CHAPTER Eight THE FOUNDING TEAM

Building Effective Founding Teams Why teams lead to a better chance for success? Shared intense effort required by a start-up Loss of one member less likely to result in start-up abandonment Team concept permits expertise across major functional areas: marketing, finance, operations Skilled team lends credibility to the start-up

The Entrepreneur’s Team

The Founding Team Benchmark for an effective team Shared vision between lead entrepreneur and the team Shared passion leads to shared hard work Industry experience relevant to the new venture Solid industry contacts with sources of capital Functional areas of the business are represented Team members have solid credit ratings Team members have the time and money to endure start-up constraints

Distribution Issues How to Divide the Pie Differentiation Performance Flexibility

Critical Issues in Distributing Ownership DIFFERENTIATION. •Different team members rarely contribute the same among team members and the reward system needs to recognize these differences. •The democratic approach involves higher risk than differentiation. PERFORMANCE. •Reward needs to be a function of performance (as opposed to effort) during the early life of the venture. •When relative contributions of the team members change, then the reward system needs to change.

Critical Issues in Distributing Ownership FLEXIBILITY. • Reward system acknowledges and accounts for changes in contributions of team members • The performance of a team member may be more or less than anticipated. • A team member may have to be replaced. • Flexibility in the reward system can include mechanisms such as vesting and setting aside a portion of stock for future adjustments.

The Key to Growth Team traits Cohesion Teamwork Integrity Commitment to the long haul Harvest mind-set Commitment to value creation Equal inequality Fairness Sharing of the harvest

Common Pitfalls Do not use the “honeymoon” period of start-up advantageously Do not answer the questions of who is in charge, who makes the final decisions, and how real differences of opinion are resolved Do not address or recognize the deficiencies of the lead entrepreneur or the management team

Common Pitfalls Do not recognize that creating and building a new venture is a dynamic process Do not identify and defuse destructive motivations of investors, prospective team members, or the lead entrepreneur Do not value trust and integrity

Rules for Friends and Families Friends/family members must possess real skills and expertise required by the venture They need to share the same work ethic as the entrepreneur The advisory board must include outsiders to balance input objectivity All relationships are business oriented and must be stated clearly in contractual terms.

Professional Advisors Outsourcing solutions for professional help: Attorneys Accountants Bankers Insurance Agents As-needed assistance for information, assistance in reviewing business concept and reality checks.

Board of Directors General information: Legal form of the business influences the decision to have a Board of Directors Boards provide beneficial expertise in establishing corporate strategy and philosophy Boards of publicly traded companies are elected by shareholders and represent their interests

Considerations for Advisors/Mentors Possess the necessary technical skills relative to the business? Have significant, successful industry experience? What is their experience running a business at the level of the next step for the entrepreneurial venture? Have any important industry contacts? Do they possess good problem-solving skills? Do they possess honesty and integrity which engenders mutual trust?

Considerations for Advisors/Mentors Permits entrepreneur to overcome “tunnel vision” Payment for services is through honorarium Serve as a sounding board, coach, advisor A safe haven for entrepreneur’s to air their fears, concerns, hopes, dreams

Outsourcing with Independent Contractors Independent contractors (IC) own their own businesses IC are hired by the entrepreneur to do a specific job Hidden costs can affect the new venture’s business Types Consultants Staff Manufacturing Support Sales Support Service Agencies Government Agencies

The 20-Point Test for Independent Contractors

Considerations of Value Contributions in certain areas are of particular value to a venture. Commitment and Risk Idea Skills, experience, track record, or contacts Business plan preparation Responsibility