Exam 2 Content
Foundations of Entrepreneurship
Fall 2012
Chapter 6
Building the Founding Team
The biggest challenge
“There’s plenty of entrepreneurs, plenty of
venture capital. What’s in short supply is
great teams. Your biggest challenge will
be building a great team.”
John Doerr –
Partner, Kleiner, Perkins,
Caulfield, & Byers (kpcb.com)
Anchoring vision in team
philosophy and attitudes
• The most successful entrepreneurs seem to
anchor their vision of the future in certain
entrepreneurial philosophies and attitudes:
– What a team is
– What its mission is
– How it will be rewarded
• Unwritten ground rules, rewards, compensation,
and incentive structures rest o these philosophy
and attitudes
Anchoring vision in team
philosophy and attitudes
“The capacity of the lead entrepreneur to
craft a vision, and then to lead, inspire,
persuade, and cajole key people to sign
up for an deliver the dream makes an
enormous difference between success
and failure.”
Jeffrey Timmons
Advantages of having a team
for a start-up
Feedback
Extended
network
Increased
skill set
Way
To
Success
Higher
social level
of support
Capacity
for innovation
Moral support
Things to keep in mind when
creating a start-up
Evaluate your skills
Use your strengths
Ask for feedback of your actions
Building a powerful team
Create a staffing plan
Find people
to fill positions
Your personal
network
Friends
Family
Your advisors’
Network
Your extended
Network
Professors
Alums
Attributes of successful teams
• Cohesion – “We’re in this together”
• Teamwork – make others’ job easier; no
individual heroes
• Integrity – hard choices and trade-offs based on
what is good for the customer
• Commitment to the long haul – no one benefits
by signing up now and bailing out early
• Harvest mind-set – capital gain is the goal, not a
paycheck
Attributes of successful teams
• Commitment to value creation – making the pie
bigger for everyone
• Equal inequality – democracy does not work well
in start-ups (more on next slide)
• Fairness – rewards are based on contribution,
performance, and results over time
• Sharing of the harvest – 10 – 20% of “winnings”
is frequently set aside to distribute to key
employees; characteristic of the most successful
entrepreneurs
Equal inequality
• Company A - 4 employees
• 34% to president, 23 % each for marketing
and technical VPs, 6% for controller
Equity distribution, Company A
6
34
23
23
Pres i dent
VP Mktg
VP Tech
Control l er
Equal inequality
• Company B – 7 employees
• 22% to president, 15% each for four VPs,
9% each to two other contributors
Equity Distribution, Company B
99
22
15
15
President
VP1
VP2
15
15
VP3
VP4
Other
Other
Filling the gaps
• “Successful entrepreneurs search for people
and form and build a team based on what the
opportunity requires, and when.”*
• Team members contribute high value when they
complement and balance the lead entrepreneur
and each other
• The process of evaluating and deciding who is
needed, and when, is dynamic and not a onetime event
* Timmons, 1975
Filling the gaps
• The founder
• Every team starts with the founder (aka,
the lead entrepreneur)
• Founder determines whether team is
needed, assesses talent, skills, track
record, and contacts of possible members
• Founder needs to determine what the
venture requires in order to succeed
Filling the gaps
• The opportunity
• Whatever the team needs are depends on the fit
between the lead entrepreneur and the
opportunity
• Entrepreneur must clearly define:
– the value added and logic of business model
(revenues and costs)
– Critical success factors
– Extent to which s/he has access to critical resources
and relationships
Filling the gaps
• Outside resources
• Gaps can be filled by external resources:
• Boards of directors, accountants, lawyers,
consultants, etc.
