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About a year ago I left Terrafugia and launched myself solo into Boston’s entrepreneurship scene. The advice given to me by a distant mentor was “find some local entrepreneurship resources and get involved.” I started by Googling. I was amazed by how much exists in Boston. Two groups in particular have earned a lot of my attention on account of their polished and varied programming:
IEEE Boston Entrepreneur’s Network
(Visit Boston ENET.)
The format of the meeting provides “as you like it” networking time way before, before, and after a set of three carefully screened and rehearsed presentations. Way before the meeting you can pay your own way to dinner at Bertucci’s. This is how I ended up meeting two of my eventual co-founders. At the meeting location itself there’s time to mix and mingle over sodas and snacks. After the meeting you can swarm the speakers or, even better, go introduce yourself to someone who asked an interesting question in front of the group.
The presentations are moderated, well timed, complementary perspectives on a single theme. For instance, this month’s meeting was “How do you know you’re ready to start a company?” The first speaker, Greg Skloot of Attendware, talked about the difference between tinkering on a project and really knowing that you have a business. The second speaker, Joe Baz of Above the Fold, gave insights into the personal aspects of entrepreneurship. Third we had Vicki Donlan, an impressively experienced consultant able to speak to a wide variety of startup success and dysfunction. We closed with Bill Seibel, whose resume slide made you turn to the person next to you and whisper “Wow.”
Every time I go to ENET:
- I meet someone helpful to my startup.
- I’m entertained by at least one charismatic and engaging speaker.
- I find a new role model of entrepreneurial success.
The Capital Network
This is like getting a laser-focused entrepreneur’s MBA for $400. Before I joined, I knew more than the average entrepreneur about debt and equity, about investment, and about business valuation. But the rules and norms for startups are usually a little different, and often they’re quite esoteric. For instance, when you buy $50,000 worth of stock of a publicly traded company worth $5,000,000, you get 1% of the company. When you buy the same amount from a startup worth the same thing, you get 0.99%. The reason is because of this difference: buying publicly traded stock gives you existing shares; buying startup stock causes new shares to be issued. If you’re thinking about taking investor money, this consideration and others must enter into your calculations, because the dilution effect on you means your share of the company will shrink with each investment round.
Unlike ENET, TCN often has a single speaker go for the full 90 minutes. In this format, the topics are meandering overviews of narrow subjects driven partly by slides and partly by audience questions. It’s a real good chance to ask about your specific startup. For instance, at the “founder issues” talk given by Paul Sweeney at Foley Hoag, we had a good audience-driven discussion about setting the strike price of stock options given to employees. (See my previous article here.) They also experiment with panels and roundtable discussions, which are helpful for giving diverse perspectives or more time in smaller groups.
Every time I go to a TCN lunch:
- I get delicious, healthy food.
- I can ask detailed questions of a knowledgeable speaker.
- I meet someone new starting an exciting business.
If you’re in Boston, you get access to lots of good Internet resources just the same as anyone else anywhere in the world. But these two groups are fun and, if you’re really going to do this for the first time, absolutely essential.
How many times have you heard an entrepreneurial success story where the founder took huge risks and won big? It usually goes like this: they took out a home equity loan, maxed out their credit cards, and pitched violently forward into the ditch of debt only to be saved at the last minute by a business miracle. It seems like that’s the way folks become successful.
I was at Boston ENET a while back and I heard a story just like this. The speaker talked about all that debt she had taken on, and all the cost-cutting she had done personally to squeak by. She offered as an aside the tidbit that she had taken a ZipCar to get to ENET that night because her own car had been repossessed.
Some folks don’t quite subscribe to this approach, and I’m wondering whether that will forever consign them to the realm of the mediocre. The alternative looks like this: work a corporate job earning more than you need and save a big cash cushion. Buy one of the zillions of decent businesses out there with established models and relatively straightforward ways to make money from your cushion. Now you’re in some measure financially independent, forever, and you haven’t bet the farm. If you’re going to start a totally new business entity, you can continue this cautious approach and sprinkle in some professional services or other “easy & early” products to keep the lights on while you spool up.
That’s called bootstrapping, and I can’t say it makes for the sexiest story. But then, it’s not very sexy to close up shop, declare personal bankruptcy, and go back to your old job, either.
This week a friend of mine was offered a chance to work for an exciting startup in the consumer packaged goods industry (think food and beverages). He wanted to know what he should ask before accepting the offer, which was a below-market salary in exchange for equity ownership in the company. Oftentimes this equity ownership comes in the form of stock options. I’ll write about that later. In this case, he was being asked to join a Limited Liability Company (LLC).
So here’s some of the advice I shared with him:
- As an LLC, there is no stock, there are only units. Properly structured LLC’s have an operating agreement explaining how the units behave, so you might ask to see that.
- LLC’s may be have classes of units, and their distribution may be arbitrary (i.e., unfair) so you need to read the operating agreement to learn whether or how you can be diluted or underprivileged.
- Having experienced a motivation misalignment before, I would try to find out whether the folks running the company are motivated more by wealth or more by control. I’m wealth-motivated, so whatever produces the greatest long-term value is what I want to do. In the past I’ve worked for control motivated folks, and we often disagreed about what to do.
- Business owners acting in their own best interest should only use ownership as a form of currency when the ownership is being over-valued by the employee or deal partner. Options and units can be great examples of this. Give out an “eye-popping” amount to employees (“Oh, that sounds like a lot!”) and hope they don’t realize what it’s actually worth. Be wary. Specifically, for an LLC you want to see that operating agreement to know how many units there are, how many you’ll get, and how new units will be created.
- I’d ask to see financial statements. If the company is a going-concern with a history of profitability, your units are absolutely taxable, and the valuation could be performed by an expert or by me or someone else. Regardless of who values the company, the IRS always retains the right to disagree.
- If they are a going-concern with a history of profitability, or else if the founders have done this successfully before, I’d be highly inclined to find a way to take the ownership. You can live very comfortably on a corporate salary, but you can be “set for life” if you hit it big with a young company that you purchased with your labor when it was worth very little.
- If they’re a loosey-goosey operation, they may flinch at showing you their underwear drawer: they may not have an operating agreement or financials. If that’s the case, I’d be highly inclined to take all or most of the compensation in cash at market rates, rather than equity. Remember that most startups fail, and if it’s not your baby, you need to make a living from it.
So that’s some food for thought beyond the global picture, which is “what is the business, does it make sense to me, etc.” Keep an eye out for your own interests, and you’ll make a good decision.
For further reading, I suggest
- Noam Wasserman’s “The Founder’s Dilemmas”