Kissimmee

I am a firm believer in agendas for all meetings as it allows everyone to properly prepare for the meeting. I also strongly believe in people showing up to the meeting prepared which means where possible preparatory information or at least summaries of this are distributed to meeting participants prior to the actual meeting. Having said this, it is the responsibility of the meeting organizer to do this. If you are not the meeting organizer and no agenda is offered you may want to speak with the organizer and offer to help in preparation of an agenda and their view on what material can be made available prior to the meeting to better prepare participants. I find distributing material for participants to review prior to the meeting avoids wasting time in the meeting for those reviews.  Of course, there will be times when because of confidentiality it is not advisable to distribute material outside of the meeting.  However, it may still be possible to distribute some summaries  that will prepare participants for discussions and reviews to be held during the meeting.  With the collaboration tools available with today's technology, it should be possible to prepare materials for secure review prior to meetings and this may help address those confidentiality concerns. I find that it is also important to make certain that the participants list for meetings is carefully controlled.  Every participant should be there for a reason related to the purpose of the meeting.  Holding a meeting simply for communicating information is generally a huge waste of valuable time and reduces individuals productivity.  There too many effective ways to communicate among team members than to waste their time with unnecessary meetings. Agendas should lay out the topics for discussion in the meeting with identified objectives and outcomes expected.  If you find that it is difficult to identify specific outcomes or objectives for the meeting, this is likely a key indication that the meeting is an unnecessary waste of time.

I have found that many Universities offer either accelerators or incubators with a focus on launching and growing startups around ideas stemming from research work being done within and around the university community.  Many of these offer opportunities for mentoring, leveraging G &amp; A resources, entrepreneurial networking, and access to the University community and its resources and connections.  Some even have access to various seed capital funding sources for qualified opportunities. Of course, some are better launching pads than others.  I do find that while all of the above can be valuable to an early stage company, it does not represent the sales and marketing needs challenges that so many early stage companies lack. Revenues, positive cash flow, and profitability are so important to early stage ventures.  Without achieving these even the best ideas are likely to die an early death.  In my experience with entrepreneurs these are often the critical skills most lacking in their teams.  So many early stage companies seem to pursue the "Field of Dreams" or "build it and they will come" tactics that may show some early promise and then quickly fade. I agree with the observation that real world sales and marketing capability is seldom found as a shared or available resource within accelerators or incubators.  Unless the service or solution offered by the startup is suitable for a licensing strategy, which University incubators in particular are often helpful with, I have not found incubators to be particular adept at helping with sales or marketing in early stage companies they assist. As with anything, I suppose there are exceptions, but this certainly reflects my own experience with incubators, accelerators, and early stage companies.

Business transformations are generally undertaken when a  business finds itself behind the curve, lacking innovation, failing to accomplish its objectives, and often misaligned with fundamental changes in both the macro-environment and the dynamics of its targeted markets. I agree with the statements already made on fundamental elements of a successful transformation.  However, I would also advocate for institution of an organizational discipline of constant and consistent transformation in the business going forward.  I do not believe that transformation should be seen as a singular event or even a periodic cycle.  Constant adaptation and innovation in reaction to changing circumstances, the introduction of new risks and opportunities are genetic markers of the most successful enterprises.

The issue of ownership of IP is one that many entrepreneurs fail to properly address.  The proper approach is to make sure that all employees execute an Employment Agreement prior to commencing employment that includes a clear definition of "work product" and IP ownership.  If the product is to be created through an outsourcing arrangement with a third party, the issue of IP ownership should be clearly covered in the Contract for Services or Services Agreement.  In both cases the entrepreneur or business owner should seek counsel from a competent attorney in drafting these documents.

Allocating Equity in a Startup 







Building a business is not unlike
constructing a building, except that the required materials aren't tangibles
like bricks and mortar, but intangibles such as a great idea, strategy,
execution and most importantly capital.
However, with multiple founders showing up with varying contributions at
different times, it's hard to know how to divide the ownership of the company. This is particularly difficult when the
company is in its early startup or development phases. However, before outside capital is sought,
the division of equity ownership amongst the founders is a matter than must be
settled. How much should be given to the
entrepreneur bringing the idea versus the individuals required to execute? What about the investors contributing the
initial development and launch capital?