• Entrepreneur must consider:
– Whether need is specialized, one-time or parttime or a critical continuous need
– What trade secrets might be compromised if
external expertise is used
External Team Members
Outside
Investors
Board of
Directors
Board of
Advisors
Lawyers
Virtual
team
Accountants
Do Nots of double employment
• Do not use your employer’s resources
• Do not expropriate intellectual property
from your current employer
• Do not solicit your employer’s customers
until you quit the job
• Do not conceal the fact that you are
founding your own venture
Types of Compensation
Compensation name
Advantages
Disadvantages
Founder Shares
Attracts co-founders
Dilutes owner’s equity
Option pool
Ties employees’ goals to
those of the company
Employees may leave
the company if the price
falls
Restricted stock
Vested over time,
expensed at current
share price
Expensed at current
price
Stock appreciation rights
Low cost to the company Dilutes owner’s equity
Phantom stock
Employees do not
receive equity
Needs cash to be
exercised
Problems that new venture teams face
Family Pressure
Interpersonal
Conflicts
Burn-out
Slicing the founder’s pie
• Making the pie as big as possible is the
primary consideration
• The ultimate goal of any VC-backed firm is
to realize a 5x to 10x ROI, usually via IPO
or acquisition by larger company
• “Work backwards” from IPO capital
structure to determine what will happen
and who will get what
Chapter 8
Building Your Pro Forma
Financial Statements
Common mistakes entrepreneurs make
Underestimating
time to
secure
financing
Not
understanding
the revenue
drivers
Top-down
versus
bottom-up
forecasting
Reduced
survival
chance
Lack of
comparables
Underestimating
costs
Underestimating
time to generate
revenues
Financial
Statements
Income
Statement
Balance
Sheet
Statement
Of
Cash Flows
BUILDING YOUR PRO FORMA FINANCIAL
STATEMENTS
Build-up Method
Comparable Method
Building Integrated Financial Statements
Final Steps
BUILD-UP METHOD
Revenue
Projections
COGS
Operating
Expenses
Preliminary
Income Statement
Revenue Worksheet
COGS Worksheet
Operating Expense Worksheet
COMPARABLE METHOD
Choose industry metrics
Benchmark other companies
in the industry
Compare your projections to other
companies and industry average
BUILDING INTEGRATED
FINANCIAL STATEMENTS
INTEGRATED
FINANCIAL STATEMENTS
Income Statement
Balance Sheet
Statement of
Cash Flows
Monthly forecasts
for years 1 and 2
Consider
Accounts Receivable
Adjust monthly forecasts
according to seasonality
Show outflow and
depreciate PP&E
Annual forecasts
for years 3-5
Consider
Accounts Payable
PUTTING IT ALL TOGETHER
2-3 page explanation of your
Financial Spreadsheets
Discuss the
Income Statement
Discuss the Cash
Flow Statement
Discuss the
Balance Sheet
Focus on major infusions of cash
Talk about revenue drivers
Talk about seasonality
Discuss the expense categories
Describe
describe the
the nature
nature of
of your
your cash
flows
accounts receivables and payables
Accounts receivables and payables
Mention PP&E expenses
Mention PP&E expenses
Talk about major asset
categories, and any
Liabilities that aren’t
clear from the previous
discussion
The Business Plan
Why write a business plan?
• Always when a new venture needs outside
funding
• Early in the planning process when you
are looking at a large-scale project
• Later or not at all when you are
bootstrapping
Dollinger, 2008
Costs and benefits of planning
• Writing a plan takes considerable time,
money, and energy
• Every plan deals with economic uncertainty
and risks posed to new venture – founders
may be uncomfortable confronting risks and
uncertainties and avoid writing a plan
• Writing the plan helps founders confront risks
and conflicts before they become serious
problems
Dollinger, 2008
The plan demonstrates how you
1. Create or add significant value to a
customer or end user
2. Solve a significant problem or meet a
significant need for which someone is willing
to pay a premium
3. Have robust market, margin, and moneymaking characteristics
4. Have a good fit with the founders,
management team at time of market entry,
and the risk/reward balance
Timmons, 1999
After you write the plan
• It becomes a point of departure for due
diligence for potential investors and to
determine risks of venture (technology,
market, management, competitive, financial
risks)
• This homework is crucial even if you don’t try
to raise outside capital
• The most valuable investors will see
weaknesses, even flaws, and will propose
tactics and people to fix them
Timmons, 1999
Tips for business planning and
raising outside funds
RE: Venture capitalists
• There are a lot of them; don’t talk to all of
them
• Getting a “no” is as difficult as getting a “yes;”
qualify your targets and force others to say
no
• Be vague about which other VCs you are
talking to
• Do not meet with an associate or junior
member twice without a partner
Timmons, 1999
Tips for business planning and
raising outside funds
RE: The plan
• Stress your business concept in the
executive summary
• The numbers matter less than the economics
(value proposition and business model)
• Make the business plan look and feel good
w/o using “filler”
• Be prepared to provide copies of published
articles, contracts, market studies, purchase
orders, resumes, etc.
