Friday, January 15, 2021

How To Prevent Your Founder’s Shares From Vaporizing

shares-founderWhen an entrepreneur first incorporates a business, they may find themselves the proud owner of 10 million shares of common stock, commonly called founder’s shares. It’s disconcerting for most to realize that these shares are initially worth nothing, and the challenge is to get that value up as quickly as possible, without losing it just as quickly to investors, lazy partners, and taxation.

This is where things get technical, but the principles are really quite simple. Every entrepreneur needs to understand the following basics, to be addressed at company formation, as they engage a qualified attorney to draw up the paperwork:

  1. Allocate founder’s stock commensurate with commitment. Even though initial stock has no value or market, it is extremely valuable in dividing entity ownership between multiple co-founders, commensurate with their investment, contribution and role. Startup owners need to assume a three to five year wait for a liquidity event, such as acquisition or going public, before they can cash out. At that time the original split makes all the difference.

  1. Make sure the government waits for a stock sale to collect taxes. In the U.S., every entrepreneur should incorporate early and file an 83(b) election with the IRS within 30 days of founding the company. Failing to file, or waiting to incorporate until a first investor arrives, is a common mistake, and will lead to a nasty tax bill when you can least afford it.

  1. Spread stock issuance over an earning period. This is the purpose of a vesting schedule, which issues allocated stock over time. Typically, vesting in startups occurs monthly over four years, starting with the first 25 percent of shares vesting only after an owner has remained active for at least 12 months (one year cliff). Key founder vesting should have no cliff.

  1. Retain the right to reclaim stock from anyone leaving the startup. To retain control, the original founder must reserve the right of first refusal to buy shares back at cost from a partner who decides to leave early or stop working. Otherwise, people with no ongoing effort (“free riders”) will own the value growth that you are adding after their departure.

  1. Minimize your own loss of ownership as major investors contribute. This is called stock dilution control. While new equity owners always have to get it from someone, actual re-allocation of existing shares should be based on a formula to maximize the value of your remaining founder shares.

  1. Accelerate your own vesting if pushed out or the startup is acquired. Don’t lose the value of stock not yet vested if your startup is bought out before the normal vesting schedule comes to a close. If new investors want to replace you as the founder early, make sure this action triggers an accelerated vesting clause as well.

  1. Facilitate an upgrade of founder’s common to founder’s preferred. Investors typically demand preferred stock to give them more control and first payouts, but these advantages can be at least partially offset (up to 20 percent) if you plan ahead. The acceptance of this option is now common, even though introduced only a few years ago.

  1. Limit board seats and manage member selection criteria. More board members is usually not better for the startup. Target no more than five members, with at least two being founders. This allows the entrepreneur more influence in controlling dilution of his or her shares, investment terms and acquisition decisions.

Every entrepreneur has heard the stories of a startup selling for millions of dollars or going public with the founder being squeezed out of all the gains. This situation only can be prevented by incorporating early, avoiding negative tax situations and managing your shares like gold.

Founder’s shares are just paper when you get them, and it’s up to you to turn them into a gold mine.

Marty Zwilling

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Wednesday, January 13, 2021

6 Market Environments Where Execution Trumps Planning

business-ready-fire-aim-strategyAs a business adviser, I often see entrepreneurs practicing what Tom Peters calls the “ready-fire-aim” go-to-market strategy to their detriment. Yet even I have been known to recommend that approach, in cases where you have a highly innovative product, speed is of the essence, and no clear existing market is available. In fact, you probably won’t get it right the first time anyway.

Certainly I believe the traditional ready-aim-fire strategy approach works best in most cases, and that should be your default. There is no substitute for talking to customers, analyzing your competition, and honing your solution to meet a target market segment. As a counter, here are some situations where it definitely makes sense to short-circuit the traditional approach:

  1. The market won’t wait for your planning cycle. The real solution in this case is to shorten your planning cycle, but sometimes unusual situations, such as the current global pandemic, make this impractical. The ready-fire-aim approach makes sense here, but it should be combined with metrics to learn from feedback, and make pivots as required.

