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Chapter 7

Building the Founding Team

Reasons why Teams have Governmental
much greater chance for Agencies (Grants,
success than solo efforts Regulatory)
1. The intense effort required of a Achieved Status
startup can be shared.
2. Should any one team member Form of status or legitimacy for
leave, it is less likely to result in the entrepreneur and it derives
the abandonment of the startup. principally from the
3. With a founding team whose entrepreneurs education and
expertise covers major functional experience.
areas marketing, finance,

operations- the new venture can
proceed further before it will need
to hire additional personnel.
4. A skilled founding team lends Affiliations Status
legitimacy to the new venture in
The benefit of being associated
the eyes of lenders, investors and
5. The entrepreneurs ability to with a prestigious institution.
analyze information and make Ascribed Status
decisions is improved because he
or she benefits from the diverse Unchangeable
expertise of the team, and ideas characteristics such as the gender and
may be viewed and analyzed from ethnicity of the entrepreneur.
several perspectives.
The Entrepreneurs Network TEAM

Prof. Advisors Five Factors That Are

(Attorneys, Accountants, Significant In Team
Bankers, Insurance) Composition

Consultants Sales, 1. Homophily (Similarity)

Market Research, 2. Functionality (Skill Diversity)
3. Status Expectation (Cultural
4. Network Constraints (Social
Personal Advisors Contracts)
(BOD, BOA, Mentors) 5. Ecological Constraints
(Geographic Distribution)
Sales Support
(Manufacturing Rep., BENCHMARKS FOR AN
Sales agencies, EFFECTIVE TEAM
Distributors, Foreign
is a small number
Manufacturing Support
of people with a complementary
(Subcontractors, Design
skills who are committed to a
Engr., Manufacturers)
common purpose, performance
goals, and approach for which
they hold themselves mutually 1. Homophily (similarity)
The extent to which
the characteristics of founding
team members such as gender,
Founding Team
race, age, values and beliefs are
The rock on which to similar.
build the company 2. Functionality (skill diversity)
Key attributes of an The degree of
entrepreneur on the founding diversity among team members
team: with respect to the leadership
Passion, skills and task expertise.
Determination, Resilience, 3. Status Expectations (cultural
Tenacity, Agility, and bias)
Widely held cultural
Characteristics of an biases regarding status (such as
Effective Team men having higher status than
1. The lead entrepreneur and the women) frequently affect the
team share the same vision for process of task group formation.
the new venture. 4. Network Constraint (social
2. The team members are contacts)
passionate about the business The ability to
concept and will work as hard as choose members of a team is
the lead entrepreneur to make it constraint by structural
happen. opportunities for social contact.
3. One or more members of the 5. Ecological Constraint
founding team have experience (geographic distribution)
in the industry.
The size of the
4. The team has solid industry population of potential team
contacts with sources of capital. members and their geographic
5. The teams expertise covers the proximity is critical in the
key functional areas of the information of founding teams.
business: finance, marketing, Special Issues for High-Tech
and operations. Teams
6. The team members have good Putting Structure On The
credit ratings; this will be Organization Before Its Time
important when the team seeks
financing. Entrepreneurial
teams should operate as teams
7. The team is free to spend the
as long as possible, particularly
time a start-up demands and
through early product
can endure the financial
development, to avoid the
constraints of a typical start up.
weight of company bureaucracy
Significant Factors For and to assess whether the team
Founding Team Composition is the right team to take
technology to market.
Pretending There Are to enter into license agreements
Sales From Beta Customers too soon and thereby giveaway
significant upside potential or
While its true that worse have to rely on a license
tech entrepreneurs often need that chosen the wrong market or
to secure beta customers at no done a poor job of developing
cost to the customer just to get the market application. An
their technology into the users alternative is to pay a strategic
hands, entrepreneurs should not partner to develop the
confuse this beta customers applications and retain the
with actual customers. For beta rights in-house.
customers, the value is "free.

