, when you are a director, you have a legal liability. You are responsible for this business. As a shareholder, you are generally not. I'm not a venture capitalist. I'm not a strategic investor. I'm not a professional investor. But my understanding is that generally, as a shareholder, you do not have legal obligation. As a director, you definitely do. As a director of a business, you are sitting on, in Australia's case, on ASIC.

In different countries, there'll be different bodies, but you have ultimate responsibility, liability and accountability for the business. Here we get into strategic planning, right? So you might use a board if you have, or you don't want to help and set direction and lean into things, but you are accountable for setting the strategy. You are accountable for leadership within the business, right? And leadership, you know, broadly, I just want to break it down into, into 10 areas here. Like we can certainly elaborate on these things, but when we talk about leadership, like,

what the responsibilities are as a leader. So I'm not talking about like the definition of leadership. The definition I like the most is the ability to get the people in the business to want to do what needs to be done. That's sort of like my description of leadership. But if we break that down into like, okay, what are the requisite parts? Here are 10 things that I really find quite useful to think about. So the first role of, or area of decision or responsibility of a leader is the direction and the vision of the company.

I'm going to go pretty fast through these things because each one of these things is probably a whole episode. But I'm just going to go through them as almost like a semi like a checklist. Department structure. So how are you structuring your organization from a people and role perspective? New positions in the business, hiring and firing, critical. Products or services to improve and develop. Clear understanding of clients and their desires. Really understanding who our target market is. What's the avatar of that target customer?

Mike Scott (11:49.422)
What are their wants? What are their needs? What are their fears? What are their insecurities? And how are we meeting those things? Oversight and creation of the marketing budget and plan. The annual revenue and profit targets. What are we going for from a revenue perspective? What are we going for from a profit perspective? And how are we going to get there? Similarly and leading from that budget oversight, legal oversight, and then prioritization within the team. So prioritization within the team. I really like those words because we can use words like accountability,

or, you know, whatever driving results, but I quite like using the term prioritization because it's shifted a bit from what could be perceived as micromanagement. It shifts it to the sort of coaching approach with your team. If you're focusing prioritization, you can have conversations about performance around things not being done around people saying that they're running out of time. And if you shift it around prioritization, it just makes that conversation quite a lot easier. It's out of the scope of today's podcast to go into it, but let's leave it at that. So.

Those are sort of like the 10 things that leadership needs to take care of in the business. This is all under the director hat. Okay. Then we've got resource allocation, compliance, culture, all of these things. So this is your director hat. This is like running the business. This is what you're getting paid your salary for, right? So shareholders get their value in dividends. And when the company gets acquired one day, hopefully, or management buyout or whatever.

The director gets paid a salary. They may or may not be a shareholder. You sitting as the founder, you have it whether you like it or not. You have a shareholder hat that you're wearing and you have a director hat that you're wearing. Right. And it's important to understand the differences between these two buckets. We could go into a lot more detail on either of these, but that's not really the point of today's show. The point of today's show is just to get you to acknowledge that you have these three hats and then to maybe have a look at where you're spending your time. So the shareholder hat, investor hat we've been through, director hat we've been through.

Then we get to the employee hat. Now, if you're a smaller, mid -sized business, the chances are you're not just spending all of your time sitting in the leadership bucket or in the director bucket. You're also probably pretty busy in the weeds doing stuff that you probably shouldn't be doing, but you feel like nobody else really can do it. There aren't enough resources. So this is almost like when you are fulfilling roles in the business that should probably be done.