 







Fair and equitable allocation of
equity ownership is a question frequently asked of Harbour Bridge Ventures. While leaving this question ultimately to be
settled by the entrepreneurial founding team, we have always suggested that a
winning business partnership is built on compromise and fairness. But to split up equity fairly, all founders
must agree on exactly what "fair" is. The option we most often suggest is for
founders to think like investors when determining the value of their
contributions, even if they have no plans to raise funds. As there is a significant volume of
information and experience of valuations conducted by investors, this can be
useful in providing a market-tested, third-party framework for equity
allocations. By relying on such
market-driven criteria, no party needs to prove the value of his or her
particular contributions.

 







So let's take a closer look at
how professional investors value founders' contributions in a Series A round,
when a young company closes its first phase of financing. Typically, after such a deal, founders will be
left with 30% to 50% of the total equity.
That represents the product, the strategy, and other noncash
contributions. The investors will get
30% to 50% of the equity in exchange for 12 months to 24 months of operating
capital. Some 10% to 20% is reserved for
future hires, including key managers.

 







Of the 30% to 50% set aside for
the founders, the idea alone commands little payout. If contributing nothing more, the person who
came up with the idea--no matter how brilliant--can expect to hold on to less
than 5% of the company. After all, ideas
are bound to evolve many times during the life of a startup. Even the principals of venture successes such
as Google and Facebook only began to see a premium after the Series B and C
rounds, once the businesses started to gain traction.

 







Instead, the bulk of founders'
equity is granted for developing the product, building a viable business plan,
and leveraging relevant experience and contacts. Founders responsible for the product or
strategy should be compensated for their efforts, with a premium paid for a
proprietary, working product. Founders
who join the company full-time deserve more equity than those making early,
one-time contributions. Opportunity
costs are a factor, too. Equity should
not only compensate founders who are giving up lucrative careers but also
motivate them to propel the startup over the next four to five years.

 







Then there's the importance of
cash. Even companies launched through bootstrap
capital generally require some working capital to finance day-to-day operations
until the company can support itself and its employees. This may be far less than a venture
capitalist is likely to invest, but that's partially offset by the fact that
the company, and any investment, is much riskier in the early stages. And these days, capital is frequently scarce
and difficult to raise for early stage companies. In a tough fund-raising climate, cash commands
a premium. In the current financial
climate, Investors are valuing potential portfolio companies at 40% to 60% less
than they did in 2007, when private equity flowed relatively more freely.

 







A final point is that, as time
passes, the company will become less risky, and those who take on less risk
deserve less equity. So later investors
in a business that is cash flow-positive will receive far less for their contributed
capital. Similarly, a founder or senior
manager who joins a startup after it already has some traction should expect
less equity -- the foundation, after all, for later success and growth has
already been laid -- than an early founder who took potentially greater risk.

The easiest approach to making this type of decision is to look at the commercial value of your time and services that you are being asked to invest as a financial investment in the startup.  If you would be willing to make this financial investment in the company, the next step might be to determine based on an established or reasonable valuation for the company what that investment would mean in terms of an equity stake in the startup.  If you still feel that this represents a good investment than structure this as a financial investment in the company, with the understanding that your financial contribution would be used to fund the services you are contemplating providing.  For a variety of reasons, relating to a lot of considerations better left to discuss with your accountant and attorney, I would then make the actual financial investment conditioned on a firm agreement that the funds would be used to pay for the services of your firm as a use of funds for the investment.