Suffocating Under
Opportunity Overload Unique Issues Surrounding
Virtual Teams
Entrepreneurs with
new technologies rarely suffer Virtual Teams
from a lack of opportunities. In
What are the advantages?
fact, quite the opposite is
generally true: they have more Enable the entrepreneur
opportunities than their to access the most qualified individuals
resources can manage once in a particular position, regardless of
theyve established their location, and to create a more flexible
business. Thats why tech organization.
entrepreneurs must focus their
efforts and stick to their strategy Example:
for growth so that the
a.) Tactical collaboration to
opportunities they do take
reach employees at their desk or
advantage of have a greater
on the road through email
chance for success.
instant messaging, and
Believing That cellphone.
Engineers Can Do Marketing
b.) Strategic collaboration that
Technology involved information sharing, file
entrepreneurs must bring in sharing, and message boards.
critical business skills as early as
c.) Task management using
possible to avoid slowing
public calendars and checklists.
progress for lack of expertise. It
takes both technical people and Founding Teams for
business people to successfully International Ventures
ramp up a technology startup,
and its rare to find an Entrepreneurs were
entrepreneur who is equally advised to establish themselves
effective at both skills. in the domestic market before
taking on the enormous
Licensing The challenge of global market.
Technology Too Soon Increasingly, however, we are
seeing more and more firms
In an effort to
going international STARTUP.
speed the technology to market,
And these Startups are generally
entrepreneurs sometimes elect
being founded by teams.
Because international What attorneys can do
startups are relatively within a particular area of
vulnerable, due to their expertise?
operations being at a distance,
Advise the entrepreneur in
they usually seek partnerships
to provide financial, political and selecting the correct
cultural resources and the organizational structure: sole
contracts they will need to be proprietorship, partnership,
successful. LLC, or corporation.
Advise about and prepare
Rules for Friends and documents for acquisition of
Families intellectual property rights
and for licensing
Friends or Family members agreements.
should possess real skills and Negotiate and prepare
experience that the business contracts for the
needs to be successful
entrepreneur, who may be
They should have the same buying, selling, contracting,
work ethic as the entrepreneur or leasing.
is a workaholic and loves it and Advise the entrepreneur on
a family member is a slacker,
compliance with regulations
there will be problems.
related to financing and
If there are family members on credit.
the startup team, there should
What attorneys can do within
be outsiders on the advisory
a particular area of
board and/or board of directors
so that the company will have
the benefit of objective input to Keep the entrepreneur
the business. apprised of the latest tax
reform legislation and help to
The relationship with family and
minimize the ventures tax
friends should be treated as a
business relationship. The
responsibilities and duties of all Assist the entrepreneur in
should be clearly spelled out, complying with federal,
and everyone should understand state, or local laws.
how disagreements will be
settled. As much as possible, the Represent the entrepreneur
activities of the business should in any legal actions as
not be brought home at night. advocates.

