LAUNCHING NEW VENTURES – AN ENTREPRENEURIAL APPROACH, 7E Kathleen R. Allen – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Building the Founding Team Chapter 8 – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Chapter Objectives Explain how to effectively build a founding team Understand what causes teams to fail Discuss the importance of roles, responsibilities, and rewards Explain how boards of directors work in a private company Compare and contrast the pros and cons of outsourcing with independent contractors versus hiring employees – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Building the Founding Team Many entrepreneurs go solo because: ◦ They want total control of the startup effort ◦ They have the resources they need to launch the venture ◦ The startup is not expected to grow large enough to support more than one founder ◦ The founder may simply want to avoid the difficulties associated with founding teams But there are short-term and long-term ramifications of the decision to go solo – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Building the Founding Team A growing body of research supports a team approach for many reasons: ◦ The intense effort required of a startup can be shared ◦ Should any one team member leave, it is less likely to result in the abandonment of the startup ◦ With a founding team whose expertise covers major functional areas, the new venture can proceed further before it will need others – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Building the Founding Team Even on a team, there is evidence to support the need for a lead entrepreneur – one who has a higher level of entrepreneurial vision and self-efficacy than other team members Lead entrepreneurs drive the development, but not alone Successful entrepreneurs use social networks to grow and maintain customers, seek resources and talent, and sell their firms – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 8.1- The Entrepreneur’s Network – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.1 The Science of Founding Teams An MIT study found several characteristics of communication that define effective teams ◦ Each team member spends about the same amount of time talking and listening; no one dominates, no one drones on and on ◦ Conversations are energetic and face to face ◦ Conversations occur among all members, not just from members to the leader ◦ Back-channel or sidebar conversations typical ◦ Team members often to outside the team to seek information and bring it back for the team – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.1a Why Startup Teams Fail If a team is new to working together, they are more likely to fail; some issues are: ◦ Putting structure on the organization before its time ◦ Pretending there are sales from beta customers ◦ Suffocating under opportunity overload ◦ Believing that engineers can do marketing ◦ Licensing the technology too soon – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2 Building the Founding Team Choosing partners for the new venture critically important and difficult Three major challenges ◦ 1. relationships – who is on the team? ◦ 2. roles – what are their responsibilities? ◦ 3. rewards – why do they want to be on the team? – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2a Who Should be on the Team? Before selection begins, ask: ◦ Do I want a highly diverse team very different from me or a team that is more like me in terms of values and skills? ◦ Should I bring on family and friends with whom I have trust or should I stay away from family and friends? We tend to work with people like us, so more likely to see all male or all female teams, and ethnically similar teams – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2a Who Should be on the Team? But heterogeneity will provide better results in the long term, but they are more likely to face conflicts in values and ways of doing things Five factors are significant: ◦ 1. Homophily (similarity) ◦ 2. Functionality (skill diversity) ◦ 3. status expectations (cultural bias) ◦ 4. network constraints (social contacts) ◦ 5. ecological constraints (geographic distribution) – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Table 8.1- Significant Factors for Founding Team Composition – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2a Who Should be on the Team? Although there are no perfect founding teams or fail-safe rules, effective teams have: ◦ The lead entrepreneur and team share the same vision for the new venture ◦ The team members are passionate about the concept and will work as hard as the lead entrepreneur to make it happen ◦ One or more members of the founding team have experience in the industry of the new venture ◦ The team has solid industry contacts with sources – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2a Who Should be on the Team? Although there are no perfect founding teams or fail-safe rules, effective teams have: ◦ Solid industry contacts with sources of capital ◦ Expertise which covers key functional areas: finance, marketing and operations ◦ Good credit ratings; important when the team seeks financing ◦ Time to spend the time a startup demands and can endure the financial constraints – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2a Who Should be on the Team? Before taking on a family member or friend: ◦ Do they possess real skills and expertise the business needs? ◦ Do they have the same work ethic as the entrepreneur? ◦ Consider using a trusted third party to referee disagreements ◦ If family members are on the startup team, there should be outsiders on the advisory board ◦ They should be treated as a business relationship – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Table 8.2- A Founding Team Quiz – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2b Who Does What: Deciding on Roles and Responsibilities Each person who brings expertise and experience to the team should have a specific role to play with appropriate responsibilities Even in two-person teams, someone must assume the leadership role & be the face of the firm, best at conveying the firm’s story to raise capital Critical development people – scientists, Web developers, engineers – should not be CEO – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2c What’s in It for Me: Rewarding Co-Founders Co-founders usually believe they should own equal shares of stock, but rarely the best idea Before deciding, ask: ◦ What did each founder bring to the table? ◦ What did each founder give up to work on the venture? ◦ When did each founder