Build Your Team

The first thing you must understand when building a team is the value of your business in terms of equity and royalties.  An owner’s equity in a business is the difference between the total value of the business' assets and its liabilities.  If ownership is divided based on equity in the business, then each owner will own a percentage of the business based on their level of contribution to the business' assets.  It is possible to divide up ownership using other methods, however it might introduce more complications to the business.  

 

For instance, angel investors should have no expectation of influence in a business's day-to-day operations.  However, other types of investors, like venture capitalists, will expect to have some level of input into a business' strategy and decision-making processes.  Spell out exactly what level of involvement investors will have before they invest to prevent any personal and legal entanglements that could arise from unmet expectations.  

 

Often, certain business partners or employees will initially accept sweat equity rather than traditional pay.  This means that rather than receiving a wage for their work, they will instead be compensated initially with future ownership shares in the company.  Many entrepreneurs will overvalue sweat equity early on and come to regret it later when too much control of the business has been handed out to those who may not deserve that level of compensation.  One way to avoid handing out ownership in exchange for work and/or business assets is to pay a royalty, which is a guaranteed fixed percentage of profit or revenue as payment to the owner of a specific asset or intellectual property.  This way, the owner of the asset or intellectual property gets compensated for their contribution to a business without the owner having to sacrifice his or her controlling share in the business.  

 

A controlling share is ownership of 51% or more of a business' outstanding shares and voting stock.  The controlling shareholder, also known as the majority shareholder, is more often than not the founder of the business.  Once one individual has given up or sold more than 51% of their voting share the business becomes much more democratic. Multiple individuals have to pool their shares to create a controlling share and have final say on large decisions.  It is important to put a lot of thought into how much equity you are willing to give up, if any, to acquire a team member. Only once your business is well established should you consider selling more than 51% ownership of your entity. 

 

If you are the only owner of the business, then you are operating a sole proprietorship, and any other team members fall below you in the business' hierarchy.  A sole proprietorship is when there is only one owner in a business. Opening a business with a partner or partners, on the other hand, can be more difficult than opening a business by oneself.  If the group does not collaborate effectively, then it can feel like you are fighting one another rather than working together to achieve your goals. It might sound simplistic, but teamwork is an invaluable skill that you and your business partners must share.  An excellent way to promote the collective over the individual is to explicitly spell out each person’s role before any work gets done. This will greatly reduce the chance for misinterpretation of the responsibilities each person carries within the business.
 

Businesses with more than one owner are either partnerships or corporations.  A partnership is a business owned by two or more individuals who share profit, risk, and responsibilities.  There are two types of partnerships: general and limited. A general partnership is when the owners share responsibilities and make all personal assets available to the business if needed.  A limited partnership is when one or more of the owners is only responsible for financial contributions and not management.  Corporations, entities that are legally separated from the individual(s) that own them, are similar to partnerships in that there are two primary types.  An S corporation is either a closely held corporation, a partnership, or LLC, that wishes to have its income taxed under the Subchapter S of the IRS code.  A business that files their income taxes as an S corporation does not pay federal income tax, but instead any losses or gains by the business during the year are passed onto the shareholder's individual income tax returns.  A C corporation is a business that is taxed separately than its owners.  The majority of larger companies are registered as C corporations. 

 

Assigning corporate titles can help to ensure that everyone knows his/her role.  Corporate titles include Chief Executive Officer (CEO), Chief Operations Officer (COO), Chief Financial Officer (CFO), Chief Information Officer (CIO), and Chief Marketing Officer (CMO), among others.  The CEO is the top of the corporate hierarchy, the highest ranking executive.  The COO is second-in-command, and oversees all day-to-day operations of a business.  The CFO is the executive in charge of a business' finances and financial departments.  The CIO, sometimes called the CTO (Chief Technology Officer), manages the various technologies and information systems that a business operates.  Finally, the CMO is tasked with oversight of all marketing activities within a business. 