Seeking Professional Advisers What should entrepreneurs

do to find the best attorney
Attorneys for the situation?
Professionals who Ask accountants, bankers,
typically specialize in one area and other business people to
of the law (such as taxes, real recommend attorneys who
estate, business, or intellectual are familiar with the
property) and can provide a challenges facing startup,
wealth of support for the new particularly those in the
venture. entrepreneurs' industry.
What should entrepreneurs When the venture is beyond the
do to find the best attorney start up line and consistently
for the situation? growing
Look for an attorney who is It is good idea to do an annual
willing to listen, has time, audit to determine whether the
and will be flexible about companys accounting and
fees while the business is in controls procedures are
startup phase. adequate.
Confirm that the attorney The auditors may also require a
carries malpractice physical inventory.
If everything is in order.
They will issue a
Bound by rules and certified statement, which is
ethics that do not permit important should the
advocacy. entrepreneur ever decide to
take the company public.
Cannot defend a
client who does something that Accountants
violates the accounting
They are also a rich
industrys generally accepted
accounting principles (GAAP) networking source in the
entrepreneurs search for additional
Accounting members of the new venture team.
Is a fairly complex field Like attorneys, they tend
that entrepreneurs need to understand to specialize, so it is wise to find
at least at a basic level in order to one who is used to working with
communicate with accountants, young, growing businesses.
auditors, lenders, bankers, and
Indeed, the accountant
investors, in addition to internal and
external stakeholders. who takes a business through
startup and early growth will
What accountants can do probably not be the best person to
for the business? take care of the companys needs
when it reaches the next level of
He may set up the companys
books and maintain them on a
periodic basis, or, as is often the As the financial and
case, the entrepreneur may hire record-keeping needs of the
a bookkeeper to perform the business increase and become
day-to-day recording of more complex, the entrepreneur
transactions. may have to consider a larger firm
with expertise in several areas.
He will also set up control

systems for operations, as well

During tax season, the
entrepreneur then goes to the Bankers
One who conducts the Insurance policy take out
business of banking; one who, by a business to compensate
individually, or as a member of a that business for financial losses
company, keeps an establishment that would arise from the death
for the deposit or loan of money, or or extended incapacity of an
for traffic in money, bills of important members of the
exchange, etc. The firms banker business. It is used for business
should be thought of as business succession or business
partner who can be source of protection purposes.
information and networking; help
Workers Compensation
make decisions regarding capital
needs; assist in all preparing pro Designed to ensure that
forma operations and cash-flows employees who are injured or
analysis and evaluate projections; disabled on job are not required
and assist in all facets of financing. to cover medical bills related to
Property and Casualty their on-the-job injury, and are
provided with monetary awards
Insurance that protects to cover loss of wages directly
against property losses to your related to accident, as well as to
business home or car and/or compensate for permanent
against legal liability that may physical impairments.
result from injury or damage to
Directors and Officers
the property of others.
Property casualties insurance Is liability insurance
may cover: payable to the directors and
officers of a company or to the
Medical bills Loss of organization itself as
wages indemnification for losses or
Pain in suffering Legal fees advancement of defense costs
in the event an insured suffers
such a loss as a result of a legal
Medical action brought for alleged wrong
Is a type of insurance full acts in their capacity as
directors and officers.
coverage that covers the cost of an
insured individuals medical and Unemployment
surgical expenses. The provider is a
clinic, hospital, doctor, laboratory Is an insurance against
health care practitioner or loss of wages during the time
pharmacy. that an able bodied worker is
involuntarily unemployed. The
Errors and Omissions goal of such insurance is to
A professional liability provide a minimal livelihood to
unemployed workers until they
insurance that protects
are once again employed.
companies and individual
against claims made by clients Auto
for inadequate work or negligent
actions. A policy purchased by
vehicle owners to mitigate costs
Life associated with getting into an
auto accident. Instead of paying
out of pocket for auto accidents, Approving annual budgets;
people pay annual premiums to
an insurance company then Accounting to the stakeholders
pays all or most of the costs the organizations performance
associated with an auto accident Boards of privately owned
or other vehicle damage. corporations vs. boards of
Liability publicly owned corporations

Protection against Privately owned

financial loss arising out of the corporations - the
legal liability incurred by an entrepreneurial team owns all or
insured because of injury or the majority of the stock
damage resulting from the use The board of directors serve at
of a covered product or out of the pleasure of the
the liability incurred by an entrepreneur, who has effective
contractor after a job is control of the company
Publicly owned corporations-
is a corporation whose
Also known as financial ownership is dispersed among
governance insurance is a type of the general public in many
insurance whereby an insurance shares of stock which are freely
company guarantees scheduled traded on a stock exchange or in
payment of interest and principal on a over the counter markets.
bond or other security in the event of a The directors have legitimate
payment default by the issued of the power to control the activities of
bond or security. the company and liability for
Seeking Personal Advisors what they do or fail to do.