Timmons, 1999
Tips for business planning and
raising outside funds
RE: The Deal
• Make sure investors want you as bad as
you want them
• Create a market for your venture
• Never say no to an offer price
• Use a lawyer with venture deal experience
• Don’t stop selling until the money is in the
bank
Timmons, 1999
Tips for business planning and
raising outside funds
RE: The fund raising process
• It is much harder than you ever thought it
would be
• You can last much longer than you ever
thought you would
• The venture capitalists have to do this the
rest of their careers
Timmons, 1999
Critiquing the plan – General
criteria
• Comprehensiveness – use a template to
help
• Analysis – resource, industry, competitor
and product analysis; financial projections
with percentages, returns, and
comparisons with analogs
• Reasonableness – assumptions are
comparable to benchmarks and facts
• Writing and presentation – well written and
organized
Dollinger, 2008
Critiquing the plan – Specific
criteria
• Management – experience, honesty,
integrity
• Resources – rare, valuable, hard to copy,
unique
• Projections and returns – all data must
have solid foundation in reality, yet
optimistic enough to attract investors
• Exit – how and when will investors recoup
money?
Dollinger, 2008
P
r
o
d
u
c
t
/
s
v
c
l
e
v
e
l
Level 4
Product/ svc fully
developed
Many users, established
mkt
4/1
4/2
4/3
4/4
Level 3
3/1
Product / svc fully
developed
Few users, mkt assumed
3/2
3/3
3/4
Level 2
Product / svc pilot
operable, not developed
for production, mkt
assumed
2/1
2/2
2/3
2/4
Level 1
Product / svc idea but
not operable, mkt
assumed
1/1
1/2
1/3
1/4
Level 1
Level 2
Level 3
Single
2
Partly
Evaluation
would-be
founders,
staffed mgt
status and experience levels
entrep
team,
System Management
Level 4
Fully
staffed,
experience
Writing and editing the plan
• Steps: Prewriting, writing and rewriting/editing,
editing – despite importance of good writing:
Research on 20 business plans in a competition:
• 30% didn’t include specific strategy
• 40% of teams had no marketing experience
• 55% failed to discuss technical idea protection
• 75% failed to identify details of competitor
• 10% had no financial projections; 15% omitted
balance sheets; 80% failed to provide adequate
details of the financial projections
Dollinger, 2008
Exercises
1. Draft an outline of your business plan
– What information do you already have?
– What information is still required? How will you get it?
2. Prepare as much of the executive summary as
you can. Be concise and informative
3. Critique a business plan
– How well does the plan address key issues?
– What changes and improvements would you make to
the plan?
– How well done is the presentation and writing?
– Would you invest in this business? Why or why not?
Dollinger, 2008
Chapter 10
Raising Money for Starting
and Growing Businesses
Ways of raising money
Turning to family
and friends
Going Public
Being Acquired
Approaching
business
angels
Looking for
Venture Capital
Four basic ways of evaluating a
business
Earning-capitalization valuation
Present value of future cash flows
Market-comparable valuation
Asset-based valuation
Earnings Capitalization Method:
Company value = Net Income/ Capitalization Rate
Present Value of Future Cash Flows:
PV = PV of the future free CF + the residual
(terminal) value of the firm
Market-comparable Valuation
(Multiple of earnings):
Total Equity Valuation = NI x P/E
Asset-based Valuation
Modified (adjusted) book value
Replacement value
Liquidation value
External Financing
Services at
reduced rates
Customer
financing
Vendor
financing
External
Financing
Leased
equipment
Reduced rent
Government
programs
Finding business angels
1. Formal angel groups
Pros: Easy to find
Cons: May charge you
for presentation or
even business plan
submission;
Few in number (several
thousand)
2. Individual angels
Pros: Several hundred
thousand
Cons: Hard to find and
approach – the best
way is through your
network
Types of Business Angels
Entrepreneurial Angels
Can be invaluable
advisors and mentors
Corporate angels
Can take over or ruin your
company
Professional Angels
Silent partners
Enthusiast Angels
Passive investors
Micromanagement Angels
Intervene in the business
Top 6 factors according to VCs
VCs may help
you hire a Team
Competent written
business plan
7X return in 5
years
Management
Team
Business
Plan
Fragmented,
accessible, and
growing rapidly
Target
Market
Product/
Service
Financial
Returns
Competitive
Positioning
Better and
protected
No dominance,
distribution
channels are
open
Assessing a VC
Value added
Deep pockets
Patience
Accessibility
Board of
directors
Harvesting (exiting) investments
• Initial Public Offering (IPO)
• An acquisition
• A buyback of the investor’s stock
Very Unlikely
Pros and Cons of an IPO
Upsides
Downsides
Financing
High Expenses
Follow-On Financing
Public Fish Bowl
Realizing Prior Investments
Short-Term Time Horizon
Prestige and Visibility
Post-IPO Compliance Costs
Compensation for Employees
Management’s Time
Acquiring Other Companies
Takeover Target
Employee Disenchantment
Advantages and disadvantages of an
acquisition for the seller
Management
Founder
and CEO
Converting
stock
Managers can
stay focused on
building the
company
Employment
Agreement
Selling a “baby”
can be
traumatic
If it is a cash
transaction, the
entrepreneurs
and employees
get cash
immediately
Company
Culture
The buyer
usually has
big pockets
Key employees
sign
non-competing
agreement
Investors
Expenses and
Commissions
Investors easily
exit their
investments
There is a risk
there will be a
clash of cultures
The expenses are
lower for an acquisition
than for an IPO
Chapter 11
Debt & Other Forms of
Financing