    In general, I see that the strategic cycle for most companies gets longer and longer as they mature, which kills any ability to stay competitive. I recommend a living strategic plan, updated on a regular basis, so that the total plan cycle gets shorter over time.

  2. Cost of a solution execution experiment is low. When serious new technology is involved, and it’s not clear how it will be perceived and used, a highly focused execution cycle may be your best planning cycle. To keep the cost low, I always recommend the “minimum viable product (MVP)” approach, and a short duration for analyzing results.

    More and more companies are settling on the incremental and experimentation approach to new products, business models, and processes. They find the costs, the structured approach, and the solution experimentation myths don’t hold in today’s market.

  3. Opportunity and competitor data are not available. Be careful with this one, because no opportunity or competitor data is usually a clear indication that there is no market for your solution. Yet we all get surprised every day by new trends and changing cultures that defy conventional market logic. Be prepared for some misfires, and high risk.

    We all tend to remember those great product successes that evolved from no apparent market opportunity, including Rubik’s Cube, Star Wars, or even Apple’s iPhone, but remember that these are rare, and you shouldn’t bet your business on a gut feel.

  4. Your team seems stuck in the getting ready stage. If you have a development organization which is never ready to ship, and insist on continually adding new features, or doing more testing, the ready-aim-fire approach will not likely happen. Firing at some market will at least give you the feedback necessary to direct appropriate development.

    My experience as a software executive with IBM is that smart engineers always have a few more key features that they need to add to the product before it is ready for sale, just because they can, as well as a large amount of additional quality and usability testing.

  5. You already have a large and loyal customer base. Some customers are so loyal that they will follow you anywhere. Why waste time planning when you already know the conclusion? Even with this situation, it pays to keep a close tab on customer whims and feedback, as the newer generations of consumers are fickle, and can dump you quickly.

  6. There is a powerful advocate or cause driving demand. In this age of outspoken experts and “influencers: on social media, your new fashion or cooking solutions can likely skip the traditional market planning cycle. Similarly, if your solution satisfies a government-driven demand, such as healthcare, speed to market is more critical.

Despite the possibilities that you may hit your target without aiming, I always have to remind entrepreneurs of the probability that you will shoot yourself in the foot instead. Thus I believe it behooves every one of you to build a go-to-market strategy, even before you build a solution. A solution without a market is an embarrassing frustration that every business owner can avoid.

Marty Zwilling

*** First published on Inc.com on 12/30/2020 ***

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Monday, January 11, 2021

8 Keys To A Major Source Of Funding For New Ventures

cash-and-piggybankMany first-time entrepreneurs find themselves unable to bootstrap their startups, and also unable to find early funding at the venture capital level or even with angel investors. Their only recourse is that first tier of investors, fondly called Friends, Family and Fools. These are the only people likely to believe in newbies, with only minimal product evidence or business experience.

Yet surprisingly, according to statistics on the Fundable crowdfunding site, friends and family are the major funding source for entrepreneurs, investing over $60 billion in new ventures per year, almost triple the amount coming from venture capital sources. The average amount per startup has been $23,000, usually in the form of a convertible loan, rather than an equity investment.

Of course, most startups ultimately need much more than this amount to scale the business, but some prior contribution from friends and family (as well as your own sweat equity) is normally expected as a qualification before professional investors will consider entering the game. Their logic is that if your family won’t invest in you, then why should they?

This is confirmation that the right people are always more important than the right product. Here are some key ways that you can be viewed as the right people, whether seeking an investment from friends and family, fools or even later from professional investors:

  1. Ask for a specific amount to meet a specific milestone. Shy introverts may be great technologists, but they won’t be entrepreneurs until they learn to nurture relationships with friends and family, practice their elevator pitch and respectfully ask for funding. Waiting for someone to give you a gift with no specific objective is likely to be a long wait.

