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