Mike Scott (14:15.406)
by employees, but you're actually doing them. So you're looking here at, for example, what very often happens is the founder of the business is very good at sales. As the business grows, they try to make themselves less in the business doing sales and more on the business doing their sort of director roles and their shareholder roles, but they're stuck in a sales role. So there's this weird thing where sometimes the CEO or the MD, the founder of the business,

plays one role, but then they also actually report in their sales role to somebody else. So it's kind of weird. They almost play this employee role where they report to somebody else. And then they're also the most senior person in the business. And this can get really weird, right? It's not that I'm saying you mustn't have any employee roles in the business, but you need to acknowledge when you do. You're the founder, so whether you like it or not, you have a shareholder hat on, an investor hat on. You almost certainly then have a director hat on. And then thirdly, you also,

almost certainly are playing at least some part of an employee hat. And we need to differentiate around what these things are. Now, when you are an employee, what are we talking about? This is role fulfillment. This is effectively performing a job, duties and responsibility. It's looking for productivity. It's looking to work together with your teammates. It's all the stuff that you would do sort of as an employee, right? But now you're shifting hats because you've got this very high level view at like a shareholder level. Then you've got this.

deep responsibility and liability role at a director level. And then you also have this employee level and these are different, they've a different personas you almost have to take on. So at this point, we've sort of articulated these three roles that generally a founder is going to play to a greater or lesser extent. As your business is growing, it's unlikely you get to sit in any one of these roles all the time. If you're sitting pretty much only in the employee role, you're going to experience a lot of chaos in your business. Your business is not going to grow. There's not going to be clarity.

It's just going to be fighting one fire after the next day in and day out. If you're stepping more into the director role, you're probably looking at building more systems processes, actually hiring the right people, starting to be more strategic about what you're doing, beginning to bring a little bit of structure into your business. And if you're sitting at the shareholder or investor role, now you're looking further out. You're looking at strategic conversations. You're looking at funding. You're looking at...

Mike Scott (16:34.606)
things that are generally going to be looking at like the longer term to maximize the value of your business, right? And it's important that we understand where we're playing all of the time. So at this point, I would invite you to, you know, go into your own research on these things. I've gone through this very, very quickly. Of course, there are massive amounts of information within each of these boxes, but it's really helpful to sort of take a look at your day, your average day, or even just like today when you're listening to this or your last week.

and just write down as many of the activities as you possibly can think of, of all the things that you did, and then categorize those things into one of these three boxes and take a hard look at yourself and go, where am I spending the majority of my time? Is it in the employee box? Is it in the director box? Or is it in the shareholder or the investor box? And just get real about it. And after that, it'll become obvious to you where you need to start to make some changes. Now, to build on this,

I want to offer you a little exercise just to give some shifting in thinking. Now the maths here is really not that important. It's just to illustrate a point. So let's take very round numbers. Let's say you have a business and your business is going to do five million dollars in revenue in the next financial year. And on that five million dollars, you hope to make one million dollars of profit, right? Cool. So there's a million dollars of profit that you think the business is going to make this year.

Then let's say you're drawing a salary of $200 ,000 plus you take other things and it ends up being $250 ,000. There's $1 ,250 ,000 there that is value that the business is creating generally because of your influence. Then you have a look at this and you go, if I was hit by a bus, would this still work? Would this still exist? Maybe it would for three months, six months, nine months, but ultimately it would probably not exist after a year.

So really what you're looking at here is you're saying, okay, well, my involvement in this entity is generating what I think is going to be $1 .25 million, right? Whatever that number is, it's kind of irrelevant for now. So we take $1 .25 million and we divide that by 52 weeks in the year and we get 24 ,000. We divide that by four, sorry, by five and we get, sorry, let me do my maths again. So we do 1 .25 million.

Mike Scott (18:54.702)
We divide that by 52 weeks in the year. That's $24 ,000 a week. And we divide that by five days in the week and we get to $4 ,800 a day. We divide that by eight hours a day and we get to $600. So what we're saying here is in a business that does $5 million of revenue, a million dollars of profit, paying you a wage of $250 ,000 a year, including benefits and all sorts of things, you end up with an hourly rate there of about $600. Now don't get too fixated on my maths here or even my logic.