  1. Offer a formal agreement as well as a handshake. The vehicle of choice is most often a convertible note, which is really a loan with a specified duration and interest, with an option to convert it to equity when professional investors come in later. Hire an attorney to make sure the terms are fair. This shows respect and professionalism.

  1. Let people see your own investment and commitment. Friends and family are quick to differentiate between a passionate hobby and a sincere effort to change the world. Show them that you have done your homework with industry experts and potential customers, and convince them you are not asking for charity or a donation.

  1. Build a prototype first on your own time and money. We all know people who are good at talking, but never seem to risk anything or find time to get started on the implementation. Every good entrepreneur needs to invest skin in the game, to show credibility and leadership to others. Investors want to be followers, not the leaders.

  1. Don’t ask for more than your friends or family can afford to lose. In other words, don’t be greedy, and remember that you have to live with these people even if your startup fails. Ask for the minimum amount you need to reach a significant milestone, with some buffer for the unknown, rather than the maximum amount you can possibly foresee.

  1. Communicate the plan and the risks up front. Remember that no investment is a gift, and everyone who buys in deserves to hear what you plan to do with their investment, and expects regular updates from you along the way. Be honest with naïve friends and trusting family members, since more than 70 percent of startups fail in the first five years.

  1. Focus on well-connected friends with relevant business experience. A wealthy uncle may seem like an easy mark, but a less wealthy friend who has connections and experience with startups in your domain can likely help you more than any amount of money. Remember that you are looking for success, not just money to spend.

  1. Tie re-payments to revenue growth in the startup. Rather than set a fixed repayment schedule, tie investment payoffs to a percentage of new product revenue, or a plan to convert the debt to equity. Use the minimum viable product concept to get revenue early, and allow market and product pivots at minimal cost.

In any case, avoid the urge to think of friends and family as a last funding resort, when they should always be your first focus, and maybe the only one you will ever need. If you succeed, there is no joy like sharing the feeling and the money with people close to you.

But make sure you do it right, per the above recommendations, or you may be the biggest fool.

Marty Zwilling

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Sunday, January 10, 2021

7 Keys To Success In Today’s Popular Sharing Culture

Uber_car_with_lidarIn the last few years I have seen a popular business model emerging which embodies a greater focus on social and environmental responsibility, and a new requirement for trust and sharing, as well as customer and community collaboration. Companies like Airbnb, Uber, Zappos, and Whole Foods are setting the example, and leading the way in profitability and purpose.

In her classic book, “We-Commerce: How to Create, Collaborate, and Succeed in the Sharing Economy,” veteran marketing strategist Billee Howard calls this movement an economy centered on the power of “we” instead of “me.” She presents a roadmap to help us navigate this new business landscape, retaining the best of the old, while innovating the path to success.

In my work with many entrepreneurs and investors, I also see and support the strong movement to this business model, which can be characterized by the following attributes she outlines:

  1. Deliver value to the greater community, as well as customers and insiders. Provide real value and give-back to the global community and employees, generating trust and loyalty, which in turn brings in more customers. The result is a win-win situation, with more profits for the business, satisfied customers, and happy employees at all levels.
  1. Develop a personal-engagement extraordinary service mentality. The days of mass production and commodity pricing as an asset are gone. The new customer generation wants to provide input, and wants to be treated as one-of-a-kind in their solution, delivery, and service. Being good in business now looks like an art, with creativity and innovation.
  1. Customers and team members must be inspired, rather than pushed. Companies that offer value beyond their product or service, for social and environmental good, are seen as leading the way forward to a shared future abundance. This results in a new loyalty inside the organization, as well as outside, building momentum and profit.
  1. Grow bigger by thinking smaller in the beginning. Start with a niche that you want to be known for, and knock it out of the ballpark by being the best. Narrowing your focus actually broadens your appeal and allows you to charge a premium because you are “the expert.” This give you the credibility to expand to other niches and grow the market.