 

When assembling a team, each team member’s employment status is a major consideration.  Hiring and paying employees is an expensive process that will never become less expensive.  Employees are workers who are paid through a regular wage or salary.  Employers must obtain a license in order to hire employees, and pay to workers compensation and job and family services.  On top of those initial steps, a business must submit W-2 forms to pay taxes at the local, federal, and state level when they pay their employees.  All those taxes are taken out before the employee is paid.  

 

Independent contractors, however, can work without any extra costs to a business.  Independent contractors are either workers or outside businesses who make a contractual agreement to perform a duty or duties for a business.  The business pays the independent contractor who is responsible for reporting their own income and paying taxes on it at the end of the year.  All a business must do is report on a form 1099 how much the contractor was paid, but only if the contractor’s compensation for the year exceeds $600.00.  Contractors also use all their own equipment and assume all personal injury risk when on the job. Unethical businesses that attempt to get around hiring employees by just calling them independent contractors are likely to find themselves in trouble with the IRS and other government organizations.

 

When it comes to employees, hiring should be extremely limited from the outset.  Only those who can fit into necessary and defined roles should be hired. You can evaluate potential employees’ strengths and weaknesses in several ways, including personality profiles and SWOT analyses.  Personality profiles are management tools that evaluate the personal traits of employees like their values, skills, and other relevant information.  Companies like Psych Press offer solutions for identifying and managing talent.  

 

It can be beneficial for a business to make initial hires on a trial-basis, ultimately only hiring full-time employees who “fit in” during the incubation period.  In order to protect a business in the event that a manager or employee leaves, it is wise to have all members of the business sign a non-disclosure agreement (NDA) or a non-compete agreement (NCA).  An NDA is a contract that prevents former members of a business from divulging certain important facts about the business after leaving, while an NCA prevents former business members from working with, or forming, competitive businesses after leaving. 

 

Startup businesses often get into trouble when the owner hires friends and/or family without a clear understanding for both parties of the employees’ roles, responsibilities, and place within the business.  The prospect of hiring people you know and like can be alluring. However, in practice, it is difficult to make such situations work and personal relationships will usually only increase the strain on work-related issues.  This is not to put you off entirely from hiring friends and family, but it is important to understand the risks associated with working with them. If you hire a friend or family member who has a necessary skill set, then be sure to keep your personal relationship separate from the work environment.

 

The first consideration when hiring should be finding people whose skill sets fit your business’s needs.  If you have enough work that is applicable to dedicate an employee solely to one type of task, then you should make that skill set your priority.  However, for a small business it will usually make sense to hire “utility players.” In baseball a utility player is one who can play multiple positions effectively, giving the manager versatility in how he organizes his team.  The principle is very similar in the business world. Having employees who can handle multiple tasks or multiple positions will often save money. As a small business, you may not have enough position-specific work available to keep multiple employees busy. However, if you have one or two employees who can handle multiple tasks, then you can actually increase your employees’ efficiency by decreasing the number of employees. 

 

A mentor is very important for young and/or new entrepreneurs.  If you can find someone within your prospective industry, or even someone you trust that has entrepreneurial experience, then their guidance can be invaluable through the startup process.  Starting a business is an extremely complex process, with tax and legal ramifications, personal responsibilities, and lots of pressure on the owner. Having a mentor who can be a sounding board for ideas or offer advice on whatever issues you might encounter throughout the process will undoubtedly make your job easier.  Just having a mentor is not enough, however. It is vital to be open to suggestions, advice, and criticisms in order to grow as both a business owner and a person. Be an active listener, take the time to thank your mentor for their help, and,once you have attained success, give back by taking it upon yourself to help mentor the next generation of entrepreneurs. 

 

A startup business's team can be the difference between success and failure.  Having a dedicated team of individuals that understand their roles is an invaluable resource for a startup business.  After all, no startup business owner truly does everything on his own. Whether it is business partners, employees, or their personal support system, at some point every entrepreneur will need someone to lean on.  That is why you cannot overstate the value of a good team.