Harbour Bridge Ventures has served in an advisory capacity to a number of startups and early stage companies. Additionally, I personally serve on the both Boards of Directors and Advisory Boards of a number of privately held companies and have been an early investor also in several of those companies. Each of those situations varies in terms of the nature of the compensation arrangements involved. However, the common element in all of those is that the compensation has been based on real value provided and the amount of effort and time contributed to each situation. In cases where I have been an investor, my compensation has normally been in the form of the equity owned as a result of my investment. My involvement as a Director or Advisory Board member in those situations is directly tied to my wishing to closely watch over and increase the value of my investment. In many cases, my participation as a Director is a condition of my investment. Where my firm is serving in a professional advisory capacity to the company, we normally charge a monthly fee for our services either on a retainer or hourly basis and may also take a small, generally less than 5% equity stake which is granted only after certain milestones are achieved to which we have made a direct contribution.

 

 In answer to your specific question and the particular situation you refer to, it seems to me that the equity stake granted to the directors not serving in active roles in the company other than participation in four meetings annually is already overly generous. In making this comment, I assume they have not made a financial investment or contribution to the company since you did not mention any investment made by them for their equity stake. Had we been advising the founders on equity allocation, we would have never suggested a stake greater than single digit percentages and often not more than 2% or 3% at most simply for serving as directors. In fact, we would like to see the directors in early stage companies taking a much more active role in promoting the company's success than simply attending several meetings per year. We like to see directors who can provide industry expertise and a network of contacts they will use in productive fashions to help the company succeed.
 
 I see no reason in this situation to be paying additional compensation to the directors beyond their equity stake. In fact, I would likely be seeking to consider recapitalizing the company and in the process diluting the stakes of the current directors and reconstituting the Board. Not likely a popular suggestion with the current directors. However, it sounds like the initial equity allocation was not carefully thought through.

David:

 I understand. I hope my suggested answer to your question was helpful. It is most important that you have an intermediate to longer term plan for the evolution of your capital stack through at least the first several rounds of financing. This also will reassure any potential investors you approach that you have carefully thought this issue through. For any serious Angels or Institutional capital sources the lack of a realistic plan for not just seed capital but several rounds of anticipated capital raises is a real turn off.

Good luck with your opportunity.

John, I agree with you. Hence my reason for initiating the discussion.  I have seen far too many poorly run and time wasting meetings and wished to have commenters provide some suggestions for improvements.

When building a team it is important that new hires can make a real contribution to accomplishing the team's and the organization's objectives and lift the rest of the members of the team.  The ability to work well as an integral part of the team and communicate well are always important skills I look for.  I believe this is true at every new hire level, from individual contributors to senior leadership and managers.  I also seek out people who are passionate about what the organization and team they will be joining are doing.  It is important that everyone care deeply about the company's vision, mission, and objectives and it willing and ready to "go the extra" mile to achieve those.

Virtually every startup with a real runway is likely to have multiple rounds of financing where the investors will have a strong say in valuation and structure of the capital stack.  It is also unlikely that you will be able to obtain and retain non-dilution clauses related to any seed stage equity stake granted.  Therefore, whatever stake is granted during seed stage growth is likely to be seriously diluted over time.  Unless you are truly one of the controlling co-founders of the enterprise you are unlikely to have much control over your stake.  Having said all of this, remember that much depends on the eventual growth and success of the company.  Many early stage employees of Apple and Google are millionaires many times over based on what were initially very small equity positions.  Also remember for every Apple and Google there are tens of thousands of ventures that went to a zero valuation pretty quickly. So, what is the answer to your question?  In my view, you need to look at the opportunities presented like an investor.  If you decide to take a stake in a seed stage company, you will be making an investment of time, energy, and also a financial commitment of some magnitude either out of your own funds or by virtue of opportunity cost.  After considering the risks entailed in that investment, do you feel that there is a sufficient potential return to justify your investment?

I have been both a successful entrepreneur building a company from a small, seven person startup to a successful business with a global footprint and over 1500 employees.  I can assure you from the day my co-founders and I launched the business, while we worked without pay for some time, every one of our employees got paid commencing the day they first came to work for us. I have also served in various advisory capacities to numerous startups and early stage as well as mature companies, and in those roles have never "worked for free."  While I may have structured a portion of my advisory compensation based on success factors, I also believe in both providing significant value and being compensated for that value. Founders of a business who are bootstrapping the business in its early stages may choose to structure a portion of their employees' compensation in the form of equity.  Indeed this is often found in many startups particular in technology companies.  However, you should also be very careful to maintain full compliance with all wage and hours laws and regulations.  Failing to heed compliance needs and maintain sound HR practices can result in serious legal consequences. When structuring compensation arrangements for both early employees and advisers you may use it is important to remember that you are most likely to "get what you pay for."  Expect to share value in order to receive value. In all of my entrepreneurial ventures I have never asked anyone to work for me without compensation.

