The New Venture TeamThe New Venture Team

Chapter 8Chapter 8

DowlingDowlingBA 560BA 560

Fall Term 2006Fall Term 2006

The New Venture TeamThe New Venture Team

The founding team has The founding team has entirely different entirely different characteristics than characteristics than does the lone wolf.does the lone wolf.

An entrepreneur makes a An entrepreneur makes a living … living …

the team-builder creates the team-builder creates an organization.an organization.

The New Venture TeamThe New Venture Team

Venture capitalists Venture capitalists believe teams are believe teams are important. important.

Team composition is Team composition is key. VC investors often key. VC investors often help shape – and help shape – and reshape – management reshape – management teams.teams.

The New Venture TeamThe New Venture Team

CohesionCohesion TeamworkTeamwork IntegrityIntegrity Commitment to the long haulCommitment to the long haul Commitment to value creationCommitment to value creation Sharing the harvestSharing the harvest

Shared philosophies Shared philosophies anchor teams:anchor teams:

The New Venture TeamThe New Venture Team

Team members will contribute high value Team members will contribute high value to a venture if they complement and to a venture if they complement and balance the lead entrepreneur – and balance the lead entrepreneur – and each other.each other.

The New Venture TeamThe New Venture Team

Questions for the lead entrepreneur/Questions for the lead entrepreneur/

founder:founder:

Are my strengths in the areas that are Are my strengths in the areas that are critical to success in my business?critical to success in my business?

Do I have the key contacts I’ll need, or Do I have the key contacts I’ll need, or must I look to partners in this area?must I look to partners in this area?

Can I attract and effectively manage a Can I attract and effectively manage a “first-team” of all-star partners?“first-team” of all-star partners?

The New Venture TeamThe New Venture Team

Additional questions:Additional questions: Is formation of a team desirable or necessary?Is formation of a team desirable or necessary? Do I want to grow a higher potential company?Do I want to grow a higher potential company? What talents, know-how, skills, track record, What talents, know-how, skills, track record,

contacts, and resources are currently available?contacts, and resources are currently available? What is needed to succeed?What is needed to succeed? Who is needed to complement me?Who is needed to complement me?

The New Venture TeamThe New Venture Team

‘‘That’s some catch, that Catch-22.’That’s some catch, that Catch-22.’

Most new Most new ventures hope ventures hope to ‘boot-strap’ to ‘boot-strap’ it, and bring it, and bring on team on team members only members only when they when they think they can think they can afford them.afford them.

With a team in With a team in place, the place, the venture’s valuation venture’s valuation is higher and the is higher and the ownership share ownership share that will have to be that will have to be parted with is parted with is smaller.smaller.

The New Venture TeamThe New Venture Team

Additional considerations:Additional considerations: Values, goals & commitmentValues, goals & commitment

It’s critical that a team be anchored by shared values It’s critical that a team be anchored by shared values and goals.and goals.

Definitions of rolesDefinitions of rolesCarefully assign roles to team members and maintain a loose, Carefully assign roles to team members and maintain a loose,

flexible structure with shared responsibility and information.flexible structure with shared responsibility and information.

Peer groupsPeer groupsThe support of family, friends, and co-workers can be vital.The support of family, friends, and co-workers can be vital.

The New Venture TeamThe New Venture TeamCommon pitfallsCommon pitfalls A team may lack skill dealing A team may lack skill dealing

with power struggles and other with power struggles and other issues common to start-ups.issues common to start-ups.

A team may not seek advice of A team may not seek advice of competent advisors.competent advisors.

A team may believe there are A team may believe there are no deficiencies in the lead no deficiencies in the lead entrepreneur or the entrepreneur or the management team.management team.

The New Venture TeamThe New Venture TeamMore pitfallsMore pitfalls Teams forget that founders leave. Teams forget that founders leave.

Often, teams fail to put in place Often, teams fail to put in place mechanisms to help facilitate mechanisms to help facilitate graceful divorces that will provide graceful divorces that will provide for the internal adjustments for the internal adjustments required as the venture grows.required as the venture grows.

Teams may take trust for granted. Teams may take trust for granted.

The New Venture TeamThe New Venture TeamThe Reward SystemThe Reward System

Rewards from new ventures Rewards from new ventures include both the financial include both the financial rewards such as stock, rewards such as stock, salary and benefits salary and benefits plusplus the the chance to realize personal chance to realize personal growth and goals, exercise growth and goals, exercise autonomy and develop skills autonomy and develop skills in particular roles. in particular roles.

The New Venture TeamThe New Venture TeamSlicing the founder’s pieSlicing the founder’s pie

Building a great team – and Building a great team – and sharing the wealth with sharing the wealth with widespread ownership – widespread ownership – is much more critical than is much more critical than what percentage of the what percentage of the company is owned by company is owned by the founders.the founders.

Slicing the Founder’s PieSlicing the Founder’s Pie

How much stock ownership should go to How much stock ownership should go to whom?whom?

– Share the wealth with those who help to Share the wealth with those who help to create the value and thus the wealthcreate the value and thus the wealth

– Realize a harvest of at least 5 to 10 Realize a harvest of at least 5 to 10 times the original investmenttimes the original investment

– Make sure the company prospers and Make sure the company prospers and grows thus creating a huge, shared piegrows thus creating a huge, shared pie

Distribution IssuesDistribution Issues

DifferentiationDifferentiation– Reward system recognizes differences in Reward system recognizes differences in

contributions among team memberscontributions among team members

PerformancePerformance– Reward is a function of performance (as opposed to Reward is a function of performance (as opposed to

effort)effort)

FlexibilityFlexibility– Reward system acknowledges and accounts Reward system acknowledges and accounts

for changes in contributions of team for changes in contributions of team membersmembers

Stock-Vesting AgreementStock-Vesting Agreement

Stock-vesting agreement—agreement Stock-vesting agreement—agreement between venture and team member used between venture and team member used to guard against the event that some to guard against the event that some portion of the stock has been earned and portion of the stock has been earned and some portion will remain unearned, as some portion will remain unearned, as when a team member quits or dies; the when a team member quits or dies; the venture places the stock purchased by venture places the stock purchased by team members in escrow to be released team members in escrow to be released over a two- or three-year periodover a two- or three-year period

Stock-Vesting AgreementStock-Vesting Agreement

Fosters longer-term commitment to the Fosters longer-term commitment to the success of the venturesuccess of the venture

Provides a method for a civilized, no-fault Provides a method for a civilized, no-fault corporate divorce if things do not work outcorporate divorce if things do not work out

Establishes a period of years, often four or Establishes a period of years, often four or more, where founding stockholders can more, where founding stockholders can “earn out” their shares“earn out” their shares

Considerations of ValueConsiderations of Value

IdeaIdeaBusiness Plan Business Plan

PreparationPreparationCommitment & RiskCommitment & Risk

Skills, experience,Skills, experience, track record, and/or track record, and/or contactscontacts

ResponsibilityResponsibility