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

2. OVERVIEW Review Forming a team Team compensation Stock options
Family & friends
Questions to ask
My take on it…
September 10, 2004
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3. REVIEW Ideation, business need ID, business selection Name
Infrastructure creation
Entity form, clearance search, office space, bank
Moving forward…
September 10, 2004
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4. 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
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5. 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
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6. 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
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7. 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
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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
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18. 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
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19. 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
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20. “Prosperity is the best protector of principle”
--Mark Twain
September 10, 2004
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