Allocation of equity in a startup is an issue on which entrepreneurs frequently take too short sighted a view. If you anticipate growing beyond just being a small, "life style" business, you will likely require multiple rounds of financing and also need to deal with allocation of equity stakes to key executives and employees. Your question is worded in such a way that it appears you are not thinking about developing an intermediate to longer term plan for your capital stack. It also seems you anticipate only you and a single co-founder holding 100% of the equity. I believe this is a very naive view of planning a capital stack for a business expected to grow beyond a simple partnership of two individuals.


 


 I have previously provided the following information on equity allocation in a startup in response to another query in Founders Discussions. I will repeat it here as I hope it will provide a broader perspective on the issue of equity allocation in a startup.


 


 


Allocating Equity in a Startup



 













Building a business is not unlike
constructing a building, except that the required materials aren't tangibles
like bricks and mortar, but intangibles such as a great idea, strategy,
execution and most importantly capital.
However, with multiple founders showing up with varying contributions at
different times, it's hard to know how to divide the ownership of the company. This is particularly difficult when the
company is in its early startup or development phases. However, before outside capital is sought,
the division of equity ownership amongst the founders is a matter than must be
settled. How much should be given to the
entrepreneur bringing the idea versus the individuals required to execute? What about the investors contributing the
initial development and launch capital?



 














Fair and equitable allocation of
equity ownership is a question frequently asked of Harbour Bridge Ventures. While leaving this question ultimately to be
settled by the entrepreneurial founding team, we have always suggested that a
winning business partnership is built on compromise and fairness. But to split up equity fairly, all founders
must agree on exactly what "fair" is. The option we most often suggest is for
founders to think like investors when determining the value of their
contributions, even if they have no plans to raise funds. As there is a significant volume of
information and experience of valuations conducted by investors, this can be
useful in providing a market-tested, third-party framework for equity
allocations. By relying on such
market-driven criteria, no party needs to prove the value of his or her
particular contributions.



 














So let's take a closer look at
how professional investors value founders' contributions in a Series A round,
when a young company closes its first phase of financing. Typically, after such a deal, founders will be
left with 30% to 50% of the total equity.
That represents the product, the strategy, and other noncash
contributions. The investors will get
30% to 50% of the equity in exchange for 12 months to 24 months of operating
capital. Some 10% to 20% is reserved for
future hires, including key managers.



 














Of the 30% to 50% set aside for
the founders, the idea alone commands little payout. If contributing nothing more, the person who
came up with the idea--no matter how brilliant--can expect to hold on to less
than 5% of the company. After all, ideas
are bound to evolve many times during the life of a startup. Even the principals of venture successes such
as Google and Facebook only began to see a premium after the Series B and C
rounds, once the businesses started to gain traction.



 














Instead, the bulk of founders'
equity is granted for developing the product, building a viable business plan,
and leveraging relevant experience and contacts. Founders responsible for the product or
strategy should be compensated for their efforts, with a premium paid for a
proprietary, working product. Founders
who join the company full-time deserve more equity than those making early,
one-time contributions. Opportunity
costs are a factor, too. Equity should
not only compensate founders who are giving up lucrative careers but also
motivate them to propel the startup over the next four to five years.



 














Then there's the importance of
cash. Even companies launched through bootstrap
capital generally require some working capital to finance day-to-day operations
until the company can support itself and its employees. This may be far less than a venture
capitalist is likely to invest, but that's partially offset by the fact that
the company, and any investment, is much riskier in the early stages. And these days, capital is frequently scarce
and difficult to raise for early stage companies. In a tough fund-raising climate, cash commands
a premium. In the current financial
climate, Investors are valuing potential portfolio companies at 40% to 60% less
than they did in 2007, when private equity flowed relatively more freely.



