Management & Ownership

Management & Ownership Business Plan Workshops Chris Pavlides Executive Director, Innovation & Entrepreneurship Institute

Business model • What a firm does, and how, to build and capture wealth for stakeholders. • Translates strategic position into a business structure and a set of functional strategies. • Includes a trajectory of growth: • a timeline, milestones, infusions of capital, growing revenues, growing, changing expenses.

People power • Success depends on teams of people • Right skills • Right personalities • Right arrangement • Right structure • More important even than capital • More versatile • Most difficult to find, to keep, to manage

Execution • Reliable delivery on tasks • Accurate • As promised • On time • On budget • Right people, right resources • Systems, controls, incentives • Relentless attention

Know-how • Tacit knowledge • Experience-based knowledge of how to do certain things • Skill-based, knowledge-based, practice-based • Typing, pipe-laying, negotiating, keeping books • Core competencies • Highly developed, specialized tacit knowledge • Important, rare, inimitable, irreplaceable • Shared, embedded in relationships • Drives innovation, builds & sustains advantages

Relationships • Business is very personal • Sex & money • Identity & self respect • Relationships are central to business • Partnership for coping with uncertainty • Grow together • Spend a lot of time together • Business relationships demand trust& authenticity

Trust is directly proportional to authenticity & experience • Project open, genuine interest • Demonstrate respectful equality • Through language, posture, listening, performance. • Respond honestly and directly • Find ways to work together • Do what you promise • Attend to the little things • Respect confidentiality

Relationships thrive onmanaged expectations • Clear roles & boundaries • Clear deliverables • Clear communications • Clear rewards & consequences • Opportunities for feedback & learning

Entrepreneurial leadership • Inherent aptitude • Learned skills and approach • Passion • Perseverance • Opportunity (calling)

Entrepreneurial leadership • Entrepreneurs have little trouble • Holding on to a vision • Acting on new ideas • Pushing themselves and others • Entrepreneurs typically have more trouble • Sharing their vision • Measuring results in useful ways • Empowering their managers • Disciplining their action towards building the organization

Building blocks of motivation Incentives Participation Feedback Education Vision

Meaningful participation energizes action • Expand participation • To those who know and can make a difference • The challenge of sharing control • Reward participation to avoid educated fans • Bonuses, stock options, phantom stock • Expanded scope of control • Examples • Food delivery: Bonuses tied to per-truck profit • Publishing: Improved cash flow linked to more influence and less stress

Exercise: People power inventory • What does your business model require? • Skill sets, customer types, resources, attitude? • Who do you have on board? • What do they bring to the firm? • Is the group compatible? • Who do you need? • In what roles?

Management responsibilities • Vision • Blends personal & organizational visions • Fosters common culture • Strategy • Environmental scanning • Strategy • Measurable objectives • Resource development • Tools, systems, education

Management responsibilities • Systems • Efficient, effective processes • Fit between systems • Coordination • Execution • Relationships • Staff development The mix of responsibilities changes with growth.

Development & start-up • Focus: Bringing product to market • Identify opportunity • Assess feasibility • Identify & accumulate resources & networks • $$, people, information, intellectual property • Plan details • Assemble team and resources • Launch…

Development & start-updecision making • Centralized • Informal • Non-specialized • Extremely flexible • Increasingly short time horizon

Growth • Focus: Execution – and adjusting plans and strategy to reality • Building market share • Building management team • Building product delivery system • Transitioning from entrepreneurial to more managerial leadership • Surviving a rapid succession of challenges as approach growth wall

Growth decision making • Centralized and informal • But transition to team decisions • Flexible • But increasing structure and specialization • Short time horizon

Stabilization • Focus: Profitability and long-term prospects • Consolidating market share • Tweaking internal systems • Coping with slowing sales growth • Coping with increased competition • Institutionalizing innovation • Planning for next five years • Considering exit – is the entrepreneur a manager?

Stabilization decision making • Formalized • Process driven, not opportunity driven • Decentralized • Requires delegation and coordination • Specialized • Implies more indirect control • Long- & short-time horizon

Organization design • Because they face undefined tasks and high levels of uncertainty, early-stage organizations demonstrate little structure in form of job specialization, rules, or formality – and depend on entrepreneur’s direct contact with people, functional areas and projects

Functional organizational design General Management • Vision & strategy • Hiring & culture • Resources & controls Marketing Sales Product Finance • Research oriented • Supervises making of materials • Organize by region • Incentive plans are crucial • Engineering • Sales support • Customer support • Statements • Cash flow • HR details • Office management • Management to add later: • HR, Logistics, IT, Counsel

Advisory groups expand ability • Networks • Bridges beyond the management team • Know-how • Affordable experience • Accountability • Deadlines and reporting help execution • Support • Been there, done that • Burn-out prevention

Responsibility charting • Provides a language and forum for discussing decision making at governance, management or staff levels. • Creates greater clarity about how decisions are to be made and who will be accountable for those decisions. • Helps raise difficult issues of power & authority.

