6.5 Staffing Headcount, Cost and Hiring Plans
6.6 Operating Expenses and Working Capital Needs
FYI:
Chapter Notes
Introduction
• Many investors and others look first at the executive summary, and then go directly to the management team section to assess the strength of the people starting the firm
• There is a prevalent belief that unless a proposed new venture has a strong management team, little else matters
• It’s often not the idea or market that wins funding among competing plans, but the perception that one management team is better prepared to execute their idea than the others
• Investors tend to evaluate management teams in the context of the type of business they’re proposing and the type of funding or financing they’re seeking
• The best candidate for investment resides in Box 2 of the 2 x 2 matrix—an untested idea and a tested management team
• The management team section should be crisp and to the point, with material such as resumes of key employees placed in an appendix
• The way your management team is assembled provides an indication of the extent to which you’re open to advice and you’re able to generate enthusiasm for your firm
• Clearly describe how your team will evolve; most new ventures will have gaps in their management teams at the business plan stage
• Describe where the gaps are and how they’ll be filled; for example, if the start-up can’t afford to hire a marketing person during its product development state, that’s understandable, but evidence should be provided showing where the firm is getting access to marketing expertise
• Leaving issues like these unaddressed or unresolved gives the impression that the founders don’t really know what they’re doing and erodes credibility
Management Team
• The management team of a new firm typically consists of the founder and a handful of key management personnel
• The description should be largely factual but should be presented in a way that makes it easy to visualize where the firm is today and where it plans to be in the foreseeable future in regard to key management team personnel
• Indicate the name or names of the founders, how many employees the company has, where the major gaps are, and how quickly the company will be adding personnel
• The three major parts to this section are management team personnel, management team ownership and compensation, and common mistakes to avoid
Management Team Personnel
• A brief profile of each member of the management team should be provided starting with the founder or founders
• Title of the position
• Duties and responsibilities of the position
• Previous industry and related experience
• Previous successes
• Education background
• Certain attributes of a management team should also be highlighted if they apply in your case
• Team members who’ve worked together before are preferred because it usually means that they get along personally and trust one another
• The skills and ability of the members of the team should complement one another rather than reinforce a single skill or competency
• The next step in describing the management team is to identify gaps that exist
• Complete a management team skill profile grid, indicating which skills are satisfied by each management team member
• The grid illustrates the skills or competencies that currently have no coverage and roughly the number of people who need to be hired
Management Team Ownership and Compensation
• You must also fully disclose the ownership structure of the new venture and the compensation of the members of the management team
• List each owner, his percent ownership in the company, and his base compensation
• An options pool is an inventory of company stock that is set aside for future employees
• Attracting high-quality people to a start-up often necessitates the granting of stock options as an incentive form of compensation
• Finally, it should be clear how the money for the firm has been raised so far
Common Mistakes to Avoid
• Do not place unqualified friends or family members in key management positions
• Don’t assume that previous success in other industries automatically translates to your industry
• Don’t adopt a “one-man team” philosophy
• Don’t hire top managers who share no ownership in the firm
• Be sure to disclose management team skill or competency gaps
• Don’t use vague or unclear language to discuss plans for filling the skill or competency gaps that are disclosed
Board of Directors
• If a new venture organizes as a corporation, it is legally required to have a board of directors, which is a panel of individuals elected by the corporation’s shareholders to oversee the management of the firm
• Technically a board of directors has three responsibilities: (1) appoint the firm’s officers, (2) declare dividends, and (3) oversee the affairs of the corporation
• An inside director is a person who is also an officer of the firm
• An outside director is someone who is not employed by the firm
• If you include this section in your plan, you should list your board members and provide a brief bio for each member
Provide Guidance
• Providing guidance and support to the managers of the firm is the most useful role of the board of directors
• Boards can also help fill competency gaps within the company
• If a firm gets investment capital, the investor will normally occupy a seat on its board of directors
Lend Legitimacy
• Providing legitimacy for a firm is another important function of a board of directors
• It is assumed that a high-quality individual would be reluctant to serve on a board of a low-quality firm; this individual’s presence on the board is known as “signaling” that the company has the potential to be successful
• Investors like to see management teams, including the board of directors, that have people with enough clout to get their foot in the door with potential suppliers and customers
• If a company doesn’t currently have a board of directors, it may be prudent to indicate that the firm anticipates having a board of directors at some point in the future
Board of Advisors
• A board of advisors is a panel of experts asked by a firm’s managers to provide counsel and advice on an ongoing basis
• Many people are more willing to serve on a board of advisors than on a board of directors because it requires less time and no legal liability is involved
• Most boards of advisors have between 5 and 15 members
• Having a board of advisors can make your start-up stand out because, although having a board of advisors is widely recommended, most start-ups do not have one
Retained Professionals and Other Professionals
• Retained professionals are those who work on a “retainer” basis. Generally these are Lawyers and Chartered Accountants. New businesses often can’t justify insourcing these management functions and rely on Retained Professionals for these services.
• You may also occasionally work with other professionals such as bankers and investors.
• The objective is not only to disclose who you’re working with but also to assure the readers of your plan that you’re getting good-quality advice
• Paid Consultants – individuals who are hired to give professional or expert advice, make up an important source of advice for many start-up firms
• Some start-ups use the services of consulting companies such as Bain & Company and Accenture, but usually on a limited basis
• Unpaid Consultants include organizations such as the Small Business Development Center and SCORE
Company Structure
• Even if you are a small firm, you should outline how the company is currently structured and how it will be structured as it grows
• Company structure is a “nuts-and-bolts” type of issue that deals with the inner workings of a firm
• The most effective way to illustrate a company’s structure and lines of authority and accountability is to include an organizational chart in the plan
• An organizational chart is a graphic representation of how authority and responsibility are distributed within the company
• Companies are generally organized along functional, product, or geographical lines
• There may be some unfilled boxes on the organizational chart, consistent with the “gaps” in management personnel shown in the skill profile
• If your firm has more than one founder, you should comment on the specific role that each founder will take on as the firm moves forward
• Some business plans complement their discussion of company structure with a brief analysis of how the firm will be managed from a leadership, motivation, and corporate culture point of view
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