 














A final point is that, as time
passes, the company will become less risky, and those who take on less risk
deserve less equity. So later investors
in a business that is cash flow-positive will receive far less for their contributed
capital. Similarly, a founder or senior
manager who joins a startup after it already has some traction should expect
less equity -- the foundation, after all, for later success and growth has
already been laid -- than an early founder who took potentially greater risk.

I suggest you consider tying some performance metrics into the compensation formula that advantage your business and the relationship. Since you have indicated that the relationship is an outsourced customer support relationship metrics related to that activity would be most appropriate. Without understanding the specifics of your product or the nature of support activities the specific metrics relevant to this relationship are ones you will need to develop yourselves. However, general ones that may be appropriate would include such metrics as support cases resolved on first touch (no recall required), customer satisfaction survey metrics related to customer support activities, and customer satisfaction metrics related to "would recommend to others ratings." I am sure there are likely ones that could related to the specific nature of your offering and the support activities as well. As to a suggested percentage of gross revenues to incorporate in your formula, that is more difficult to identify without more specifics.  However, in pricing customer support and maintenance related to enterprise software products the most common formula used in the industry is an annual fee of approximately 18% to 20% of the initial license cost.  Note that this is a percentage of license fee not a percentage of gross revenues.  If you can supply more information about the nature of your offering, its pricing, and the support activities, it may be possible to suggest a more appropriate formula based on your revenues.  I do suggest that this is a topic you take up with either your internal finance team or external finance adviser.  Whatever formula you use will need to fairly compensate and motivate your outsource supplier as well as allow your own business to flourish and prosper profitably. Good luck with your opportunity.

Anton, Yes it can work, however the model certainly has both its challenges and potential strengths.  I am presuming that given your progress to date you share a common vision and have clearly defined the roles of each participant.  The challenges will arise as the opportunity you have launched grows in size and additional resources and people must be brought in to support that growth.  You will need to think carefully about how to distinguish what role or roles each location in the enterprise will fulfill and how to manage effectively the coordination of the teams and their functions.  The right command and control mechanisms will need to be put in place.  A common corporate culture and ethic shared by the original founders will need to effectively shared and promoted amongst all who join in the future and moderated by the founders.  The diversity of the founders can also be a strength if you understand how to use it effectively.  I wish you luck.  My own history saw my partners and I quickly grow a small technology company to be a global leader in its space with an extensive network of over 1500 employees on five continents and many countries in each.  The challenges in managing that growth were extensive but the diversity of our workforce was also an important strength that helped us become a global leader.  Good luck and I wish you great success.<div> </div>

The suggestions offered so far appear sound and I would not disagree with any of them.  It seems from your question that one challenge you are encountering is spending the time of you and your team as well as the applicants when the applicants appear not to be a good cultural fit for the organization and it present members.  I would suggest that you first decide what are the "genetic markers" of the culture you aspire to create or perpetuate in the organization and among its team members.  Once you have documented it clearly and concisely, develop a set of survey questions that explore the likelihood of the applicants fit against that culture.  The questions may be open ended requesting a reply, multiple choice, or some other type such as true/false, etc.  Using a tool like Survey Monkey or some other online survey tool, you can then request applicants complete the survey and review online their answers before committing your own, your team's, or the applicant's time in a face to face interview.  You may find after the first few reviews it is necessary to refine the survey which can be easily accomplished with a tool such as Survey Monkey.  I hope this helps.

