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.
CREATING THE FOUNDING
The Entrepreneurs Network TEAM

Prof. Advisors Five Factors That Are

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

Consultants Sales, 1. Homophily (Similarity)

2. Functionality (Skill Diversity)
Market Research,
3. Status Expectation (Cultural
Trainingltants
Bias)
Management)
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
TEAM
Reps.)
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 Significant Factors For
they hold themselves mutually Founding Team Composition
accountable.
1. Homophily (similarity)

The extent to which

Founding Team the characteristics of founding
team members such as gender,
The rock on which to
race, age, values and beliefs are
build the company similar.
Key attributes of an 2. Functionality (skill diversity)
entrepreneur on the founding
team: The degree of
diversity among team members
Passion, with respect to the leadership
Determination, Resilience, skills and task expertise.
Tenacity, Agility, and
Curiosity 3. Status Expectations (cultural
bias)
Characteristics of an
Effective Team Widely held cultural
biases regarding status (such as
1. The lead entrepreneur and the men having higher status than
team share the same vision for women) frequently affect the
the new venture. process of task group formation.
2. The team members are 4. Network Constraint (social
passionate about the business contacts)
concept and will work as hard as
the lead entrepreneur to make it The ability to
happen. choose members of a team is
constraint by structural
3. One or more members of the opportunities for social contact.
founding team have experience
in the industry. 5. Ecological Constraint
(geographic distribution)
4. The team has solid industry
contacts with sources of capital. The size of the
population of potential team
5. The teams expertise covers the
members and their geographic
key functional areas of the
proximity is critical in the
business: finance, marketing,
information of founding teams.
and operations.
Special Issues for High-Tech
6. The team members have good
Teams
credit ratings; this will be
important when the team seeks Putting Structure On The
financing. Organization Before Its Time
7. The team is free to spend the Entrepreneurial
time a start-up demands and teams should operate as teams
can endure the financial as long as possible, particularly
constraints of a typical start up. through early product
development, to avoid the
weight of company bureaucracy
and to assess whether the team
is the right team to take
technology to market.
Pretending There Are
Sales From Beta Customers
While its true that
tech entrepreneurs often need
to secure beta customers at no
cost to the customer just to get
their technology into the users
hands, entrepreneurs should not
confuse this beta customers
with actual customers. For beta
customers, the value is "free.
Suffocating Under
Opportunity Overload
Entrepreneurs with
new technologies rarely suffer
from a lack of opportunities. In
fact, quite the opposite is
generally true: they have more
opportunities than their
resources can manage once
theyve established their
business. Thats why tech
entrepreneurs must focus their
efforts and stick to their strategy
for growth so that the
opportunities they do take
advantage of have a greater
chance for success.
Believing That
Engineers Can Do Marketing
Technology
entrepreneurs must bring in
critical business skills as early as
possible to avoid slowing
progress for lack of expertise. It
takes both technical people and
business people to successfully
ramp up a technology startup,
and its rare to find an
entrepreneur who is equally
effective at both skills.
Licensing The
Technology Too Soon
In an effort to
speed the technology to market,
entrepreneurs sometimes elect
to enter into license agreements
too soon and thereby giveaway
significant upside potential or
worse have to rely on a license
that chosen the wrong market or
done a poor job of developing
the market application. An
alternative is to pay a strategic
partner to develop the
applications and retain the
rights in-house.
Unique Issues Surrounding
Virtual Teams
Virtual Teams
What are the advantages?
Enable the entrepreneur
to access the most qualified individuals
in a particular position, regardless of
location, and to create a more flexible
organization.
Example:
a.) Tactical collaboration to
reach employees at their desk or
on the road through email
instant messaging, and
cellphone.
b.) Strategic collaboration that
involved information sharing, file
sharing, and message boards.
c.) Task management using
public calendars and checklists.
Founding Teams for
International Ventures
Entrepreneurs were
advised to establish themselves
in the domestic market before
taking on the enormous
 challenge of global market. Professionals who
Increasingly, however, we are typically specialize in one area
seeing more and more firms of the law (such as taxes, real
going international STARTUP. estate, business, or intellectual
