Entrepreneurship Canadian Edition William D Entrepreneurship Canadian Edition William D. Bygrave, Andrew Zacharakis, Sean Wise

BUILDING THE FOUNDING TEAM Chapter 7

Learning Objectives The Talent Triangle Learning Objective 7.1 Describe the three elements of the talent triangle. Power of the Team Learning Objective 7.2 List the benefits of teamwork to entrepreneurs. Where Do You Fit? Learning Objective 7.3 Explain the various roles entrepreneurs can take in their business. How to Build a Powerful Team Learning Objective 7.4 Explain how entrepreneurs build successful teams.

Learning Objectives Bootstrapping: Building The Team Based On Stage-Of-Venture Life Learning Objective 7.5 Explain how entrepreneurs build teams based on stage-of-venture life. Compensation Learning Objective 7.6 Describe the various forms of compensation entrepreneurs can offer their teams. External Team Members Learning Objective 7.7 Describe the external team members entrepreneurs may hire. Keeping the Team Together Learning Objective 7.8 Explain the issues entrepreneurs face in keeping their team together.

Today’s Key Concepts Talent Triangle Compensation for Founders Why 2 > 1 Dilution What to look for in cofounder Premature Scaling Boards of Advisors vs Boards of Directors Bottom up vs Top Down Hiring 7 Advantages of a Team 6 or 9 theory Finding Co Founders Startup Hiring Mistakes Bootstrapping

Entrepreneurship Is a Team Sport Grow beyond self-employment with the support of a team Team can include partners, employees, advisors, family, vendors, investors Do more with others than you can alone

Higher social level of support Seven Advantages of a Team Feedback Increased skill set Moral support Capacity innovation Extended network Higher social level of support

What Is a Well Rounded Management Team?

Get feedback on your actions Considering Your Role Evaluate your skills Use your strengths Get feedback on your actions What position can you best fill? Don’t be crippled by your weaknesses, but also don’t be oblivious to them either.

Staffing Plan Role Primary Duties Person Filling Role When Needed Talent Triangle Product Development Develop prototype Lead entrepreneur Now Operational experience Market Development Customer research Channel development Founder Domain knowledge Finance Raise outside capital To be determined Next month Business acumen Production Identify manufacturing partners Three months from now Operational knowledge

Find people for positions Building A Powerful Team Create a staffing plan Find people for positions Your personal network Family Friends Your advisor network Your extended network Professors Alum

Resources For Creating A Team Founders Often little or no pay in the beginning Salary from another job or support from a spouse Prepare for diminished personal cash flow Employees Raise capital to pay salaries Offer stock incentives Start positions as part-time until there’s enough cash to pay full-time

The Don’ts Of Double Employment Do not use your employer’s resources Do not build your venture while on the job Do not expropriate intellectual property from your current employer Do not solicit your employer’s customers Do not conceal the fact that you are founding your own venture

Types of Compensation Founder Shares Option pool Restricted stock Compensation name Advantages Disadvantages Founder Shares Attracts co-founders Dilutes owner’s equity Option pool Ties employees goals to those of the company Employees may leave the company if the price falls Restricted stock Vested over time, expensed at current share price Expensed at current price Stock appreciation rights Low cost to the company Phantom stock Employees do not receive equity Needs cash to be exercised

Quick Note of Valuation An Art not a Science 50/50 Company / Investor Set by Investor (value is in the eye of the beholder) PostMV = PreMV + Cash Invested PreMV = PostMV – Cash Invested Founder % = PREMV PostMV Investor % = Cash Invested

Founder’s Dilution over time

The Dilution Effect: An Example Event Entr. Share Co-Founder Family/Friends Angels Option Pool CEO CFO VP Sales VC Rnd 1 VC Rnd 2 Total Valuation (000) Ent’s. Value Founder 60% 40% 100% F+F 48% 32% 20% $1,000 $480 Angel 22% 14% 9% 15% $2,500 $540 Series A 8% 5% 3% 6% 10% 7% 43% $7,000 $562 Series B 4% 2% 29% $30,000 $1,605 Sold to F500 $100,000 $5,349 Payout $3,566 $2,229 $9,905 $3,714 $6,667 $2,000 $4,667 $28,571 $33,332

External Team Members Virtual Team Accountant Outside investors Board of directors Lawyers Board of advisors

Board of Directors vs. Board of Advisors Both provide guidance to senior management Both can fill holes in the Talent Triangle Both can facilitate client introductions Both generate “signal” to investors But one comes with liability, regulatory compliance and requires insurance BoD is elected by Shareholders BoA are appointed by CEO

Bootstrapping Bootstrapping refers to the starting of a self-sustaining process that is supposed to proceed without external input. Running your startup without out investor money.

Bootstrapping Ideas Defer legal fees Take your product to a festival Use QuickBooks One nice suit Look for shared office space Use customers not models Don't use a PR firm At first, use WordPress for your website Write a white paper Think from your customer backwards Network

Jack Welch’s 6 or 9 Theory RANK and YANK Let everyone know where they stand, and on what basis Fire the bottom 10% Promote the top 10%

Bottom up vs. Top down Hiring Bottom Up is hiring from within Top Down is brining in top execs from the outside Bottom Up Pros Bottom Up Cons Top Down Pros Top Down Cons Rewards Effort Group think Brings in fresh vantage points Headhunter costs Less turnover, less misfits No new ideas Steals competitors leaders May not fit culturally Secures Corp Culture Hire for the Role Secures IP Proven commodities Encourages others No recruiter costs Hire for the person

5 Big Mistakes When It Comes to Hiring Hiring someone just because you know them. Hiring someone to "help them out.“ Taking someone on as a partner because you can't afford to hire him. Hiring someone to do a bit of everything. Hiring for the job you hate. Brad Sugars, Entrepreneur Magazine http://www.entrepreneur.com/article/195252

What is the advantage to strong corporate culture? Less Turnover Easier to attract future employees Evangelical employees Leads to more 9s, less 6s Higher Efficiency Requires less oversight Less sick days

Strong vs. Weak Culture Aaltio-Marjosola, I. (1994). From a “grand story” to multiple narratives? Studying an organizational change project. Journal of Organizational Change Management, 7(5), 56-67.

Interpersonal conflicts Problems Faced by Startup Teams Burn out Interpersonal conflicts Family pressure

Premature Scaling #1 Cause of Startup Death? Premature Scaling “Spending money beyond the essentials on growing the business (e.g., hiring sales personnel, expensive marketing, perfecting the product, leasing offices, etc.) before nailing the product/market fit.”  Nathan Furr Why? uses up your precious cash more quickly, which means you have less runway to discover product / market fit makes you less agile, harder to move a larger ship than a small boat Match growth to life cycle

Case: Zeo, Inc. What are the advantages/disadvantages of founding a company with your friends? How did the founders identify and entice stakeholders to join their board of advisors? Why did the founders seek a new CEO? Would you do that or would you want to run the business yourself? What was the process they used to select the CEO? How did the role of each founder change as the business grew? How do you maintain the culture when the company is professionalizing with a large top management team?

Recap Entrepreneurship is a team sport Determine who should be on the team Create a culture so that team can flourish Maintaining a team is an ongoing effort Hire 9s, fire 6s Bootstrap as long as you can Don’t scale prematurely

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