There is really no effective way to prevent employees from discussing compensation, so you should expect that despite any policies or trying to create a culture of keeping compensation confidential, bad news has a way of working its way to the surface.  Hence, the best suggestion is to make every effort to see that compensation throughout a company is as fair as it can possibly be. In my own case, I had a global software and services company with offices in many different locations around the world.  This makes compensation even more difficult by adding layers of location and culture specific issues to compensation policies and practices beyond those found in many companies.  I found the best test to use on fairness of compensation practices, policies, and levels is to feel that you should be confident enough in your compensation for all that you be comfortable posting the individual compensation levels of every employee on a bulletin board for all to read. Of course, I do not suggest you actually post them.  However, you should realize that it is inevitable if you have unfair, unjust, or inappropriate inequities in compensation, they will be exposed and communicated.  Therefore, take every step possible to see that compensation for all is fair, just, equitable and defensible. I also suggests that detail compensation policies and practices as well as all policies and practices related to performance reviews are communicated to all at employee orientations for new hires and also as part of the employee handbook or policies distributed to all in writing as well. If you need assistance in developing good human resource programs and policies there are many excellent sources available to HR professionals to assist you.

Just as qualified and experienced angel investors will undertake due diligence on prospective investment candidates, your client should do due diligence on prospective angel investors. How many times have they previously invested in startups? What is a typical investment amount they will consider? What has their experience been in their prior investments? Do they bring any potential synergy or experience as well as financial support to the opportunity? Do they have experience in this vertical or industry sector? Do they have any contacts in their network that can be helpful? Should they make an investment are their expectations in terms of their level of participation in the opportunity and eventual returns realistic and consistent with what is expected?
 
 Qualified and experienced angel investors will be able to answer these kind of questions and appreciate informed entrepreneurs. If the prospective investor has difficulty answering these questions, they may not be properly qualified as potential investors.
 
 I find many entrepreneurs have difficulty distinguishing between participants in a friends and family early stage round and a true angel round.

Devin,

 You have recognized one of the most important challenges facing every startup, earning a viable place in the market. When reviewing startup investment opportunities our group believes the viability of their Go to Market program along with an evaluation of the team are among the most important factors.

 

 Selecting the right resources for Marketing and Sales are indeed key to the success of your opportunity. Let's try to separate the two for a moment. Depending upon the nature of the opportunity and available resources and capital, the marketing needs of the startup may be served by either a marketing firm or a full time, employed marketing professional. Whichever you choose the evaluation process can be similar. I suggest you ask potential firms or candidates essentially to prepare and present a marketing program for your review and discussion with them that includes the essential elements of a good marketing program along with a proposed budget for those activities. If they are well qualified this should be relatively easy for them to accomplish and will allow you to compare the proposed programs. Additionally, request references of others they have assisted previously to help evaluate their track record of success and ability to work effectively as a part of a team. Of course, there will be other evaluation criteria you will want to explore such as cultural fit, knowledge of and experience with your target market and industry. All of this should help in assessing various resources.

 

 Lead sales professional resources, in our view, cannot be outsourced in most instances. With a few exceptions I favor employing strong sales professionals directly. Even if your start up is pursuing channel partnerships or distributors, you will need a sales professional to acquire and manage those. Your evaluation should include careful examination of their successful history in your industry and with your intended target market. Asking questions such as "Tell me who the first 10 prospects you feel would be good targets and who you would contact in those organizations," will help you evaluate their familiarity with your target market. Role playing several types of sales scenarios, including cold calls is a good technique also. I would ask them to describe what they believe is an ideal sales cycle for your business opportunity. Request they include the gates that exist between each sales cycle stage and what they believe is the normal elapsed time in each stage of the cycle. True sales professionals should find it easy to address these sort of questions. Again, you will also want to evaluate their prior business development skills, cultural fit, etc. This type of approach to evaluating candidates should help you choose the most likely candidates to succeed in this role for your opportunity.

 

 Good luck with it.

Think About It ... A quote sometimes attributed
 to Dave Barry said it best: “If you had to identify, in one word, the 
reason the human race has not achieved, and never will achieve, its full
 potential, that word would be ‘meetings.’ ” What practices do 
you adhere to in meetings to assure they contribute to achieving the 
meeting's objectives as well as those attending and the organization 
achieving their full potential?

Think about it - Are your meetings productive?

Serial entrepreneur with track record of multiple successes in building successful enterprise scale companies and assisting others in accomplishing the same.

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