chapter 6 building the founding team. the biggest challenge “there’s plenty of entrepreneurs,...
TRANSCRIPT
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)
Size of the company
Revenue derived
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
Extended network
Capacity for innovation
Moral support
Higher social level of support
Increased skill set
Feedback
Way To
Success
Advantages of having a team for a start-up
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
Your advisors’ Network
Your extended Network
FriendsFamily
ProfessorsAlums
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
34
23
23
6
Pres ident VP Mktg VP Tech Control ler
Equal inequality
• Company B – 7 employees
• 22% to president, 15% each for four VPs, 9% each to two other contributors
Equity Distribution, Company B
22
15
1515
15
9 9
President VP1 VP2 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 one-time 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 part-time or a critical continuous need
– What trade secrets might be compromised if external expertise is used
External Team Members
Board of Directors
Board of Advisors
Accountants
Lawyers
Outside Investors
Virtual team
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
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
Types of Compensation
Problems that new venture teams face
Family Pressure
InterpersonalConflicts
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