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Getting access to funds
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Getting access to funds
After using personal savings,
start with Internal Sources
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Cash conversion cycle
Key Components
The Inventory Cycle
The Accounts
Receivable Cycle
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
The Accounts
Payable Cycle
Integrative Approach to Working Capital Management
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Sources of short-term cash: More time for
Payables & less for Receivables
Short-term
Bank Loans
Tightening up
Accounts
Receivable
Collections
Negotiating
with Suppliers
Sources of
Short-term
Cash
Seasonal
Business
Credit Terms
Trade Credit
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Choosing the Right Mix of Short-term Financing
Obtaining
Bank Loans
though
Accounts Receivables
Obtaining
Financing
from
Customer repayments
Obtaining
SBA-guaranteed
Loans
Obtaining
Loans
against
Inventory
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Chapter 12
Legal and Tax Issues
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
In this chapter we study
• Issues related to leaving your current employer
to start your own company
• How to choose an appropriate attorney and
accountant
• Issues related to the legal form for your business
• Shareholder relationships
• Insurance
• and issues related to selling stock to investors
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Corporate opportunity doctrine
Look for another
opportunity
Identify
the opportunity
Notify the
company
about it
You can use
the opportunity
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Consider when leaving a company…
You may be held
liable for
persuading people
to leave the firm.
Recruitment of
fellow workers
You may not be
allowed to compete
with your former
employer.
Proprietary
information
Make sure that the
information you
learned from your
previous job is not
protected before using
it.
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Non-competition
Choosing an attorney and
accountant
Attorney
Accountant
Choose
specialized
Hire
early
Choose
local
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Choice of legal form
Forms available
Sole Proprietorship
Brief description
Owned and operated by one owner who is in total
control
Two or more persons go into business for profit, as
co-owners, sharing profits and losses
Partnership
Separate legal entity, with legal existence apart
from its owners, the stockholders
Corporation
Limited Partnership
One or more general partners, who conduct the
business and take on personal risk, and one or
more limited partners, who act as passive investors
Limited Liability
Company
Owned by “members,” who either manage the
business themselves or appoint “managers” to run
it for them
Bygrave & Zacharakis, 2007. Entrepreneurship,
New York: Wiley. ©
Comparative table of entities
Forms
available
Control
Liability
Taxation
Administrative
obligations
Owner has complete
control
Unlimited personal
liability
Not a separate taxable
entity
Only those applicable
to all businesses
Partnership
Partners share control
Joint and several
unlimited personal
liability
Not a separate taxable
entity
Corporation
Control distributed
among shareholders,
directors and officers
Limited personal
liability
Separate taxable
entity unless
subchapter S selection
General partners control,
limited partners do not
General partners: joint
and several unlimited
personal liability,
limited partners:
limited liability
Not a separate entity
unless affirmatively
chosen
Sole
Proprietorship
Limited
Partnership
Limited Liability
Company
Members share control or
appoint managers
Limited personal
liability
Not a separate entity
unless affirmatively
chosen
Bygrave & Zacharakis, 2007. Entrepreneurship,
New York: Wiley. ©
Only those applicable
to all businesses
Some additional
Some additional
Some additional
Shareholder and operating
agreement
Negotiating
employment terms
between you and
the investor
Each party’s
obligations
Disposition of
equity interests
Distribution of
company profits
Redemption
provisions
-Redemption
Agreement
-Cross-purchase
Agreement
Provisions to
resolve voting
deadlocks
between owners
Protection for
investors against
being left behind
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Legal and tax issues in hiring
employees
Employees as Agents of the Company
Employment Discrimination
Other Employment Statutes
Employment Agreements
Equity Sharing
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Insurance
Property
Liability
Key Person Life
Business Interruption
Group Life, Disability and Health Insurance for Employees
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Legal issues in the sale of securities to
investors
Intra-state
offering exemption
Public placement
Two securities offerings that do
not have to be registered with
government authorities
Offering under $1,000,000
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Private placement
Chapter take-aways
• Pay attention to issues related to leaving your
current employer to start your own company
• Choose an attorney who specializes in your
industry and an accountant who specializes in
your local area
• Pick the legal form that’s most appropriate for
your business
• Manage shareholder relationships
• Get the right insurance
• Know when you don’t need to register stock
sales
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Chapter 13
Intellectual Property
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Practical Reasons for Protecting a New Idea
Investors are loath to put money into a venture that cannot
establish a unique product niche.
