Why would a CEO who had previously managed a start up have an advantage over one who had not? One reason is that he might have developed a unique set of “company building” skills. These are an unheralded set of skills that can make the difference between failure and success for a start up. What are they, and how does an executive obtain them?
“Company building” skills are unique to the early stages of a start up. They include tasks like forming a corporation., attracting a “virtual” team, deciding how to allocate founders shares of stock, bootstrapping a company until it is capable of “attracting” capital. These are tasks that are not generally performed by executives in large corporations, so being a general manager or a CEO and a large corporation does not necessarily prepare an individual to execute them well.
Let’s look at a few of the most important “company building” skills.
The initial incorporation of a company is straightforward if you use an attorney who knows how to do it. The trickier issue is, “When to incorporate?”One of the best ways to compensate your cofounders or initial team is by letting them purchase founders shares at a nominal price. But if you form a corporation and then try to bring founders on board a year or two later, you run the risk of creating some IRS tax issues. So, if you can, it’s best to assemble your initial team of cofounders at about the same time that you form the corporation.
Allocating shares of stock
Deciding how to allocate shares of stock amongst cofounders is tricky business. It is extremely important. If it’s not done correctly, you can have enormous personnel problems in the future . The objective should be to parcel out founders’ shares on the basis of “value contributed to the company.” This is always subjective, but you must try to allocate shares in proportion to each participant’s contribution, or expected contribution.
“Value contributed to the company” can refer to past contributions or to future contributions, or both. Your company might not exist had it not been for the invention of one of the founders. This is a valuable contribution. On the other hand. the invention will be worthless unless the company can turn it into a marketable product, which means you need to incentivize and reward future contributors.
I like to build a simple spreadsheet that attempts to allocate “points” to both past and future team members in proportion to their contribution. This will always be a subjective process, but, done thoughtfully, it is better than simply allocating founder shares on an equal basis, just to be democratic.
Writing a business plan “from scratch”
Developing strategies and writing a business plan for a newly invented product are not easy tasks. Again, these are not the kinds of things that most executives in large companies learn. Writing a business plan from scratch is a creative process. It requires imagination about what the product will be, how best to describe it, who the customers will be, what the market will look like, and so on. It usually requires some market analysis and detailed competitive analysis. Working through the various planning levels of mission, objectives, strategy, competition, operational plan, team composition, and funding requirements, can be a daunting task, even for an experienced corporate planner.
Many successful start ups begin with a “phantom” or “virtual” team of people who create the initial value. Often the these are people with full-time jobs who spend part of their evening and weekend time developing a working prototype or an initial product. The startup CEO must find these people, and he must find a way to incentivize them with small percentages of the company’s stock.
Proof of concept
Getting to some kind of “proof of concept” is very important for many startups. Investors try to minimize the risk they take in an investment, and one risk they really don’t like is. “Will the product work?” This is why it’s important for companies to “bootstrap” their way to a “proof of concept” if possible.
Most startup companies need to do some “bootstrapping” before they are able to “attract” capital. This amounts to “running the company on fumes” for some period of time. It often means using part-time employees, and compensating them with stock, because the company has no cash with which to pay salaries.
Corporate CEOs face challenges on a quarterly, or annual, basis to make sure their company, or division, is adequately funded. In large corporations, portions of this task are usually carried out by financial staff. This process is usually considerably different then the startup company process of building a team, compensating it, writing a business plan, and presenting it to outside investors.
The best way to “raise” funds is to “attract” funds, which means executing the “company building” tasks well and in proper sequence.
CEOs who have developed the “company building” skills have a better chance of “attracting” capital than those who have not.