Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Identify and Secure Your First Class Executive Team Using Small Amounts of “Sweat Equity” and a Consulting Contract

Start-up companies are notorious for not having any money to pay for anything. This is especially true regarding paying for the salaries of potential, first class, executive team members. Often, this is seen as a crutch to bringing a first class executive team on board.  On the other hand, indentifying those individuals that are willing to work for “sweat equity” are most likely your best bets.  Why, because it is these same individuals that understand that nothing in life that is worth anything is free and they are willing to prove it to you by contributing their time, effort, skills to create value for your start-up company.  On the other hand, individuals that want to be paid a salary up front to prove that they can perform are probably not worth the money they are asking for. So, as an entrepreneur take your time to indentify a first class executive team.  While doing so, you will find the right individual contributors that have the appropriate skill sets and are willing to commit their time and energy for a small amount of “sweat equity” to get your start-up company off the ground.  These same individuals are the ones that are willing and have the capabilities to create significant value to your start-up company.  To keep the ball rolling in this manner, you must check your rolodex, network and sell your vision, keep potential executive team members informed on company progress, and identify near term responsibilities and tasks for each potential executive team member.

Check Your Rolodex, Network and Sell Your Vision

Finding the right executive team members for your start-up company takes time.  It is not an overnight task. So, take your time to identify the right executive team members, as it is much better to find the right individual the first time, than it is to go through multiple iterations on bringing on the wrong individuals, only to have to let them go within three to six months. 
To find the appropriate executive team members, you need to check your rolodex, spend time networking and sell your vision to everyone you meet.  Selling your start-up company’s vision is the key, as you never know who will be the right individual with the appropriate skill set to help move your start-up company forward. With this in mind, finding the right individuals with the appropriate skills and capabilities is an active process.  Don’t always pick the first person you find, as this is often a big mistake.  Through networking and talking with colleagues you will necessarily find the appropriate executive team members that are willing to put in the time and effort in to move your start-up company forward.  In fact, if these same individuals buy into the vision of the company, they will be willing to “walk through walls” to get things accomplished. It is at that point that you know you have found the right executive team members.  Finally, with each executive team member you bring on, you necessarily exponentially expand your network and the pool of individuals to choose from, as each new executive team member has their own rolodex and network of colleagues to help develop your start-up company. This is absolutely beneficial to your start-up company and moving it forward and building a successful executive team.

Keep Potential Executive Team Members Informed on Company Progress

Often with the “virtual” nature of start-up companies, many of your potential executive members or significant individual contributors will be geographically disperse and can often take some time to convince to come on board.  With the support of the internet, you can keep these same individuals informed of the progress of your start-up company. This is important, as you want these same individuals to be excited about the possibility of coming on board your start-up company.  So, every couple of weeks or so, as the CEO of your start-up company, you should set aside a time to contact potential executive team members to keep them informed on the progress of the company. If these are significant events that are upcoming, or meetings that have the potential to create substantial value for your start-up company, these potential executive team members will want to know.  Keeping potential executive team members informed will raise their energy level and get these same individuals excited about joining your start-up company.  So, take the time to keep potential executive team members informed on the progress of your start-up company as this will keep them excited and get them to commit to joining your start-up company.

Identify Near Term Value-added Tasks for Each Team Executive Member

Once you have identified an executive team member that you want to bring on board, the best thing to do is to bring them on as a consultant for a fixed period of time, usually three to six months.  This can be done with a standard consulting contract, with a small amount of “sweat equity” for compensation.  This arm’s length relationship is invaluable, as you need this time to determine whether you want to bring this person on board full time as a contributing executive team member of your start-up company. So, use a consulting contract to identify the near term value-added tasks this individual needs to accomplish as a team potential executive member. This will allow you to determine if this individual is able to contribute at an executive team member level. If the potential executive team member does not work out, you are out is a small amount of equity based on the terms of the consulting contract.  On the other hand, if this person works out, you have identified a high-level, contributing executive team member.  So take the time to indentify the appropriate value-added tasks and time frame, so that you can get an appropriate assessment of potential executive team members.  This will save you lots of time, money and equity in the long term.                                                                                                           

Start-up companies typically do not have any money to pay for the salaries of potential, first class, executive team members.  This, often seen as a crutch, can be used as a positive to indentify and bring on board executive team members that will add significant value to your start-up company.  Through a process of networking and selling your vision, keeping potential executive team member excited, and offering “sweat equity” through a consulting contract, you can identify and evaluate potential executive team members’ skills, capabilities and commitment. By taking this approach, as an entrepreneur, you can secure a first class executive team to make your start-up company successful in the market and at the same time minimize any associated risk and expense to your start-up company.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

