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Wednesday, April 27, 2011

Staff & Money or Money & Staff

At this point in the process, you should have a business plan, a slide show, an elevator pitch, and maybe you practiced your presentation at a venture fair, a local angel meeting, or some event.  Hopefully, you got feedback which is useful to improving your presentation and business plan.  Perhaps, you have a deal with the inventor who is continuing to develop the product or a prototype and you have the future rights if new inventions come about.  All of this is good progress, but you still do not have staff or money.  Which comes first?  A bit of chicken and egg right!

You are constantly thinking about what type of staff you need, how much they will cost you, and where you will get money to pay them and other expenses.  The team you create is a reflection of the quality of the company, technology, and your leadership.  The higher the qualities of your team, the better your chances are to attract money.  I actually presented to a venture firm a few years back and was told that they just invested in a company that had inferior technology.  The entire investing syndicate was in love with the team.  Their thinking was that the technology was not important, and that the team was so good that they would eventually turn the company into a valuable asset. The morale is that having an A class team, is generally superior and helps get money. 

A great team will be able to find the path to create value and overcome adversity in most situations.  Take a look at public companies that have had technical or product failures in the past, but have bounced back.  This usually happens because the management team mapped out changes to improve performance and then executed effectively on the strategy. 

The most senior people are your most critical hires. As you need help, it is possible to find it via part time or consulting arrangements.  Your overall objective is keeping the expenses low until you can afford to add.  Cutting staff is extremely painful for them and for you. I usually recommend that full time hires be kept to a minimum and the company work semi-virtual until there is a real need to add a significant head count.

So what type of people do you need to start with?  A few suggestions below of key hires:

·       Chief Scientific Officer, Chief Medical Officer, or Chief Technology Officer (CSO, CMO, CTO) – Your inventor is likely not an employee in the company and you licensed the technology.  Even if the inventor is in the company, he/she may not have the key corporate development experience. The product development must be advanced and you really need experience to do this right.  This hire is a critical position and I prefer filling it with a highly experienced professional from industry; a “Been There, Done That” person. 

·       Chief Business Officer (CBO) – This is a person that can help get deals done, map out partnering programs and go after partners, help define your business strategy, and maybe introduce you to funds with money, maybe do a few early deals, etc.  This should be someone with relevant experience in the field and they must come with a database of contacts.  You want them to hit the ground running.

·       Chief Financial Officer (CFO) - You need a financial person to keep track of your funds, expenditures, and to help with budgets etc.  This could be a CFO, but in the early years of your company it could even be a part time financial services firm.  You can upgrade the position when you are ready to go public or enhance company growth; then you really do need that experienced CFO.  When the time comes, get the best you can afford. 

·       Technical staff - You are likely to need a few technical staff.  Especially, if you have lab or development space and need hands to advance the projects.  If they are experienced, they can even help write grants to funding agencies.

How do you pay for the senior people?  This will be a real negotiation and a sales job when you have no cash and you are in your startup mode.  To complicate the negotiation and sales, you are likely seeking mid-six figure salary employees.  This is where you need to be creative in structuring a compensation package. 

There are many former senior executives around that may be able to take on risk for some real upside.  You will find them via extensive networking!  You may be able to convince them to assist as an advisor, consultant, or employee for an equity stake in the company.  Most difficult is the ability to convince them to forgo salary because you cannot pay.  Give this consideration when you determine the equity stake as it will require you to give them more equity than if you could pay.  You may need to cover their out-of-pocket expenses if they travel. This will cost a bit, but you can’t ask them to spend their funds and not make a salary.  That will not work well for long.  You can also consider setting limits in their agreements that stipulate a salary of a certain amount when the company completes a capital raise of a certain amount.  For example, you will provide a salary of $200,000 per year once the company completes a financing of $5MM.  You offer them for example 3% of the equity of the company starting immediately and add a buyback or vesting provision that goes to zero in a 3-4 year timeframe.   The buyback or vesting ensures they have to work for a period to keep the stock or options.

It is possible to find experienced staff with little or no funding, but you will have to do some real networking and negotiating.  Remember, they are not getting paid for a while so don’t expect them to move until the company is adequately funded.  On an occasion, you may need to consider having them work from a distance even after funding has been achieved.  This can be managed, but you really do not want everyone doing this.

Which comes first the money or staff? If you are creative, you may be able to get the staff on board with minimal cash in the bank.  Then you can use that to help increase your chances for getting the money or argue for a higher valuation of the company.   Maybe, the staff will come up with a way to advance the company with much less money or via grants. 

All the above said, I never like to turn away money. If you can get someone to give you funding with no management team, you should consider taking it. 

I hope this has been helpful.  I am always available to discuss the topics in the blog or others you may find of interest. 

 Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon