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)

Market Research, 2. Functionality (Skill Diversity)
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
 they hold themselves mutually
accountable.
Founding Team
The rock on which to
build the company
Key attributes of an
entrepreneur on the founding
team:
Passion,
Determination, Resilience,
Tenacity, Agility, and
Curiosity
Characteristics of an
Effective Team
1. The lead entrepreneur and the
team share the same vision for
the new venture.
2. The team members are
passionate about the business
concept and will work as hard as
the lead entrepreneur to make it
happen.
3. One or more members of the
founding team have experience
in the industry.
4. The team has solid industry
contacts with sources of capital.
5. The teams expertise covers the
key functional areas of the
business: finance, marketing,
and operations.
6. The team members have good
credit ratings; this will be
important when the team seeks
financing.
7. The team is free to spend the
time a start-up demands and
can endure the financial
constraints of a typical start up.
Significant Factors For
Founding Team Composition
1. Homophily (similarity)
The extent to which
the characteristics of founding
team members such as gender,
race, age, values and beliefs are
similar.
2. Functionality (skill diversity)
The degree of
diversity among team members
with respect to the leadership
skills and task expertise.
3. Status Expectations (cultural
bias)
Widely held cultural
biases regarding status (such as
men having higher status than
women) frequently affect the
process of task group formation.
4. Network Constraint (social
contacts)
The ability to
choose members of a team is
constraint by structural
opportunities for social contact.
5. Ecological Constraint
(geographic distribution)
The size of the
population of potential team
members and their geographic
proximity is critical in the
information of founding teams.
Special Issues for High-Tech
Teams
Putting Structure On The
Organization Before Its Time
Entrepreneurial
teams should operate as teams
as long as possible, particularly
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.
Increasingly, however, we are
seeing more and more firms
going international STARTUP.
And these Startups are generally
being founded by teams.
 Because international What attorneys can do
startups are relatively within a particular area of
vulnerable, due to their expertise?
operations being at a distance,
Advise the entrepreneur in
they usually seek partnerships
to provide financial, political and selecting the correct
cultural resources and the organizational structure: sole
contracts they will need to be proprietorship, partnership,
successful. LLC, or corporation.
Advise about and prepare
Rules for Friends and documents for acquisition of
Families intellectual property rights
and for licensing
Friends or Family members agreements.
should possess real skills and Negotiate and prepare
experience that the business contracts for the
needs to be successful
entrepreneur, who may be
They should have the same buying, selling, contracting,
work ethic as the entrepreneur or leasing.
is a workaholic and loves it and Advise the entrepreneur on
a family member is a slacker,
compliance with regulations
there will be problems.
related to financing and
If there are family members on credit.
the startup team, there should
What attorneys can do within
be outsiders on the advisory
a particular area of
board and/or board of directors
expertise?
so that the company will have
the benefit of objective input to Keep the entrepreneur
the business. apprised of the latest tax
reform legislation and help to
The relationship with family and
minimize the ventures tax
friends should be treated as a
burden.
business relationship. The
responsibilities and duties of all Assist the entrepreneur in
should be clearly spelled out, complying with federal,
and everyone should understand state, or local laws.
how disagreements will be
settled. As much as possible, the Represent the entrepreneur
activities of the business should in any legal actions as
not be brought home at night. advocates.

Seeking Professional Advisers What should entrepreneurs

Attorneys
Professionals who
typically specialize in one area
of the law (such as taxes, real
estate, business, or intellectual
property) and can provide a
wealth of support for the new
venture.
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
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.

systems for operations, as well

as payroll. BANKERS AND INSURANCE
AGENTS
During tax season, the
entrepreneur then goes to the Bankers
accountant.
 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
Approving annual budgets;
Accounting to the stakeholders
the organizations performance
Boards of privately owned
corporations vs. boards of
publicly owned corporations

Protection against Privately owned

financial loss arising out of the corporations - the
legal liability incurred by an entrepreneurial team owns all or
insured because of injury or the majority of the stock
damage resulting from the use The board of directors serve at
of a covered product or out of the pleasure of the
the liability incurred by an entrepreneur, who has effective
contractor after a job is control of the company
completed.
Publicly owned corporations-
Bonding
is a corporation whose
Also known as financial ownership is dispersed among
governance insurance is a type of the general public in many
insurance whereby an insurance shares of stock which are freely
company guarantees scheduled traded on a stock exchange or in
payment of interest and principal on a over the counter markets.
bond or other security in the event of a The directors have legitimate
payment default by the issued of the power to control the activities of
bond or security. the company and liability for
Seeking Personal Advisors what they do or fail to do.

