Conflicts of Interest

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I’ve been home all week with a sick kid, attempting to get some semblance of work done. 

Maybe I’ve been cooped up in my house for too long, but I’m starting to suspect my daycare intentionally gets the kids sick as a margin management tool.  

“Becky, we aren’t going to hit budget this month, quickly go to the cabinet and sprinkle some ebola on the kids so we can cut staff next week.”

They still get paid if we aren’t there.  Clearly, the incentives to reduce the time kids are actually at daycare are high. 

Yea… I’ve been cooped up too long.  Let’s just get to today’s Newsletter before I embarrass myself more.  Speaking of incentives:

Topic of the Week: Conflicts of Interest

This week, several news outlets reported that WeWork’s CEO is the landlord to a few of the properties WeWork leases.  See this WSJ article here for more detail.

I’ve read mixed reactions. Some people believe this practice should not be allowed for a company of this size and prominence.  Others point out that this is a fairly common practice in real estate.

Either way, this type of situation presents a potential conflict of interest.  Conflicts of interest are inherently risky to deals because there is a higher chance decision making would be impacted by conflicting incentives.

I thought I’d share some of the other types of conflicts I look for when evaluating deals.

  1. Property owned by executives or family members of executives and leased back to the company (WeWork).
  2. Acquisition of a company in which an executive owns.
  3. Investment in a product or service in which an executive owns.
  4. Meaningful executive debt on the business (i.e. the executive team has been borrowing from the business) 
  5. Personal expenditures of the executive team on the books.
  6. Customers are all portfolio companies of the company’s existing investor base (how strong is that value proposition really?).
  7. Family members working for the business.
  8. Family members working for close competitors of the business.
  9. Side projects and second businesses owned by the executive team that consume meaningful amounts of time.

There are so many more conflicts of interest that can arise in business situations.  Most of them are harmless, but every once in a while, one can be incredibly detrimental to the business.

Have a great weekend everyone!

Danielle

About the author

Danielle O'Rourke

Recovering Investor. Mom. Wife.

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Danielle O'Rourke

Recovering Investor. Mom. Wife.

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