Note: This post also published at NextView’s blog for seed stage companies The View From Seed.

The startup ecosystem is often full of hyperbole, which is perfectly understandable when you think about it.  A population of founders, employees, investors, advisors, and others all aligned in trying to build large disruptive businesses is naturally prone to lofty, even over-the-top language.

But the reality of tech entrepreneurship is that not everyone is “killing it,” and certainly not all of the time.

Not every startup is going to “crush” their original milestones and financial projections.

Not every round of funding is closed at a “monster” valuation.

And even acquisitions painted as successes may look very different below the (typically confidential) surface.

This has very real consequences that founders should consider — both for their relationships with investors and for the success of their current and future ventures (and therefore the many people likely tied to these ventures).

The Power of Perception 

I saw this firsthand with my own experience as an early PayPal employee.  PayPal ultimately became a very successful company.  We went public in 2002 and eBay bought the company later that year for over $1.5 billion. Today, PayPal is poised to become a very large standalone company again.

But during the year 2000, we went through three different CEOs, fraud nearly killed the company, our revenue was negligible and unproven, and at our worst point, the company was burning well over $10 million a month — A MONTH!

As a VC investor, I’ve seen numerous other companies face challenges too — both in businesses that were ultimately successful and those that ultimately failed.

Our industry is so enmeshed in TechCrunch headlines, the Twitterverse, and offline chatter at networking events that it’s easy to believe that everyone else is killing it.  This is the vernacular of today’s startup ecosystem, for better or worse.

But here’s the very troubling byproduct of this: I’ve met plenty of entrepreneurs who, surrounded by this hype, find it hard to manage when their own startup hits challenges, which are inevitable in any startup (even successful ones like PayPal). If you perceive everyone to be “killing it,” then it’s nearly impossible to speak up as the “only” person that isn’t.

How can we put things into context?  And when and how should founders communicate challenges with their employees, investors, or other stakeholders?

Since this hyperbolic culture can and does prevent founders from seeking help — despite all founders needing it at some point or another — these questions are actually worth answering today.

It seems simple, but the first step is being honest with yourself as a founder, and being honest with your co-founders.  Don’t shrug off poor sales or user growth, a dysfunctional team, a wave of bad PR, or other challenges confronting the business.  If you’re in denial, it’s hard to overcome any challenge.

Then, it’s time to speak up and work past your challenges.

Communicating with Your Team

While there’s no precise formula for when and how to share challenges with your employees, given how varied each situation can be, I’d recommend the following guidelines to do so:

1. Do No Harm

Unfortunately, some startup CEOs convey perpetual crisis mode to their team.  Every small issue is portrayed as a firestorm, real or not, and the steady stream of scary news can easily distract employees from both their day to day execution and the company’s long term goals.  Know the difference between being honest with your team versus sowing unnecessary panic.

2. Frame the Solution and Involve Your Team

In addition to being candid about the challenges facing the company, talk with your employees about what the possible solutions may be and how they’re likely to be involved.

3. Don’t Blindside Them

As a startup exec or employee, one of the toughest things to experience is for your CEO to share bad news in a way that blindsides you.  Folks can feel taken by surprise when they suddenly hear about things that they never expected or (more commonly) that a CEO let fester for a long time in secret.  Odds are good that at least some folks on your team already know or suspect when challenges hit the company, so hiding stuff is usually counterproductive.

Communicating with Investors

Some of the same principles apply when sharing difficulties with investors, but the nature of the relationship is obviously different.

A few guidelines that might help when communicating challenges to your board and investors:

1. Be Direct

I find both the challenge at hand and the long term relationship work best when CEOs communicate challenges directly and promptly with their investors.  Most good VCs will seek to help and advise where possible, and founders who put off sharing bad news or beat around the bush only frustrate others and reduce the amount of time they can work together towards a positive solution.

2. Communicate Challenges 1-on-1

Difficulties are easier to communicate privately with your board members or key investors.  The topic may be revisited later in group settings like a board meeting, but breaking bad news should almost always be done 1-on-1 where possible.  This helps mitigate the risk of groupthink or “pile-on-the-CEO” discussion … which benefits no one.

3. Be Decisive About the Way Forward

If you have thoughtful investors in your company, hopefully they’ll provide useful feedback about how to deal with a difficult situation.  And it’s okay if you as the CEO don’t have all the answers when confronting a challenge.  But you have to be prepared to map out the options of how to move the company forward, and it behooves you to have a strong recommendation and rationale for your plan.

It’s Never Easy — It’s Even Harder When Avoiding It

Facing difficulties and sharing bad news is never fun.  But the reality is that not every startup is killing it, and even the ones that seem to be growing quickly aren’t actually succeeding all of the time in everything they do.

Successes may define us to others more than failures, but great entrepreneurs distinguish themselves by how they handle those situations when the chips are down.