  1. Make innovation, creativity, and artistry your core competency. This requires team members who’ve been taught to think like innovators, and a reward system that fosters creativity. It requires actively listening to customers, and a culture of change. Most of all, it requires leadership and communication from the top on purpose and shared goals.
  1. Tell your purpose story for engagement and improved recollection. Stories have been an essential driver of change and engagement throughout human history. Good stories make us think and make us feel. They stick in our minds and help us remember ideas and concepts in a way that numbers and text on a slide with a bar graph won’t.
  1. Bridge the physical and digital worlds for your customers. Make sure all relevant customer interaction data, regardless of channel or source, is immediately available at every step of the customer’s journey. Empower all team members and customers, both in-store and online, with the right information they need in order facilitate a buy decision.

On top of the current pandemic, the business world has been forever altered by the growth of the world-wide Internet and global telecommunications. The customer and business universes are now globally and totally connected. This means that all customers see social needs and the environment as part of their own world, and expect these to be part of every business focus.

Thus, as the new sharing economy challengers continue to evolve their new business models, the traditional incumbents are being forced to change, or forced out of the marketplace. It’s time to take a reading on where you are in this spectrum. Is your company innovating a path to success, or riding an old wave into a cliff?

Marty Zwilling

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Saturday, January 9, 2021

8 Keys To Preparing Early For Your Next New Venture

exit_signsOnce an entrepreneur, always an entrepreneur. Although many won’t admit it, true entrepreneurs can’t wait to exit their current startup, and build a new and better one with their next great idea. In addition, current investors want to see every startup go public or be acquired, as an exit event, so they can get their due return for that investment which has been tied up for the last few years.

For these reasons, I always look for an overt exit strategy in every startup I might consider for an angel investment. As a mentor to many entrepreneurs, I also encourage an entrepreneur exit focus early, and I really like the specific steps outlined in the classic book, “Exit Signs,” by Pamela Dennis, who has helped companies through this critical transition for decades.

Her focus is a bit more on mature companies, but I believe the following eight steps, paraphrased from hers, are especially applicable to every startup and the entrepreneurs who create them:

  1. Think about the end game as you start. Running a mature company is totally different from running a startup. Most startup founders don’t relish the thought of managing repeatable processes, greedy stockholders, and endless regulation reports. Yet they often fall into these roles by not proactively preparing themselves for any alternatives.

  1. Set a target personal destination and timing. The first step is clarifying your personal goals and the legacy you want to leave. Exiting this startup is not the end, and may be the beginning of something even better, like Bill Gates philanthropy, or your next plan to change the world. At minimum, you need to get an exit advisor to keep you on course.
  1. Set your startup health gauges and use them. New startup founders keep all the operating metrics they need in their head. If you intend to exit, or even if you don’t, it’s never too early to think what an acquirer or stockholder looks for to assess your business health. This all starts with building a culture and strategy that can survive without you.
  1. Tune up your startup value and salability. Even if you don’t have a formal board of directors, it pays to have trusted advisors who will give you regular unbiased feedback on your team strengths and weaknesses, financial and operating ratio norms, and an external view of current company valuation issues. Listen carefully and act accordingly.
  1. Build relationships with potential acquirers. The best sale or acquisition is a gradual one, where the acquirer gets to know you through formal and informal relationships. Don’t wait for a distress situation in the business or your personal life, and hope that the ideal acquirer magically appears. Keep a critical lens on payment options and tax implications.
  1. Mature your business processes and customer base. Secure your company’s sustainability through multiple revenue streams and customer sets, and solid core business processes. Build an exit-transition plan for yourself, and a plan to retain key talent on the team. Anticipate customer and valued-supplier reaction to any change.
  1. Build a positive data bank and presentation. Well ahead of any planned move, you need to assemble hard data to support your historical and projected performance and sustainability. Your valuation and salability depends on the credibility of this effort. Plan to spend 30-60 percent of your time away from running your business during this phase.
  1. Lead your way out rather than wait for a push. The win-win startup acquisitions and successful transitions to public companies are led by the entrepreneur, rather than happen passively. You need to proactively engage the right people, drive improvements where required, and pay attention to all the external and internal factors gating success.