And these Startups are generally property) and can provide a
being founded by teams. wealth of support for the new
venture.
Because international
startups are relatively What attorneys can do
vulnerable, due to their within a particular area of
operations being at a distance, expertise?
they usually seek partnerships
to provide financial, political and Advise the entrepreneur in
cultural resources and the selecting the correct
contracts they will need to be organizational structure: sole
successful. proprietorship, partnership,
LLC, or corporation.
Rules for Friends and Advise about and prepare
Families documents for acquisition of
intellectual property rights
Friends or Family members
and for licensing
should possess real skills and
agreements.
experience that the business Negotiate and prepare
needs to be successful
contracts for the
They should have the same entrepreneur, who may be
work ethic as the entrepreneur buying, selling, contracting,
is a workaholic and loves it and or leasing.
a family member is a slacker,
Advise the entrepreneur on
there will be problems.
compliance with regulations
If there are family members on related to financing and
the startup team, there should credit.
be outsiders on the advisory
What attorneys can do within
board and/or board of directors
a particular area of
so that the company will have
expertise?
the benefit of objective input to
the business. Keep the entrepreneur
The relationship with family and apprised of the latest tax
friends should be treated as a reform legislation and help to
business relationship. The minimize the ventures tax
responsibilities and duties of all burden.
should be clearly spelled out, Assist the entrepreneur in
and everyone should understand complying with federal,
how disagreements will be state, or local laws.
settled. As much as possible, the
activities of the business should Represent the entrepreneur
not be brought home at night. in any legal actions as
advocates.
Seeking Professional Advisers
Attorneys
 What should entrepreneurs
do to find the best attorney
for the situation?
Ask accountants, bankers,
and other business people to
recommend attorneys who
are familiar with the
challenges facing startup,
particularly those in the
entrepreneurs' industry.
What should entrepreneurs
do to find the best attorney
for the situation?
Look for an attorney who is
willing to listen, has time,
and will be flexible about
fees while the business is in
startup phase.
Confirm that the attorney
carries malpractice
insurance.
Accountant
Bound by rules and
ethics that do not permit
advocacy.
Cannot defend a
client who does something that
violates the accounting
industrys generally accepted
accounting principles (GAAP)
Accounting
Is a fairly complex field
that entrepreneurs need to understand
at least at a basic level in order to
communicate with accountants,
auditors, lenders, bankers, and
investors, in addition to internal and
external stakeholders.
What accountants can do
for the business?
He may set up the companys
books and maintain them on a
periodic basis, or, as is often the
case, the entrepreneur may hire
a bookkeeper to perform the
day-to-day recording of
transactions.
He will also set up control
systems for operations, as well
as payroll.
During tax season, the
entrepreneur then goes to the
accountant.
When the venture is beyond the
start up line and consistently
growing
It is good idea to do an annual
audit to determine whether the
companys accounting and
controls procedures are
adequate.
The auditors may also require a
physical inventory.
If everything is in order.
They will issue a
certified statement, which is
important should the
entrepreneur ever decide to
take the company public.
Accountants
They are also a rich
networking source in the
entrepreneurs search for additional
members of the new venture team.
Like attorneys, they tend
to specialize, so it is wise to find
one who is used to working with
young, growing businesses.
Indeed, the accountant
who takes a business through
startup and early growth will
probably not be the best person to
take care of the companys needs
when it reaches the next level of
growth.
 As the financial and
record-keeping needs of the
business increase and become
more complex, the entrepreneur
may have to consider a larger firm
with expertise in several areas.
BANKERS AND INSURANCE
AGENTS
Bankers
One who conducts the
business of banking; one who,
individually, or as a member of a
company, keeps an establishment
for the deposit or loan of money, or
for traffic in money, bills of
exchange, etc. The firms banker
should be thought of as business
partner who can be source of
information and networking; help
make decisions regarding capital
needs; assist in all preparing pro
forma operations and cash-flows
analysis and evaluate projections;
and assist in all facets of financing.
Property and Casualty
Insurance that protects
against property losses to your
business home or car and/or
against legal liability that may
result from injury or damage to
the property of others.
Property casualties insurance