Building a Board of Directors Boards Can Be Comprised

Of Inside Or Outside Members
Board of directors is a body of
elected or appointed by Inside Board Member- who is
shareholders who jointly oversee a founder, employee, family
the activities and the overall member, or retired manager of
managerial and operational the firm
aspects of the corporation. Have The Advantage Of
Duties of the Board of Complete Knowledge About
Directors Business

Governing the organization by Generally More Available Have

establishing broad policies and Demonstrated Their
objectives; Effectiveness In The Particular
Positions The Occupy In The
Selecting, appointing, Business
supporting and reviewing the
performance of the chief Outside board member-
executive; someone with no direct connection
to business
Ensuring the availability of
adequate financial resources;
 Outside directors are generally
beneficial for succession
planning and for raising capital
They can often bring a fresh
point of view to the strategic
planning process, along with
expertise that the founders may
not possess.
When choosing people
to serve on the Board of
Directors, entrepreneurs
should consider those who
have:
1. Technical skill related
business
2. Significant, successful
experience in the industry
3. Experience running a company
at the level the entrepreneur
wants to grow to next
4. Important contacts in the
industry
5. Expertise in finance, capital
acquisition, and IPOs
6. A personality compatible w/ the
rest of the board
7. Good problem-solving skills
8. Honesty and integrity
ADVISORY BOARD
Advisory Board
A group of
individuals who've been
selected to help advise a
business owner regarding any
number of business issues,
including marketing, sales,
financing, expansion and so on;
a body that advises the board of
directors and management of a
corporation but does not have
authority to vote on corporate
matters.
Is an informal panel
of experts and other people who
are interested in seeing the new
venture succeed.
Functions of Advisory Board
1. The function of an advisory
board is to offer assistance to
enterprises with anything from
marketing to managing human
resources to influencing the
direction of regulators. Advisory
boards are composed of
accomplished experts offering
innovative advice and dynamic
to perspectives. Meeting quarterly
or biannually, boards can
provide strategic direction,
guide quality improvement, and
assess program effectiveness.
2. Entrepreneurs, especially from
startup companies or small
business may not want to dilute
their control of their business by
establishing a board of directors
with formal responsibilities and
authorities. Thus, an advisory
board may be a more suitable
solution to entrepreneurs who
want access to high-quality
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 groupthink and giving direction
the business) on big picture issues.
4. Encourage and support the How can be the Advisory
exploration of new business Board effective?
ideas
An effective advisory board can
5. Act as a resource for executives
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
directors.
7. encourage the development of a
governance framework that Benefits of Advisory Board
enable sustainable growth of the
1. Less compensation compared to
company
board of directors.
8. monitor business performance
2. Fiduciary duty/ liability issues
9. impose challenges to directors
The Mentor Board
and management that could
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
the entrepreneurs spirit and warn
1. The main reason to create an the entrepreneurs when he or she is
advisory board is to seek heading own a wrong path.
expertise outside of the
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
2. Companies should seek advisory TEAM AND BOARDS
board members whose qualities
complement the existing board Mistakes To Avoid With
of directors and not mask gaps Boards
in knowledge or skill in the main
Appointing only friends
board. An advisory board
strengthens the existing board, and family members instead of
but not interfering with the most qualified people will
authorities of the existing board. not result to in the best advice
The former editor of The for the entrepreneur.
Economist, also an advisory 1. Expecting the board to always
board member, once said, They support management
(advisory boards) are there to
give focus to or sometimes 2. Failing to establish adequate
challenge research and structure
intelligence work being done in 3. Lacking commitment and trust
the company, thus avoiding in the board recommendations
 Mistakes to avoid with
Teams
Assembling the extended
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
mistakes is cash-strapped
entrepreneurs make is giving
team members of stock in lieu of
salary of fees.
Equity Distribution
One of the biggest
incentives for taking on the risk
of a startup venture is the
opportunity to acquire an equity
or ownership stake and
participate in the potential
upside if the startup is a
success.
It is important to clearly
understand what each team
member is contributing and
value it appropriately. If there is
three founders, its probably not
a wise idea to give equal stakes:
First, because founders,
its probably not a wise to
contribute
Second, it creates the
potential for an impasse with no
one with enough power to make
a decision.
The Buy-Sell Agreement
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.
Mistake #1- Fixed Valuation
First, buy-sell agreement
are often created at the time the
business is formed
Second, even if the buy-
sell agreement makes reference
to the use of a formula, the
appropriateness of the
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
post-production support required
to operate the project efficiently
and to smooth out any
unexpected.
Sales Support
Team carriers out a
number of functions to help
sales representatives do their
more effectively.
Contact costumers
and prospects to arrange
appointment or to update them
on the status of an order or a
delivery.