come on board? ◦ What is each founder expected to contribute in the future. Founders who bring the idea or seed capital – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.2c What’s in It for Me: Rewarding Co-Founders Founders who bring the idea or seed capital to the venture generally receive a premium on the share of stock they receive, usually % provides a co-founder equity calculator for startups that ask questions, then calculates the suggested percentage equity You will also need professional advice – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.3 When Entrepreneurs Don’t Scale The skills required to conceive and launch a venture are very different from those required to grow and maintain a business Four effective approaches when the firm is new are not effective when the firm is larger and more complex ◦ Blind loyalty to the founding team ◦ Dedicated focus on a task ◦ Sticking to a single-minded purpose ◦ Focusing solely on the technology – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.4 Expanding the Team Up until this point, we have focused on the founding team But growing businesses requires expertise and connections rarely found in the founding team – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.4a Seeking Professional Advisors Professionals provide information and services and a reality check ◦ Attorneys – advise re organizational structure, IP rights, regulatory compliance, contracts; more ◦ Accountants – set up company books, control systems, payroll, and tax preparation; more ◦ Bankers – for loans, community banks may be an advantage; they support local businesses ◦ Insurance Agents – property & casualty, medical, life, workers’ compensation; more – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5 Seeking Personal Advisors Personal advisors take on several forms, but they have the common purpose of supporting the founding team in their efforts to launch and grow the business ◦ Boards of Directors ◦ Boards of Advisors ◦ Mentor Board – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5a Building a Board of Directors If the new venture is a corporation, a board of directors is required, & elected by shareholders Distinguish between boards of privately owned corporations and publicly owned corporations ◦ Privately owned - entrepreneurial team owns all or majority of stock; directors serve at pleasure of entrepreneur, who controls company ◦ Publicly traded – directors have power to control activities of company and liability for what it does or does not do; elected by shareholders – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5a Building a Board of Directors When choosing directors, seek those who have: ◦ The technical skill related to the business ◦ Significant, successful experience in the industry ◦ Experience running a company at the level the entrepreneur wants to grow to next ◦ Important contacts in the industry ◦ Expertise in finance, capital acquisition, IPOs ◦ A personality compatible with rest of the board ◦ Good problem-solving skills ◦ Honesty and integrity to engender mutual trust – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 8.2- Board Members and the Business Life Cycle – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5b Advisory Board The advisory board is an informal panel of experts and others who are interested in seeing your new venture succeed Usually used when a board of directors is not required or in the startup phase Can provide needed expertise and advice But volunteers will not necessarily be proactive in providing help; their time is limited, and given to the firm pro bono – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5c Mentor Board Composed of a group of mentors you respect and trust, usually 1-4 people with whom you meet separately ◦ Will serve as a sounding board of ideas, act as coaches, and warn you when heading down the wrong path ◦ Role models and people who have businesses and lifestyles like the one you want to create ◦ They provide a safe place for you to air your fears and concerns Takes time to develop potential mentors – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5d Outsourcing with Independent Contractors Independent contractors (ICs) are not employees, but own their own businesses and are hired by you to do a specific job But hidden costs: ◦ Cost of searching for and contracting with an IC ◦ Transferring activities to the IC ◦ Managing the IC ◦ Bringing the activity in-house Retain in-house critical activities and core competencies of the business – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5d Outsourcing with Independent Contractors There are strict IRS rules for ICs: ◦ Consult an attorney ◦ Draw up a contract with each IC, specifying that the IC is not an employee for tax purposes ◦ Be careful not to indicate the means or methods of performing the work, only the desired result ◦ Verify that the IC carries workers’ compensation insurance ◦ Verify that the IC possesses the necessary licenses – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Table 8.3- The 20-Point Test for ICs – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5d Outsourcing with Independent Contractors Consultants can: ◦ Train the sales staff and/or management ◦ Conduct market research ◦ Prepare policy manuals ◦ Solve problems ◦ Act as temporary key management ◦ Recommend market strategy ◦ Design and engineer products ◦ Design a plant layout and equipment ◦ Conduct R&D; recommend controls – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8.5d Outsourcing with Independent Contractors A Professional Employer Org (PEO) assumes the payroll and human resource functions for the firm for a fee that ranges from 3-5% of gross payroll Each pay period, you pay the PEO a lump sum to cover payroll plus the fee The PEO also includes safety and risk management, benefits administration, and HR management PEOs are growing rapidly – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

New Venture Action Plan Identify the members of the founding team or at least the expertise needed to start the venture Determine what expertise is missing from the founding team and how you will supply it Begin asking questions about potential professional advisers, such as an attorney or accountant – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

New Venture Action Plan Determine whether you will need a board of directors, an advisory board, or a mentor board Identify at least one type of independent contractor that your new venture could use – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.