may cover:
Medical bills Loss of
wages
Pain in suffering Legal fees
Medical
Is a type of insurance
coverage that covers the cost of an
insured individuals medical and
surgical expenses. The provider is a
clinic, hospital, doctor, laboratory
health care practitioner or
pharmacy.
Errors and Omissions
A professional liability
insurance that protects
companies and individual
against claims made by clients
for inadequate work or negligent
actions.
Life
Insurance policy take out
by a business to compensate
that business for financial losses
that would arise from the death
or extended incapacity of an
important members of the
business. It is used for business
succession or business
protection purposes.
Workers Compensation
Designed to ensure that
employees who are injured or
disabled on job are not required
to cover medical bills related to
their on-the-job injury, and are
provided with monetary awards
to cover loss of wages directly
related to accident, as well as to
compensate for permanent
physical impairments.
Directors and Officers
Is liability insurance
payable to the directors and
officers of a company or to the
organization itself as
indemnification for losses or
advancement of defense costs
in the event an insured suffers
such a loss as a result of a legal
action brought for alleged wrong
full acts in their capacity as
directors and officers.
Unemployment
 Is an insurance against
loss of wages during the time
that an able bodied worker is
involuntarily unemployed. The
goal of such insurance is to
provide a minimal livelihood to
unemployed workers until they
are once again employed.
Auto
A policy purchased by
vehicle owners to mitigate costs
associated with getting into an
auto accident. Instead of paying
out of pocket for auto accidents,
people pay annual premiums to
an insurance company then
pays all or most of the costs
associated with an auto accident
or other vehicle damage.
Liability
Protection against
financial loss arising out of the
legal liability incurred by an
insured because of injury or
damage resulting from the use
of a covered product or out of
the liability incurred by an
contractor after a job is
completed.
Bonding
Also known as financial
governance insurance is a type of
insurance whereby an insurance
company guarantees scheduled
payment of interest and principal on a
bond or other security in the event of a
payment default by the issued of the
bond or security.
Seeking Personal Advisors
Building a Board of Directors
Board of directors is a body of
elected or appointed by
shareholders who jointly oversee
the activities and the overall
managerial and operational
aspects of the corporation.
Duties of the Board of
Directors
Governing the organization by
establishing broad policies and
objectives;
Selecting, appointing,
supporting and reviewing the
performance of the chief
executive;
Ensuring the availability of
adequate financial resources;
Approving annual budgets;
Accounting to the stakeholders
the organizations performance
Boards of privately owned
corporations vs. boards of
publicly owned corporations
Privately owned
corporations - the
entrepreneurial team owns all or
the majority of the stock
The board of directors serve at
the pleasure of the
entrepreneur, who has effective
control of the company
Publicly owned corporations-
is a corporation whose
ownership is dispersed among
the general public in many
shares of stock which are freely
traded on a stock exchange or in
over the counter markets.
The directors have legitimate
power to control the activities of
the company and liability for
what they do or fail to do.
Boards Can Be Comprised
Of Inside Or Outside Members
Inside Board Member- who is
a founder, employee, family
 member, or retired manager of ADVISORY BOARD
the firm
Advisory Board
Have The Advantage Of
A group of
Complete Knowledge About
Business individuals who've been
selected to help advise a
Generally More Available Have business owner regarding any
Demonstrated Their number of business issues,
Effectiveness In The Particular including marketing, sales,
Positions The Occupy In The financing, expansion and so on;
Business a body that advises the board of
directors and management of a
Outside board member-
corporation but does not have
someone with no direct connection authority to vote on corporate
to business matters.
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
They can often bring a fresh venture succeed.
point of view to the strategic Functions of Advisory Board
planning process, along with
expertise that the founders may 1. The function of an advisory
not possess. board is to offer assistance to
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
1. Technical skill related to innovative advice and dynamic
business perspectives. Meeting quarterly
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
5. Expertise in finance, capital their control of their business by
acquisition, and IPOs establishing a board of directors
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
8. Honesty and integrity advice and network in the

