BOOTSTRAP FOUNDERS WEEK 3 : SEPT. 10 MBAX 6860 : Bootstrap Tactics for Entrepreneurs BOOTSTRAP FOUNDERS September 10, 2004 BOOTSTRAP

OVERVIEW Review Forming a team Team compensation Stock options Family & friends Questions to ask My take on it… September 10, 2004 BOOTSTRAP

REVIEW Ideation, business need ID, business selection Name Infrastructure creation Entity form, clearance search, office space, bank Moving forward… September 10, 2004 BOOTSTRAP

FORMING A TEAM Carefully map-out the talents & requirements of the founding team Assess the strengths and weaknesses of the team Bring on new founders to address weaknesses and holes Just because you like each other does not mean you will work well together Set expectations! September 10, 2004 BOOTSTRAP

TEAM ORGANIZATION Create an Organization Chart! Who reports to whom? Write an Operating Agreement! What are the responsibilities of each founder? Job description, performance metrics How much time is expected from each founder? How will each founder be compensated? What happens if a founder leaves? Who owns their work? September 10, 2004 BOOTSTRAP

NONCOMPETE AGREEMENT Promise not to work for (or create) a direct competitor for a specified period of time Protect confidential information, trade secrets Caveats There must be a good business reason for agreement Must protect an individuals right to earn a living Last too long or be too broad Courts will not enforce an unreasonable agreement September 10, 2004 BOOTSTRAP

NDA Contract to protect confidentiality of secret information (trade secrets) NDA’s can be mutual or one-way NDA’s include Definition of confidential information Exclusions from confidential information Obligations of receiving party Time period of agreement Miscellaneous provisions September 10, 2004 BOOTSTRAP

TEAM COMPENSATION Work for hire Salaries Stock Stock options Payment as a independent contractor for specified work Salaries Ongoing payments for doing a job Deferred salaries Stock Grants of stock for work performed Stock options Options to purchase stock for work performed September 10, 2004 BOOTSTRAP

WORK FOR HIRE Advantages Disadvantages Flexible; best suited for project work Easy to start and stop Avoid many employment law issues Disadvantages Must conform to employment law for independent contractors Not suitable for ongoing management work Can be expensive September 10, 2004 BOOTSTRAP

SALARIES Advantages Disadvantages Provide steady income to founders Protection and benefits of employment law Workers comp, social security, etc. Disadvantages Significant cash flow or cash resources required Setting up payroll is cumbersome Employment laws can be restrictive More difficult to terminate or start/stop employment September 10, 2004 BOOTSTRAP

STOCK DISTRIBUTIONS Provide stock in lieu of cash payments Advantages Give founders an increased stake in company Do not diminish cash resources Disadvantages Dilute ownership of investors Change balance of ownership and governance Must pay taxes on value of stock ( ! ) September 10, 2004 BOOTSTRAP

STOCK OPTIONS Provide right or option to purchase stock at some future time Advantages Avoid immediate tax liabilities Provide incentives to make company successful Motivates! Do not diminish cash resources Disadvantages Change ownership structure of company (long term) Tax consequences when options are exercised September 10, 2004 BOOTSTRAP

TYPES OF OPTIONS Incentive Stock Options Employee Stock Purchase Plans Generally used for ongoing companies Many mandated restrictions; some tax advantages Employee Stock Purchase Plans For ongoing companies to incent workers Not appropriate for start-ups Nonqualified (Nonstatutory) Stock Options Best suited for startups September 10, 2004 BOOTSTRAP

NONQUALIFIED OPTIONS No limit on number of options granted No qualification rules regarding who gets options Employees, investors, advisors, contractors, etc. Option exercise price can be any amount (1¢) No tax liability upon grant of option (unless the option has a “readily ascertainable” market value) Taxed as ordinary income based on fair market value at time of exercise September 10, 2004 BOOTSTRAP

WORKING WITH FAMILY & FRIENDS Be careful working with family and friends But only if you want to keep them as family & friends! Put everything in writing Even more important than with strangers Decide on your priorities What’s more important? Family/friends or business? Remember, everything changes when there is significant money at stake! September 10, 2004 BOOTSTRAP

QUESTIONS TO ANSWER What do you do when team members do not carry their weight? What do you do with a team member that is working hard, but he/she is not the right person for that position? How do you maintain the trust between team members? How do you distribute equity fairly? Some people argue that the real work doesn't begin until after you already have the money so everyone should have equal equity. Some people argue that the most "valued" work was the work it took to get the money. It is usually obvious who takes which position, but which is right? How do you compensate the people who have stuck with it without the money? How do you introduce new "founding" members after the founding team has been working together for a year? Where does their equity come from? If a team member leaves, who owns his/her work? If you have to dissolve the company, who pays the debt? Who collects the money for selling the name or URL? Who is ultimately responsible for paying the bills? From Scott Kohla, Leeds MBA 1999 September 10, 2004 BOOTSTRAP

MY TAKE ON IT… Forming a team Team compensation CLEARLY define roles needed to be successful Fill each role with best person for job Alternative – sit around a table and pick titles – NO! Team compensation It depends…resources available, desire of adding team member, new team member’s flexibility Overall…options are a GREAT compensation tool Motivates, no cash hit, favorable tax Think of cash flow! September 10, 2004 BOOTSTRAP

MY TAKE ON IT… Stock options Family & friends Great tool! Nonqualified Just easier to set-up and administer Family & friends My tenant here = Don’t do it! For me, risking important relationships just isn’t worth it But…I’ve heard of situations where it worked well…because they SET EXPECTATIONS! September 10, 2004 BOOTSTRAP

WEEK 4 Bootstrap intelligence/research Tasks to complete: Speakers = Zoe Midler Tasks to complete: Readings Tasks from Week 2 Agenda # 5 Company organization NDA, noncompete agreements Stock and stock options September 10, 2004 BOOTSTRAP

“Prosperity is the best protector of principle” --Mark Twain September 10, 2004 BOOTSTRAP