According to Dennis, an astonishing 87 percent of small and mid-size business owners don’t have an exit strategy or plan, leaving them to die at their desk, or get pushed out on terms they don’t like. If you are like most entrepreneurs, who look forward to a life of pride and profit after their current startup, it’s time to take some steps to make a startup exit more than a wistful dream.

Marty Zwilling

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Friday, January 8, 2021

8 Initiatives To Heighten Your Customer’s Experience

customer-service-expectationMost leaders agree that poor customer service is a business killer today, in terms of lost customers, reduced profits, and low morale. Yet the average perception of customer experience has not improved. Young entrepreneurs and startups, in particular, often remain naively unfocused, despite their passion, of what it takes to provide the high-quality service expected.

It’s a tough job, and inexperienced entrepreneurs just don’t know where to start, and how to do it. Chip Bell and Ron Zemke, who are experts in this area, provide some of the best specific insights I’ve seen, in the classic book “Managing Knock Your Socks Off Service.” Their eight initiatives should be required reading for every entrepreneur:

  1. Find and retain quality people. You have to start with hiring only people who are willing and able to make serious customer service happen. Make sure you know and communicate well exactly what you mean by high-quality service. Train them fully, give them authority, make them accountable, and tie their pay to customer satisfaction.

  1. Know your customers intimately. This means personally listening, understanding, and responding to your customers’ evolving needs and shifting expectations. Then make sure that everyone on the team does the same, and are motivated to improve the match with your startup. Seek out complaining and lost customers for the most important input.
  1. Build a service vision that everyone sees as clearly as you. This means articulating and living the customer service mindset for the team, in front of customers and in the board room. It must be understandable, written down, and verifiable, with regular measurements and metrics to make it real, benchmarked against the competition.
  1. Make your service deliver process “happy.” A well-designed service delivery process will make you easy to do business with. The process must be employee friendly, as well as customer friendly, and have feedback mechanisms to correct poor results. If service employees are not happy, the process isn’t working yet.
  1. Train and coach continuously. Companies with great service routinely spend 3% to 5% of salaries training team members – experienced as well as new. Leaders have found that keeping everyone on top of changes in technology, competition, and customer demands is critical to success. Service people need this as required team support.
  1. Involve, empower, and inspire. Involve team members in the fix to customer problems, as well as fixing the faulty process causing the problems. Empower them to look beyond simple rules for solutions, not out of habit, routine, or fear. Inspiration is the process of creating excitement, enthusiasm, and commitment, by your passion and actions.
  1. Recognize, reward, incent, and celebrate. By human nature, he team that works for and with you want to do a good job. The best incentive is to give them something good back in return. This should start with constructive feedback on how well they are doing, and what they can do to improve. Don’t forget recognition for accomplishment and efforts.
  1. Set the tone and lead the way. Like it or not, you are the personal role model for all the people in your startup. How they see you deal with and talk about peers, partners, team members, and customers tells them what the real rules of conduct are for customer service. You can’t con or manipulate people into doing quality work.

Customer service is not just handling exceptions, something that you can think about later, once the business is up and running. It’s a core process that must be up and effective when you deliver your first product or service. If you still doubt the consequences, consider the following facts from research by MTD Training Group:

  • More than 50% -- Scrapped a planned purchase because of bad service
  • 60% – Consider switching businesses after 2-3 instances of poor service
  • 69% – Spent more money on purchases from satisfied businesses
  • 90% – Tell others about their service experiences.