The point I'm trying to just illustrate here is that basically if you're doing anything under that construct that is less in value than $600 an hour, you should not be doing it. Like you've just calculated your value. Now you can even determine what your value is. Neville Ravikant is quite famous for, I think he determined his hourly rate at like $5 ,000 an hour. This is when he wasn't making any money. He just had a mindset shift going, what if I treated my life as if my time was worth $5 ,000 an hour?

so that where I'm spending my time is only on high leverage activities and anything low leverage, I'm just gonna pay somebody else to do and I'll find the money at some, like I'll find out how to do that. This was when he wasn't wealthy. Let me just be clear about this. And he attributes a lot of his success to that mindset. So as the founder, have a look at the value that you are influencing being created now or in the future. Reverse engineer that down to an hourly rate and you can actually make this up. It doesn't have to be real, but then use it as a guide.

to what you spend your time on. Because if you're sitting in the employee box all the time doing small activities, chances are you're doing 10, 20, $30 an hour activities a lot when actually your time should only be spent on the high value items that are two, three, four, 500, $1 ,000 an hour activity. That's where your time should be spent and you need to figure out how to delegate everything else out. Your time needs to be spent on the high leverage activities. Starting with these three buckets of shareholder investor,

director and employee, categorizing all of your activities as many as you can think of into these buckets, seeing where you're spending all of your time, allocating yourself an hourly rate, what your time is worth, and then being deliberate about where you're spending your time can make a massive impact on, well, how you spend your time, but also your mental state. Because if you're listening to this now, you might be feeling super overwhelmed, going, Jesus, I'm basically doing a full -time role as a shareholder, full -time role as a director.

Mike Scott (21:18.158)
and a full -time role as an employee, that is not sustainable.

And the question then becomes, okay, where do we need to make a move here? Where do we need to shift this? And this is where tools like an org chart with all of the accountabilities of every role can be really useful. This is where getting really, really clear, not about the role descriptions and the job descriptions per se, but what are the roles in the business and what are the five to seven, maybe eight things that each role is accountable for delivering to the business. That's where these tools can really help. So, you know,

If you're listening to this and this is resonating and scaring you, but know that you're not alone. It took me a long time to actually acknowledge the sort of three different roles or three different hats that I have to wear as a founder. It was really helpful to me actually when I realized that there are activities that I'm doing that are employee activities. There are activities that I'm doing that are director activities and there are activities that I'm doing that are shareholder or investor activities and categorizing them really helps generally.

they go up in value. So employee activities will generally be lower value activities, director will be higher value activities and shareholder will be very high activity. Not always. Sometimes if your role as an employee is sales, for example, you might close a deal that's worth $10 million, right? Yes, sure, that's high value. But in general, the higher up or the more to the shareholder side of things, your activities, the higher the value.

The other thing that this might prompt is, you know, you probably, if you're a small or mid -sized business, you probably don't have a board and that might be the right thing to do. You might have an advisory board. You probably don't have a formal board. I'm not telling you whether you should or shouldn't form a board, but this can help you to start articulating what you would want, what your expectation would be from shareholders that bought into the business. And if you have business partners to have this conversation with them as well, hey guys, girls.

Mike Scott (23:17.038)
of all the things you're doing, which of these sit in the employee bucket, director bucket, shareholder bucket? Hey, how do we delegate these? How do we divide these up? What should we be doing? What should we not be doing? The last thing that I want to help with here or offer here is a delegation framework. And when you're doing all this stuff, you're probably going to realize that there's a lot of stuff that you're doing that you probably shouldn't be doing. Like just because you can do it does not mean you should necessarily do it.

But how do you determine what you delegate? There's a couple of cool frameworks out there. The two that I want to share now are very, very simple. The first one is extremely simple. The second one is you might have to visualize it, but you can definitely Google it and you'll find a million examples. The first one is the rule of sort of 70%. So it's quite a simple two sets of questions. One, of all the things that I'm doing, is there someone in the business that can do this at least 70 % as well as I can?