industry. Advisory board, as an
 external group, could also
provide non-biased information
and advice to entrepreneurs.
Roles and
Responsibilities of Advisory
Board
1. Developing an understanding of
the business, market and
industry trends
2. Provide wise counsel on issues
raised by owners/directors or
management
3. Provide unbiased insights and
ideas from a third point-of-view
(not involved in the operation of
the business)
4. Encourage and support the
exploration of new business
ideas
2. Companies should seek advisory
board members whose qualities
complement the existing board
of directors and not mask gaps
in knowledge or skill in the main
board. An advisory board
strengthens the existing board,
but not interfering with
authorities of the existing board.
The former editor of The
Economist, also an advisory
board member, once said, They
(advisory boards) are there to
give focus to or sometimes
challenge research and
intelligence work being done in
the company, thus avoiding
groupthink and giving direction
on big picture issues.
How can be the Advisory
Board effective?

5. Act as a resource for executives An effective advisory board can

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 directors.
governance framework that
Benefits of Advisory Board
enable sustainable growth of the
company 1. Less compensation compared to
board of directors.
8. monitor business performance
2. Fiduciary duty/ liability issues
9. impose challenges to directors
and management that could The Mentor Board
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
1. The main reason to create an the entrepreneurs spirit and warn
advisory board is to seek the entrepreneurs when he or she is
expertise outside of the heading own a wrong path.
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.
 MISTAKES TO AVOID WITH or ownership stake and
TEAM AND BOARDS participate in the potential
upside if the startup is a
Mistakes To Avoid With
success.
Boards
It is important to clearly
Appointing only friends
understand what each team
and family members instead of member is contributing and
the most qualified people will value it appropriately. If there is
not result to in the best advice three founders, its probably not
for the entrepreneur. a wise idea to give equal stakes:
1. Expecting the board to always First, because founders,
support management
its probably not a wise to
2. Failing to establish adequate contribute
structure
Second, it creates the
3. Lacking commitment and trust potential for an impasse with no
in the board recommendations one with enough power to make
a decision.
Mistakes to avoid with
Teams

Assembling the extended The Buy-Sell Agreement

founding team is serious
undertaking, and failure to put
the team together effectively
could have severe ramifications
for the future of the business.
1. Not providing feedback
2. Not making time for your team
3. Being too friendly
4. Failing to define goals
5. Misunderstanding motivation
6. Not walking the walk
7. Not delegating
One of the biggest
Closely held business
owners often enter into buy-sell
agreements to assure that the
business remains in the hands of
the current owners and/or that a
ready market exists for a
departing owners interest in the
event of a certain triggering
event. Despite the widespread
use of buy and sell agreements
advisors can often add value by
identifying and addressing one
of several common mistakes
associated with the agreements
themselves or planning
associated with such planning.

mistakes is cash-strapped Mistake #1- Fixed Valuation

entrepreneurs make is giving
team members of stock in lieu of First, buy-sell agreement
salary of fees. are often created at the time the
business is formed
Equity Distribution
Second, even if the buy-
One of the biggest sell agreement makes reference
incentives for taking on the risk to the use of a formula, the
of a startup venture is the appropriateness of the
opportunity to acquire an equity
 designated formula may have
changed over time.
Mistakes #2- Failing to Fund
The second major
mistakes associated with buy-
sell agreements involves failure
to fund, inadequate funding or
improper arrangement of the
funding vehicle.
Two types of Buy-Sell
1. Cross-Purchase Agreement
a document that allows a
companys partner or other
shareholders to purchase the
interest or shares of a partner
who is deceased, incapacitated
or retiring. Cross-purchase
agreement is used in business
continuation planning.
2. Stock Redemption Agreement/
Entity Buy-sell Agreement
is a binding agreement
that is implemented by the
owners of a business to facilitate
the orderly transition of a
business interest in the event of
the death, disability
retirement of a business owner.
OUTSOURCING WITH
INDEPENDENT CONTRACTORS
The cost of searching for and
contracting with an independent
contractor (IC).
Transferring activities to the IC
Managing the independent
contractor.
Bringing the activity in-house.
The IRS And Independent
Contractors
The law of agency
defines the terms employee and
independent contractors. 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 use in
producing the result.
Types of Independent
Contractors
Consultants
Is an experienced
individual that is trained to
analyzed and advise a client in
order to help the client make the
best possible choices
Two types of
Consultants
1. INTERNAL CONSULTANTS
someone who
operates with an organization
but is available to be consulted
or on areas of specialism by other
department of individuals
2. EXTERNAL CONSULTANTS
someone who is
employed externally whose
expertise is provided on a
temporary basis, usually for a
fee.
PROFESSIONAL EMPLOYER
ORGANIZATION (PEOs)
Enable clients to cost
effectively outsource
compensation the management
of human resources, employee
benefits, payroll and workers
compensation.
Manufacturing Support
 Offer you the necessary sales representatives do their
post-production support required more effectively.
to operate the project efficiently
Contact costumers
and to smooth out any
and prospects to arrange
unexpected.
appointment or to update them
Sales Support on the status of an order or a
delivery.
Team carriers out a
number of functions to help