In the past, competitive advantage was all about economies of scale, advertising power, and service versus price. With instant low price search, ordering via smart phones, and unfiltered online reviews via Yelp and Foursquare, the advantage today has shifted to companies who can make every experience positive. Prepare for it, and don’t jeopardize your future on the first day.

Marty Zwilling

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Wednesday, January 6, 2021

8 Strategies For Sustaining Momentum In Your Startup

momentumEvery new business I know dreams of building momentum in their business, where growth continues to increase, customers become your best advocates, and employee motivation is high. The most common approach I see to achieving this is to do more of everything for everyone. Unfortunately, with limited resources, this isn’t possible, and it frustrates customers and the team.

Based on my experience advising new entrepreneurs as well as more mature businesses, I recommend the following strategies for building business momentum, while still optimizing the limited resources of every small business:

  1. Find more customers that like what you do best. Fight the urge do more things, to attract more customers in a broader market. In reality, too many choices actually dilutes customer interest in your existing market, and makes your job of production, marketing, and support much more complex. Focus first on finding more of the right customers.
  1. Focus on the mainstream customer majority. New entrepreneurs, especially technical ones, are excited by early adopters, and tend to focus on their feedback, which will always suggest more product features and options. Ongoing momentum requires a move to mainstream, or even late adopters, who demand simplicity in your base function.

    I’m sure it wasn’t early adopters who suggested that Amazon implement a simple “big red button” for a “one-click-buy,” but many experts now attribute huge online growth to this simplification for less tech-savvy customers. Most ecommerce sites highlight this feature.

  1. Select a single dimension to measure momentum. Your focus for momentum could be sales, profitability, or number of customers, but trying to keep all possible parameters growing is simply not practical. It’s important to define your growth strategy, document it, communicate it to your team, and align metrics and employee rewards to target goals.
  1. Build a strong employee culture focused on growth. One person can build a product, but it takes a dedicated team, with strong leadership, to build a business. Momentum requires a team culture of high motivation and engagement. These attributes require an effective employee feedback and reward system, as well as fostering collaboration.

    For example, Mark McClain, cofounder and CEO of SailPoint Technologies, created an employee growth culture resulting in growth of forty percent a year, with more than $100 million in revenues. The company has since gone public, and is still a market leader.

  1. Plan a long-term strategy, and avoid crisis moves. In most companies, maintaining momentum requires the right strategic partners and acquisitions, in lieu of short-term price adjustments and special sales. That means you need to focus early on where you need to be in five years, and focus on strategic planning on a regular basis.
  1. Maximize key customer transaction efficiency. Momentum normally requires an ever-increasing volume of transactions, so you must make sure that key ones can be handled smoothly and quickly. Customers have no tolerance these days for multiple interactions, necessary support requests, poor customer service, or bureaucratic processes.
  1. Utilize outside expertise and mentoring. No matter how much energy, experience, and passion you have, there is always more you can learn from an Advisory Board of external experts or a mentor. Maintaining business momentum requires constant analysis and vigilance for market and technology changes, as well an internal focus on optimization.
  1. Track competition to stay ahead of copycats. Don’t wait for negative momentum to alert you to new competition – recovery is much more difficult than proactively making focused changes to retain customer loyalty and repeat business. Incremental changes are always easier to make and market to existing customers than disruptive products.

I’m sure that you have all seen how quickly business momentum can shift, as from MySpace to Facebook, or more recently in the explosive growth of Amazon and e-commerce compared to retail. Today’s customers quickly sense the growing momentum of specific businesses, or lack of it, via social media, online reviews, and texting with friends, and change their habits accordingly.

Thus you should never be complacent in your business about the growth you have achieved, or your loyal customer base. I urge you to practice the strategies outlined here both to build that initial business momentum, as well as to sustain it. Your long-term success and satisfaction depends on it.

Marty Zwilling

*** First published on Inc.com on 12/22/2020 ***

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