Category Archives: Business Structure

Bad People Kill Your Company Good Ones Help It

Posted on by
Reply

Talented People
An article by Om Malik in Business Week entitled Silicon Valley and the Talent Crunch was forwarded to me by a friend and caught my eye. It is an interesting read about Silicon Valley and talent in the area. He points out that early stage investing made up 11% of the deals in Q3 of 2010 vs. only 1% in Q1 of 2010. There is also the mention of other larger companies scooping up talent and possibly paying more than market rate to obtain them. He also mentions a good team, in other words good talented people, make a business succeed. This is true , but they can also make you fail. I do not disagree with his points or conclusions but let me dive deeper based on my experiences.

Attract Good People and Keep Them
This is the key, attracting and keeping good people. Here are a couple things I have noticed.

Attracting Good People
When a start up looks for talent they typically reach out to everyone they know in the area, they also look to their investors for referrals and may try head hunters as well. Getting someone you know into the office for an interview is typically an easy sell as they already have a relationship with you. However getting someone into the office who you do not know, is a talented individual and probably already has a job is an entirely different proposition. You have to sell them, or the investors do, or the head hunter you are working with does.

Convert Good People for Your Team
I have seen too many good individuals be turned off by a lack of follow through or a well thought out interview process. If you are bringing in a potential COO or VP or this/that and the other thing, you should do more than simply sit them in an office and have them meet with the office manager or front desk personnel. Also be sure that whoever does interview them can actually interview someone. Interviewing someone does not mean the interviewer tells them about themself and then leaves. There are many resources on interviewing and do not allow it to be handed off to someone who cannot interview properly.

A small startup has no excuse for not having everyone interviewed by the CEO or another individual of the executive management team. Until the startup reaches a certain size the CEO should meet everyone. This is part of the sales process when attempting to recruit good talent. Everyone wants to hear the startups story and vision from the CEO, as well as who has invested and why.

If the CEO has done a good job of outlining their vision for the company the deal is not closed, assuming the business and CEO’s vision is a good one, and next the issue is the compensation package.

Compensation Package and Obtaining Talent
Many call it a compensation package because it is much more than a salary. An individual that has a high salary at a large company is probably going to be interested in a startup for many reasons. They want the excitement, more day to day responsibility, and the to be able to have a greater overall effect on the company. This means that items such as stock options or other equity vehicles will be more interesting as they can profit from their hard work. Therefore the additional responsibilities, equity, and feeling of making a difference make up the reasons why good talent will join a start-up.

Keep Good Talent
There are many ways to retain good talent. I will only point out one as I believe it is overlooked too often. That is that you must fire those that are not pulling their weight or doing their job. Please do follow the proper HR procedure and be sure to do it legally (that is my disclaimer). The issue is that if you release someone is not doing their job you probably realized it after their co-workers did. You need to address it immediately. Correct the problem, demote them, fire them, whatever is necessary to have them do their job and let others know that it is not acceptable. I have seen great people leave a company because they were upset after putting in their blood sweat and tears into the company they have to watch someone slack off, knowing that individual will profit eventually (hopefully) from their hard work. If you do not remove the bad apples the good talent will leave.

CEO is Responsible to Close the Good Talent
The term “close” is meant to mean the convincing of good talent to join the team and want to make the business succeed. This is ultimately the responsibility of the CEO who is to paint the vision, show their leadership and convince the good talent to join.

How to Incorporate as a Business and Why

Posted on by
1

I get a lot of questions about incorporation, how to and why, as well as venture capital and funding. I thought I would touch on the highlights of organizing a business and why.

Why Organize Your Business or Incorporate
Personally I like to embark only on tasks that make sense and are done for a reason. Therefore instead of just incorporating for the sake of doing it, let’s discuss why first. If you begin to operate a business, meaning you are incurring expenses and hopefully generating revenue, then you are officially in business. There are three main areas of concern: debts, liability and taxes. While a debt is typically considered a liability I am splitting it into financial debts and legal liabilities.

Sole Proprietor
By default you are a Sole Proprietor and while nothing needs to be done you may not want this particular classification and here is why. As a sole proprietor you are personally liable for the debts of the business.

Debts
If you were to obtain a loan with the business it would be obtained under your social security number and you would be personally liable if there were ever an issue. A common example, because you would be surprised how many do this, you may rent office space under your own name. The lease may be a 5 year lease and you have only yourself, two years later you have 10 employees and have increased the space. An issue comes up and the bill cannot be paid for some reason, maybe you took on a partner and they stole some money, now the landlord can come after you personally. You have put your personal assets and potentially your family at risk. As an aside I have known individuals to have incorporated but still sign personally for leases, they had their reasons but there are alternatives, they did not have to – a topic for another post.

Legal Liabilities
If there is ever a lawsuit relating to the business, as a sole proprietor you have again put your personal assets at risk.

Taxes
You will only be taxed once, there are other issues but this is the most important to keep this review brief.

Partnerships
I will touch on this briefly, but essentially there are: general partnerships and limited partnerships. As a general partner you will both be personally liable. Limited partners can invest in the business but “limit” their risk and exposure to the amount of money they invested. There are reasons for this structure, however for now I will focus on the more common below.

Corporations
The first thing to note is that as a corporation it is it’s own entity, a separate legal entity. Without getting into two many details, if done properly the business owners will avoid taking on liability for the debts and only the business will be accountable for the legal liabilities. However there is double taxation. The business is taxed and then the income that is paid to you is taxed on your personal return – hence the “double” taxation. Therefore you have probably heard of “C” and “S” corporations. Electing to be an “S” corporation with the IRS allows you to have your income flow through to you and not be taxed twice while maintaining the other debt and legal liability protections of a C corporation.

LLC
LLC’s have become more popular over time. The acronym stands for Limited Liability Company. An LLC provides the best of all worlds with the debts associated to the company, the legal liabilities associated with the company and you are effectively taxed once.

Conclusion
It should be said that every situation calls for a potentially different structure. There are also other issues such as the issuance of stock and how they are governed which may dictate one legal entity over another. However that being said it seems to be more popular these days for individuals to use LLCs as the entity of choice. There is also typically less paperwork and in some cases lower yearly fees for LLCs.

There is also the issue of choosing which state to incorporate in. Many choose their own state, depending on where they are doing business. Others choose states such as Delaware for their long history of case law and feeling of general certainty as how they would rule in various instances, others choose based on state tax and/or privacy.

Suggestion
GoDaddy provides incorporation services and you can lean more here on their Business Page.

* As a caveat I need to point out that this is not legal advice and there are exceptions to every scenario outlined above.