Building a Board of Directors Boards Can Be Comprised

Of Inside Or Outside Members
Board of directors is a body of
elected or appointed by Inside Board Member- who is
shareholders who jointly oversee a founder, employee, family
the activities and the overall member, or retired manager of
managerial and operational the firm
aspects of the corporation. Have The Advantage Of
Duties of the Board of Complete Knowledge About
Directors Business

Governing the organization by Generally More Available Have

establishing broad policies and Demonstrated Their
objectives; Effectiveness In The Particular
Positions The Occupy In The
Selecting, appointing, Business
supporting and reviewing the
performance of the chief Outside board member-
executive; someone with no direct connection
to business
Ensuring the availability of
adequate financial resources;
Outside directors are generally Is an informal panel
beneficial for succession of experts and other people who
planning and for raising capital are interested in seeing the new
venture succeed.
They can often bring a fresh
point of view to the strategic Functions of Advisory Board
planning process, along with
1. The function of an advisory
expertise that the founders may
board is to offer assistance to
not possess.
enterprises with anything from
When choosing people marketing to managing human
to serve on the Board of resources to influencing the
Directors, entrepreneurs direction of regulators. Advisory
should consider those who boards are composed of
have: accomplished experts offering
innovative advice and dynamic
1. Technical skill related to perspectives. Meeting quarterly
business or biannually, boards can
2. Significant, successful provide strategic direction,
experience in the industry guide quality improvement, and
assess program effectiveness.
3. Experience running a company
at the level the entrepreneur
wants to grow to next
2. Entrepreneurs, especially from
4. Important contacts in the startup companies or small
industry business may not want to dilute
their control of their business by
5. Expertise in finance, capital establishing a board of directors
acquisition, and IPOs with formal responsibilities and
6. A personality compatible w/ the authorities. Thus, an advisory
rest of the board board may be a more suitable
solution to entrepreneurs who
7. Good problem-solving skills want access to high-quality
advice and network in the
8. Honesty and integrity
industry. Advisory board, as an
external group, could also

ADVISORY BOARD provide non-biased information

and advice to entrepreneurs.
Advisory Board
Roles and
A group of
Responsibilities of Advisory
individuals who've been Board
selected to help advise a
business owner regarding any 1. Developing an understanding of
number of business issues, the business, market and
including marketing, sales, industry trends
financing, expansion and so on;
2. Provide wise counsel on issues
a body that advises the board of
raised by owners/directors or
directors and management of a
corporation but does not have
authority to vote on corporate 3. Provide unbiased insights and
matters. ideas from a third point-of-view
(not involved in the operation of groupthink and giving direction
the business) on big picture issues.
4. Encourage and support the How can be the Advisory
exploration of new business Board effective?
An effective advisory board can
5. Act as a resource for executives
provide the new venture with
6. provide social networking needed expertise who the
platform for directors and the significant costs and loss of control
company associated with a board of
7. encourage the development of a
governance framework that Benefits of Advisory Board
enable sustainable growth of the
1. Less compensation compared to
board of directors.
8. monitor business performance
2. Fiduciary duty/ liability issues
9. impose challenges to directors
The Mentor Board
and management that could
improve the business The work of mentor board
Reasons of Creating an is to serve a sounding board for
Advisory Board ideas and act as coaches to raise
the entrepreneurs spirit and warn
1. The main reason to create an the entrepreneurs when he or she is
advisory board is to seek heading own a wrong path.
expertise outside of the
company. Advisory board They are usually role
members should provide the model and people who have
company with knowledge, business and lifestyle like the one
understanding and strategic entrepreneur wants to create.
thinking of the industry or
management of the company.
2. Companies should seek advisory TEAM AND BOARDS
board members whose qualities
complement the existing board Mistakes To Avoid With
of directors and not mask gaps Boards
in knowledge or skill in the main
Appointing only friends
board. An advisory board
strengthens the existing board, and family members instead of
but not interfering with the most qualified people will
authorities of the existing board. not result to in the best advice
The former editor of The for the entrepreneur.
Economist, also an advisory 1. Expecting the board to always
board member, once said, They support management
(advisory boards) are there to
give focus to or sometimes 2. Failing to establish adequate
challenge research and structure
intelligence work being done in 3. Lacking commitment and trust
the company, thus avoiding in the board recommendations
Mistakes to avoid with
The Buy-Sell Agreement
Assembling the extended
Closely held business
founding team is serious
undertaking, and failure to put owners often enter into buy-sell
the team together effectively agreements to assure that the
could have severe ramifications business remains in the hands of
for the future of the business. the current owners and/or that a
ready market exists for a
1. Not providing feedback departing owners interest in the
event of a certain triggering
2. Not making time for your team
event. Despite the widespread
3. Being too friendly use of buy and sell agreements
advisors can often add value by
4. Failing to define goals identifying and addressing one
5. Misunderstanding motivation of several common mistakes
associated with the agreements
6. Not walking the walk themselves or planning
associated with such planning.
7. Not delegating