If they can do it at least 70 % as well as you can, you should probably delegate it to them. The flip side of that is the other question. What are the things that I do that nobody can do 70 % as well as me? What are the things that I'm doing in the business that only I can do as well as I can do them? The reality is that list is probably really small. That's the truth. There's probably a whole lot of stuff in the business that you're doing that a lot of other people could do at least 70 % as well as you. In fact, there's probably some stuff that you're doing that people can do better than you.

That list of the things that only I can do is generally the stuff that you should do. If that list though of the things that only you can do is all of the employee work, all of the doing stuff, all of the busy stuff, well then you haven't got the right people in your business and you haven't built the right structures. But we need to get to a point where as the founders, the leaders, we're focusing.

on the things that only we can do, the really high value activities. And when we go back to the hourly rate, those are likely to be the things that have a very, very high value per hour return. That's the one framework, very, very simple. So think of it as the 70 % rule. And maybe in your business, you want to change that to 60 % or 80%, but you get the point, right? You should only be doing the things that only you can do as well as you can do them. The other one is something called the Eisenhower matrix, which...

Mike Scott (25:32.526)
I would urge you to Google. It's a very commonly known and used framework. It's very, very useful. It's very easy to find. And basically,

Mike Scott (25:43.086)
Sorry, Chad.

Mike Scott (25:50.862)
So the other tool that I want to speak about is called the Eisenhower matrix. And you can Google it. It's very easy to find. It's a pervasive. It's very commonly used. What's not so common about it is not the categorization, which I'll go through in a minute, but what to do once you've categorized. So the Eisenhower matrix is a sort of two by two blocks. So there's four blocks. Upper left -hand corner is what we call urgent and important. Then if we go to the lower left -hand corner, we've got not important, but urgent.

And if you move across to the right, we've got not urgent, but important. And if we go bottom right, we've got not urgent and not important. Okay. So when something is both urgent and important, you do it now, right? So if you sit down with all the tasks you've got to get through today at the beginning of your day, and you look through all the stuff you've got to do, and you look at it and you go, is this both urgent and important? You need to do it and you need to do it now. If it is urgent,

but not important. Typically you'll do that because you can do it and it needs to be done quickly, but you shouldn't. When something is urgent, but not important, you need to delegate that. So it's got to get done, but it's not a very high value or high risk activity. Resist the temptation to just do it yourself. Delegate that out to someone who can do it at least 70 to 80 % as well as you can. When it is not urgent, but very important,

This is when you need to schedule time to do it. So this is a thing that is high value. It is not urgent, but it does need to be done. And it probably needs to be done by me. You don't procrastinate. You put it on your calendar and you schedule it. And then the last one, which is often the most difficult one and the most sort of new and most sort of subtle is if it's not urgent and not important, you just delete it. You get rid of it. A lot of us just.

tile up these things, these massive lists of things that we'd like to get to someday maybe and they would be nice, but honestly they are neither urgent nor important. We need to have the discipline and the courage to just delete it. So that was probably quite difficult to follow in your brain. So rather just Google it. It's called the Eisenhower matrix. And then if you don't find the right sort of framework, you can come back and listen to this in terms of what to do with it. So just to wrap this all up, right.

Mike Scott (28:07.118)
You're an entrepreneur, you're a founder, you're listening to this, you're building a business, you're building a leadership team, you're doing a bunch of things. When we put these things into categorized boxes, it can really help us guide and prioritize what we should be doing, where we're getting the highest return on our time, the different hats that we wear in a business, helps us plan ahead. And I'm hoping that this episode can help you do that. I would urge you to, if you haven't already, to actually take this episode, take what I've been saying in it.

write down your tasks for the last day or the week or as long as you can remember and do the exercise for yourself. Categorize them into one of those three boxes to get a sense of where you're actually spending your time and where that return on your time is coming from. And from there, I'm pretty confident that while you're going through that exercise and visualizing it, it will become evident to you what you need to do. You can kind of coach yourself with that tool. As always, hope this was useful and I'll see you again soon.