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Lecture 14
Social Capital
Why Social Capital? Who will manage the business? What qualifications do they have? What are the strengths/weaknesses of the
management team? What social capital can you access? What consultants or specialists are
needed? How will you use them? Compensation and ownership
External Assistance WISC
http://WISC.uww.edu Wisconsin Technology Council
http://www.wisconsintechnologycouncil.com/ Wisconsin Innovation Network
Wisconsin Entrepreneurs Network http://www.wenportal.org/
Wisconsin Angel Network www.wisconsintechnologycouncil.com/angel_network/
More Resources
Milwaukee 7 initiative http://www.mmac.org/display/router.asp?docid=662
BizStarts Milwaukee initiative http://www.bizstartsmilwaukee.com/display/
router.aspx Service Corps of Retired Executives (SCORE)
http://www.scoremilwaukee.org/ www.score.org http://www.madison.com/communities/score/
Important information for management plan Summary of backgrounds Evidence of appropriate ability Evidence of commitment Evidence of prior successes Evidence of functional balance Definitions of roles and responsibilities Insiders/board members/advisory board Compensation/Ownership structure Investors & restrictions Employment agreements/stock options
Task Roles Creator – source of the new Driving Force – gets beyond today Organizer – efficiency + details Marketer – selling Money Bags – getting money/how much Watch Dog – is the help really helping
you Maker – making the stuff
Inside Team Members (General Requirements) Personal/Financial match with business Complementary values Fill gaps in entrepreneur’s knowledge Fill gaps in each others’ knowledge Honesty about limitations Matched with opportunity Commitment to the long haul Harvest mind-set Sharing of harvest Commitment to value creation Equal inequality
Recruiting issues Familiars versus Unfamiliars Possess resources that are
rare valuable hard to duplicate not easily substituted
Help the firm acquire/employ resources that meet the above
Outside Team Members
Advisory Board Fiduciary Board Accountant Lawyer Banker Outsourced Services
Outsourced Services Consultants
Marketing - WISC Operations Accounting Design Computing
Manufacturing Support Sales Support Service Agencies
Payroll Computing/Data
Processing Temp Clerical
Buying Offices
REMEMBER:
You are the client
Get multiple opinions before you commit
Slicing the pie
Share wealth with those who create value
You get more by dividing a bigger pie
Work backward from IPO Success of first venture is more
important than 100% ownership of first venture
Rewards Extrinsic Rewards
Stock Salary Fringes Promotions Work conditions
Personal Rewards Growth Goals Autonomy Skills Visibility
Lifecycle of rewards Intangible rewards available throughout Some financial rewards dependent on stage
of success Rewards should be consistent with goal of
harvest or IPO Rewards on performance, not effort Contributions change, so rewards should
change Relationship with external funding may
determine some requirements
Timing of rewards
Stock as a way of attracting early contribution
Stock proportions will change only infrequently
New members dilute existing positions, but do not usually induce redistribution
BENEFITS health insurance disability insurance life insurance retirement plan flexible compensation (cafeteria plans) leave from work bonuses service awards reimbursement of employee educational
expenses other benefits appropriate to employee
responsibility
CLEAR Agreements
Specification of ownership, Commitments of time, money and
resources Rules for resolution of
disagreement How a team member can leave or
be fired
Managing Teams Cannot anticipate all problems Loose, flexible relationships Flat hierarchy Shared responsibility Keyed to rapid learning Keyed to responsive decision making Grade A team with grade B idea beats the reverse Dangers
Groupthink Risk polarization Satisficing
Pitfalls in Team Formation Insufficient time clarifying team issues in
“moonlighting” phase Untested limits to expertise or resources Insufficient flexibility in initial agreements
Need for “graceful divorces” Taking trust for granted Equality isn’t always functional Micro management and laissez faire
Hiring Mistakes
Inept associates Character flaws Personality conflicts Disagreements over policy
Mistakes in Team Formation
Forming team by chance Forming team casually Team members with
different/incompatible personal goals Family members as professional
advisors Shares or options without buy-sell
agreement
Evolution of Team Formation
Analogy of marriage and family No team starts perfectly No team stays perfect Some teams are built, some are born Roommates sometimes get more
review Turnover exceeds the divorce rate
Central Roles
Need Management vs. Leadership Create agenda Planning/Budgeting Establishing
Direction Build Network Organizing/staffing Aligning
People Execution Controlling/Prob. Solving
Motivating/Inspiring Outcomes Predictability and order Change
Challenges for Family Firms Finding Capital (Resistance to Dilution) Business need for capital vs. Family need for
cash Estate planning (taxes) Succession
Accomplishing shift of power Sibling/Cousin rivalry Competence/motivation of next generation
Finding competent senior level non-family managers
Conflict in cultures of family, board and business
Entrepreneurial couples + Both spouses
work long hours + Spouses can
take shifts at work/home
+ Marriage and careers are intertwined
- Too much togetherness
- Business issues dominate homelife
Divorce my cause loss of business for at least one parner
General Characteristics of Team Members Proven Profit and Loss Experience Same Industry, Technology, Market and/or
Service Area Complementary Skills Integrity Honesty about limitations Personal/Financial match with business Fill gaps in entrepreneur’s knowledge Fill gaps in each others’ knowledge Complementary values
Organizational Chart