April 12, 2010 Posted by | Venture Capital | , , , , , , , | Leave a comment

Entrepreneurs, Legacy Costs Can Hurt Your Start-up Company’s Fund Raising Efforts

Start-up companies, by definition, need to be nimble and have the ability to change direction as the market changes.  Often with the development and maturation of a start-up company, things can change significantly from the original direction, mission and focus of the company.  This is especially true, if this same start-up company has been through multiple incarnations to develop a differentiated and long-term sustainable competitive position in the market.  These changes in direction do not come without costs to the start-up company itself.  And, often these costs can hurt your start-up company’s fund raising efforts.  Therefore, as you move forward and your start-up company changes direction, strategy, and its market entry tactics, you need to step back and understand what legacy costs need to be let go or changed to successfully move your start-up company forward in your fund raising efforts.  This can include replacing old executive team members, restructuring the company’s capitalization, and shedding old, irrelevant contracts, as all of these things if not appropriately addressed will hurt your start-up company’s fund raising efforts. 

A Change in Direction May Require a New Executive Team

Significant changes in direction for a start-up company may result in requiring new executive team members to move your start-up company forward.  Often these changes in direction come with a new CEO.  As such, the executive team members that were relevant for the old company and its original focus are not appropriate for the new company and therefore this often requires the new CEO to clean house and secure a completely new executive team.  This significant level of change within the executive management team of a start-up company can be very traumatic and should not be made over night. If there are some team members that have relevant capabilities and skills that add significant value to the new direction of your start-up company, then they should be given a chance to move forward with new direction of the company. On the other hand, if there are executive team members that lack the proper motivation and appropriate skill sets to add any value moving forward, then they will need to be let go and replaced with new executive team members that have the skill sets, motivation, and ability to move your start-up company forward.  Nothing is worse for a start-up company than to have legacy executive team members hanging around that add no value to your start-up company and its current direction. So, make the decision to bring on new executive team members and let go the legacy executive team members that do not any value regarding the new direction of your start-up company.  This will clean the slate and provide for a better path forward for securing funding.   

A Legacy Capitalization Structure Often Needs to be Changed

One thing that will immediately diminish the interest of potential investors is a legacy capitalization structure that does not support your required funding efforts. This legacy capitalization structure can take many forms and can include the following:

  • Too many small investors with tiny equity positions,
  •  Too much debt,
  • Too much equity for legacy team members,
  • Too much of a “hangover” in the stock option pool,
  • Not enough equity for multiple investor rounds,
  • Other.

These legacy capitalization structure issues need to be addressed before you talk with investors.  If you do not do this, you may risk losing potential investors.  So, take a look at your legacy capitalization structure before you engage with your investors.  If you do not know what makes an attractive capitalization structure which will facilitate the venture funding of your start-up company, find a financial consultant that has worked with venture capitalists. They will be able to provide you with the appropriate advice regarding recapitalization of your start-up company to make it more attractive to investors. 

Old Contracts May be Inappropriate or Irrelevant

Often with significant changes in direction, start-up companies should take the time to review old contracts and strategic relationships.  Contracts that were once important to your start-up company may be inappropriate or irrelevant to your start-up at its current point in time.  So, make sure that you clean up old contracts and relationships before you engage with your investors. This can include:

  • Discontinuing certain strategic relationships,
  • Cancelling old irrelevant contracts,
  • Reviewing and modifying existing contracts,
  • Other.

As an entrepreneur of a start-up company you must take the necessary steps to eliminate any risks moving forward. This includes reviewing all of your outstanding contracts and strategic relationships.  By doing so, you will facilitate third party angel or venture capital funding.

Often start-up companies go through multiple incarnations to develop a differentiated and long-term sustainable competitive position in the market.  These changes in direction do not come without costs to the start-up company itself and often require this same start-up company to shed some of its legacy costs to move forward in its fund raising efforts. To do this, an entrepreneur must often secure a new executive team, change its capitalization structure and cancel old, irrelevant contracts.  This is often necessary, as in doing so, you will be putting your start-up company in a much better position to secure venture funding from angel investors or venture capitalists.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

March 29, 2010 Posted by | Venture Capital | , , , , , , , | 1 Comment