DECISION: Roles Involved Fin. CEO Oper. Sales Approve Responsible Types of Participation Consult Informed Responsibility chart

Responsibility chart details • Approve • Sign off & veto power • Final responsibility to commit resources • Shares accountability • Responsible • Takes the initiative, develops alternatives, recommends, implements • Accountable for results • Consult • Input but no veto power • Inform • Notify only

Exercise: Organizational design • Necessary functions • Organizational design • Internal or external functions (in-house or outsourced • Management team vs advisory group functions • Structure – flat or hierarchical

Governance • Structured relationship between stakeholders • Key agreements that distribute power and responsibility • Includes legal and ownership structures

OwnershipPressures Family/StakeholderPressures ManagerialPressures Business systems

Business systems dynamics • Each system has its own logic, its own bottom line • Ownership: Wealth creation & maintenance • Institution: Increasing density of relations • Management: Efficiency & replicability • Each has its own time horizon • Ownership: Ten years or one working life • Institutional: Reproduction • Management: Quarterly results

Governance defines the circles and the relationships • Who decides what • Owners, key employees, key customers, family members, professional advisors • Decision makers for each circle • Owners (board of directors) • Managers (management team) • Family/stakeholders (council, shareholder meeting) • Scope of each circle’s decisions • Responsibility of circles to each other • Conflict resolution between interests

Governance tools • Direction • Vision, values, culture • Agreements • Contracts, bylaws, charters • Support • Facilitators, advisors, models

Exercise: Governance • Who are your stakeholders? • What influence will they have? • What structures might organize that influence?

Legal structures • Grow out of governance concerns • But have liability and task implications • Sole proprietorships • Partnerships • Corporations • S corporation • C corportaion • Stakeholder Corporations • ESOPs, cooperatives, joint ventures, community corporations, professional corporations (LLC)

Sole proprietorships • Disadvantages • Unlimited liability • Lack of continuity • Limited availability of capital & financing • Limited viewpoint & experience • Advantages • Ease of formation • Sole ownership of profits • One controlling party • Flexibility • Relative freedom from government control • No corporate business taxes

Partnerships • Disadvantages • Unlimited liability of general partners • Bound by acts of partners • Lack of continuity • Difficulty in obtaining financing • Difficulty of disposing of partnership interest • Advantages • Ease of formation • Flexible • Facilitates growth and performance through direct rewards • Relative freedom from governmental control and regulation • Possible tax advantage

Partnership details • Types of partnerships • General, Limited, LLP, R&D Ltd • Partnership agreements • Name, purpose, domicile • Duration • Responsibilities of partners • Division of profits and losses • Death of a partner • Sale of Interest/Addition of new partner • Business expenses • Settlement of disputes

Corporations • Definition • Legal entity separate from owners • Artificial being with continuous life • Person before the law • Types • Domestic vs. Foreign • Public vs. Private • Profit vs. Nonprofit (501 (c) 3) • Professional or stakeholder corporations (LLC) • Forms • C Corp • S Corp • LLC

Corporations • Disadvantages • Activity restrictions • Lack of representation • Regulation & reporting • Organizing expenses • Double taxation (except S corp) • Advantages • Limited liability • Transfer of ownership • Unlimited life • Relative ease of securing capital in large amounts • Increased ability and expertise that comes with stability and wide ownership

Costs of incorporation • Lawyer’s fees – $1500 –5000 • Accountant’s fees • Fees to state • Unemployment insurance tax • Employer’s contribution to social security • Annual legal and accounting fees

PA requirements for domestic corporations • File articles of incorporation with the PA Dept of State • Register with the commonwealth • Maintain a registered office within PA • Pay the required $100 filing fee

S Corporation • Corporate liability advantages withsingle taxation • Strict guidelines • Domestic, no corporate or partner shareholders • Less than 75 shareholders • No nonresident alien shareholders • Losses can offset personal income • Undistributed income can be taxed at individual tax rate

Limited liability corporations • Hybrid: Limited liability of corporation with tax advantages of partnership • Profits are passed through to shareholders • Liability limited to investment • Corps, partners, and foreign investors may be shareholders • No limit to number of shareholders • LLC statures differ by state

Stakeholder corporations • LLC, nonprofit, or C corporation structure • Some special structures – notably cooperatives • Owners have other stakes • Employees (ESOPs, cooperatives), community members • Encourage active involvement of stakeholder owners • Special governance structures

Entrepreneurial realities • No right answers • Marketplace rules • Persistent trial and error • No lone wolves • Strength of weak ties • No excuses • Execution • Life choice

Management & Ownership