7 BUILDING THE FOUNDING TEAM
Learning Objectives • Explain how to effectively build a founding team. • Understand how to work with professional advisers. • Discuss when to add a board of directors. • Compare and contrast the pros and cons of outsourcing with independent contractors versus hiring employees.
Building Effective Founding Teams • Why do teams lead to a better chance for success? • Shared intense effort required by a startup • Loss of one member less likely to result in startup abandonment • Team concept permits expertise across major functional areas: marketing, finance, operations • Skilled team lends legitimacy to the startup in the eyes of lenders, investors, etc. • Diverse experience of the team allows entrepreneur to make better decisions
The Entrepreneur’s Network Figure 7.1
Creating the Founding Team • Benchmarks 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 good credit ratings • Team members have the time and money to endure startup constraints
A Founding Team Quiz Table 7.2
Special Issues for High-Tech Teams • Funding is through angel and venture capital. • Founding team consists of scientists-engineers with little market or business experience. • The venture requires professional management outside of the founding team. • The investors help with forming this team.
Unique Issues SurroundingVirtual Teams • Virtual teams function differently and affect how the team interacts. • Synchronous-asynchronous communication media alleviate physical distance issues. • Trust is critical to effective virtual teamwork.
Founding Teams for International Ventures • Success in the international market depends on the skills and knowledge of the team. • Successful characteristics include: • Extent to which founding team members have traveled or worked abroad • The number of languages they speak • Experienced founding teams likely to form partnerships to facilitate entering the foreign market.
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 spelled out.
Seeking Professional Advisers • Outsourcing solutions for professional help: • Attorneys • Accountants • Bankers • Insurance agents • “As-needed” assistance for information, assistance in reviewing business concept, and reality checks
Seeking Personal Advisors • Building a board of directors • 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. • Members assist with business development, act as arbitrators for dispute resolution, and give credibility to the new company’s image.
Building a Board of Directors • Considerations when choosing board members: • The necessary 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 • Experience in finance, capital acquisition, or IPOs • A personality compatible with the rest of the Board • Good problem-solving skills • Honesty and integrity, to engender a sense of mutual trust
Board Members and the Business Life Stage Figure 7.2
Advisory Board • Consists of a panel of experts interested in the new venture’s success • Ranges from infrequent meetings and no pay to frequent meetings and provided equity stake in company • Often used when board of directors is not required or in the startup phase • Helps the entrepreneur to overcome “tunnel vision”
The Mentor Board • The entrepreneur’s personal board who serve as a sounding board, coach, advisor • A safe haven for entrepreneur’s to air their fears, concerns, hopes, dreams • Generally role models and individuals who have businesses and lifestyles like the one the entrepreneur wants to create
Mistakes to Avoid • All team members should have the required experience and qualifications, and the same goals for the business. • Avoid using only family and friends. • Only give stock incentives after an individual has proven him or herself.
Mistakes to Avoid (cont’d) • Equity distribution: it is important to clearly understand what each team member is contributing and value it appropriately. • Buy-sell agreement: used to prevent an owner from selling his/her interests in company without consent of the other owners and to determine what happens should owner leave the business.
Outsourcing with Independent Contractors • Independent contractors (ICs) own their own businesses and are hired by the entrepreneur to do a specific job. • Including: consultants, manufacturers, distributors, employee leasing firms, and professional advisers. • Hidden costs: • Searching and contracting ICs • Transferring activities to ICs • Managing IC • Bringing activity in-house
The IRS and Independent Contractors • Law of Agency: • Defines the terms employee vs. independent contractor. “While an employee acts under the direction and control of the employer, an independent contractor contracts to produce a certain result and has full control over the means and methods that shall be used in producing the result.”
The IRS and Independent Contractors (cont’d) • Ensure compliance with IRS regulations: • Consult an attorney • Draw up a contract • Indicate only the desired result • Verify the IC’s workers’ compensation insurance • Verify the IC’s licenses to do business
Types of Independent Contractors • Consultants • Professional employer organizations (PEOs) • Manufacturing support • Sales support
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 management team and how you will supply it. • Begin asking questions about potential professional advisors, such as an attorney or accountant. • Determine whether you will need a board of directors, an advisor board, or a mentor board. • Identify at least one type of independent contractor that the new venture could use.