One of the biggest Mistake #1- Fixed Valuation

mistakes is cash-strapped
entrepreneurs make is giving First, buy-sell agreement
team members of stock in lieu of are often created at the time the
salary of fees. business is formed

Equity Distribution Second, even if the buy-

sell agreement makes reference
One of the biggest to the use of a formula, the
incentives for taking on the risk appropriateness of the
of a startup venture is the designated formula may have
opportunity to acquire an equity changed over time.
or ownership stake and
participate in the potential Mistakes #2- Failing to Fund
upside if the startup is a
The second major
mistakes associated with buy-
It is important to clearly sell agreements involves failure
understand what each team to fund, inadequate funding or
member is contributing and improper arrangement of the
value it appropriately. If there is funding vehicle.
three founders, its probably not
Two types of Buy-Sell
a wise idea to give equal stakes:
1. Cross-Purchase Agreement
First, because founders,
its probably not a wise to a document that allows a
contribute companys partner or other
shareholders to purchase the
Second, it creates the
interest or shares of a partner
potential for an impasse with no
who is deceased, incapacitated
one with enough power to make
or retiring. Cross-purchase
a decision.
agreement is used in business order to help the client make the
continuation planning. best possible choices
2. Stock Redemption Agreement/ Two types of
Entity Buy-sell Agreement Consultants
is a binding agreement 1. INTERNAL CONSULTANTS
that is implemented by the
someone who
owners of a business to facilitate
the orderly transition of a operates with an organization
business interest in the event of but is available to be consulted
the death, disability or on areas of specialism by other
retirement of a business owner. department of individuals

someone who is
INDEPENDENT CONTRACTORS employed externally whose
expertise is provided on a
The cost of searching for and temporary basis, usually for a
contracting with an independent fee.
contractor (IC).
Transferring activities to the IC ORGANIZATION (PEOs)
Managing the independent Enable clients to cost
contractor. effectively outsource
compensation the management
Bringing the activity in-house.
of human resources, employee
The IRS And Independent benefits, payroll and workers
Contractors compensation.

The law of agency Manufacturing Support

defines the terms employee and
Offer you the necessary
independent contractors. while
post-production support required
an employee acts under the
to operate the project efficiently
direction and control of the
and to smooth out any
employer, an independent
contractor contracts to produce
a certain result and has full Sales Support
control over the means and
methods that shall be use in Team carriers out a
producing the result. number of functions to help
sales representatives do their
more effectively.
Types of Independent Contact costumers
Contractors and prospects to arrange
Consultants appointment or to update them
on the status of an order or a
Is an experienced delivery.
individual that is trained to

analyzed and advise a client in