 Stockholders will challenge a corporation's investment of its
resources in a program that can be easily copied once it is
introduced to the market.
 All the time, effort, and money people invest in perfecting a
product, as well as advertising and promoting it, may be
wasted if imitators can enter the market easily.
 Moreover, the imitators can cut prices, because they have
not incurred the startup expenses the company had to
endure to bring the idea from conception to a massproducible, reliable, and appealing product or service.
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Business Intellectual Properties
Patents
Trade Secrets
Trademarks
Copyright
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
International Protections for Intellectual Property
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Licensing and Technology Transfer
Common concerns and clauses
Defining the property being licensed
Limitation on licenses
Assigning value to a license
Royalty rates
Negotiating license agreements
Foreign licenses
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Software Protection
All manner of software could be protected by
patent regardless of how it is perceived, and many
patents have been issued on software.
Software specific to the operation of the computer
itself is patentable.
All forms of computer programs could be
protected by copyright.
Companies can also protect software through a
trade secret approach.
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
The Internet
Uploading and downloading of copyrighted
material on the internet can be copyright
infringement.
Copyright infringement has also been found in
some cases against bulletin board operators and
administrators who have received and stored such
material.
Domain names are taking on some of the
characteristics of trademarks.
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
IP Agreements
Preparing employment contracts
Transfer of employee rights to company innovations
How employee moonlighting might compromise
confidentiality
Non-competition clauses
Preventing employee raiding
Employee ownership of copyright
Rights of prior employees
Consultant contracts
Confidential disclosure agreements
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
3 in 1
These “Bee Movie”
Pez dispensers have
all three types of
intellectual property
protections - patent,
trademark and
copyright.
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
You’re “dead!”
From USPTO.GOV, in the
trademarks section…
Bygrave & Zacharakis, 2007.
Entrepreneurship, New York:
Protecting trademark names
Seek non-descriptive words
• The purpose of the mark is to distinguish
between products, not to describe the
products
• “Celestial Seasonings” is OK
• “Tasty Seasonings” would be difficult to
protect
Search for any other users
• Do so both before applying for registration
and after registering
• Go after imitators as soon as you learn
about them
Register the mark
• Register at the state level
• When it becomes clear you’ll be interstate,
register at federal level
• Renew it six months before it lapses
• * Registration is not required to prove
ownership of a mark, but it gives better
protection
Use the mark as registered
• Do not alter it
• If change is needed, register a new mark
Pre-1961
1994
2002
Now
Refer to the trade name as
brand
• Scotch “Brand”
• Kleenex “Brand”
• Xerox “Brand”
• Google “Brand”
Why? See next slide
Do not use the name as a verb
• Using the brand name as a verb poses a
challenge to protection of the trade name /
trademark
– Xerox does not use the term Xeroxing, which
could make the term generic
– Do Google employees “google?”
License mark to others carefully
• If others fail to maintain the quality the
mark represents, it may lose its identity
• The “dark side” of brand licensing
– Long-term impact. Consumers have
expectations when they buy a product with
your (brand) name on it - need to use quality
monitoring or case auditing
– Day-to-day issues. Call centers, customer
contact points
Flaunt the mark
• Otherwise, it may be judged to have
become abandoned
• Put it on the product, advertisements,
displays, tags, and manuals