Category: Team Building & HR (Page 5 of 7)

by Nicholas de Wolff, founder of deW Process

Before naming your remaining executive management, you might want to think about how the organization plans to grow:

Might there exist the need to bring on external members of the leadership team, down the road a little (this means you should leave some suitable titles sitting on the back burner, in anticipation)?

Does the mid-range business plan call for rapid employee growth, slow growth, minimal growth, large numbers?  This will impact the nature of the developing hierarchy.

Will the operations be managed and nurtured on a more horizontal basis, or will the organization prosper under a more traditional “top-down” model?

While titles should mean less to people who are inward facing and intent on staying on board for a very long time, the more externally exposed your executive is, the more thoughtfully structured their title should be, as it communicates their standing in relation to the contact they are meeting (hierarchy), as well as their functional responsibilities, thereby suggesting what types of internal influence/oversight they may have.  It also serves as part of the organizational brand positioning, in that it communicates the structure, personality, and internal relationship paradigm of your company.

Think as much about where you want this “right-hand person” to evolve as anything else:

• If they are going to move increasingly into the realm of operational oversight and fiscally responsible management of the asset that is the company, they could become your COO.
• If they are going to be responsible for marketing, in the strategic sense (positioning, branding, strategic relations, product development, etc), they’re your CMO or VP, Marketing.
• If they are going to shift more in to the biz dev/ sales side, they are your VP or director of Sales – depending on whether Sales falls under the control of your marketing lead or not (no point in naming anyone Exec Sr. VP if there are only a few of you!)

Startups require their leadership to multitask, and step in to the breach wherever required.  Sometimes they will function as a true executive leader, and sometimes the toilet will need unclogging.  Some startups exhibit a degree of insecurity about bringing someone on who has a track record of leadership, for fear that the individual will not be willing to “roll up their sleeves”.   Instead, the fledgling company avoids hiring proven executives, and places aggressive but inexperienced “up-and-comers”, hopeful that they will “grow in to the role”.   I suggest it is easier to find an extraordinary executive who can answer the phones, than an intern who can effectively develop a budget, business plan, or marketing strategy.  If you find someone willing to take a pay cut in return for a balance of equity participation, sometimes the risk will be exceeded by the reward.

QUESTION:

What should I do if my employee is padding his expense account?

ANSWER:

by Charles Swan at www.thevirtualcfo.net

This has to be nipped in the bud.  You haven’t mentioned how critical this employee is to the success of the company, so that I will assume that since you are a startup, it is a sensitive position.

You should have a discussion with the employee, and define what is and is not a business expense as far as the company is concerned.  If you don’t have one now, it may be a good time to draft an employee manual, or at least a reimbursable expense policy.
Expense reimbursements policies are derived from IRS regulations.  IRS requires the expense to be business related.  It is the employee’s burden to justify the business purpose.  There is an implicit assumption that the reimbursed expenses are business related, and the company is therefore allowed to deduct them as business expenses on its income tax returns.  However, if upon audit, the expenses are determined, the deduction by the company can be disallowed, and any reimbursement will be attributed to the employee, with interest and penalties for late payment of related income taxes.  If the employee is a significant shareholder, then the treatment can get uglier for the employee/shareholder, as well as the company.

Good luck, and consider that if your employee is cheating on his/her expense reports, what else might they be cheating on?

QUESTION:

I want to hire an overseas software developer. What should I watch out for? I’m worried that they may steal my IP. I’m also worried that they may not deliver and I’ll have no recourse. But I can’t afford a US developer. Any advice would be appreciated.

ANSWER:

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

On the one hand, there’s no easy answer to this question. If you hire someone in a remote country with a less-than-ideal legal system, you’re going to run some risks. That said, developers in the U.S. can be pretty geographically remote from you and our legal system, though better than many, is also far from frictionless. So start out with a realistic assessment of the alternative. If you hire a developer in the U.S. she can still take your stuff and/or fail to produce and you may have a very hard time doing anything about it. So keep your focus on what you really want (functioning code so you can get on with your business), not the booby prize (a lawsuit). That said, there’s a difference between dealing with someone that would be hard to go after and someone who would be effectively impossible to go after. Here are a few pointers.

Reputation

First, reputation is important. When I say that, I mean it should be important to you and to the developer. If someone comes with good recommendations from several trusted sources, that will give you some comfort that they’re OK. Moreover, that person has something to lose – a good reputation and the future business that comes with it – even if you can’t hold them legally responsible.

Payment

In big deals, there are subtle ways to avoid paying if you don’t get what you paid for, such as escrows and letters of credit. In most cases, these arrangements are overkill and will cost you more than they save. Your best protection is to agree to pay only after the developer has delivered the goods to your satisfaction. Of course, a savvy developer will worry about that arrangement for the same reason you’re worried about paying up front. The usual result is some combination of up front and back end payments. In complicated development deals, there are generally a series of progress payments when the developer achieves set milestones. If you possibly can, however, you should make sure that you owe a significant final payment only after you’ve “accepted” the final delivery (i.e. you’ve got it and tested it and it meets your specs).

Protecting Your IP

Assuming you’ve found someone with a decent reputation, you should still be careful about your IP. You should think about this in two ways.

Protecting Yourself from IP “Theft”

The first is the concern you stated: Protecting yourself from theft. The best way to deal with this is to try to be more precise about what IP could be “stolen” in a way that would hurt you and avoid turning that over if you don’t have to. This may not seem obvious to you. If the IP “belongs” to you, shouldn’t you be worried about losing it? Yes and no. I’ll go through a few categories that might occur to you.

Your Basic Business Idea

By “basic business idea,” I mean your business plan in a nutshell. For example, “an iPhone app that will [fill in function here].”

Generally speaking, you shouldn’t spend a lot of time worrying about people stealing this kind of idea for two simple reasons. First, several people are probably already working on the idea, even if you don’t know about it. The time you waste worrying about someone stealing your idea is time they’ll be using to execute on it. Second, this kind of idea will almost always be apparent to everyone as soon as you launch your business. Unless there’s a patentable invention involved, you’ll have no protection at that point. So if it’s a good idea, you’ll quickly have competition. If you succeed in building a viable business, it will have a lot more to do with executing well than with the “aha moment” that started you off.

If you do think you might have some patentable inventions, there are some steps you should take but I’ll discuss them in the section on “Protecting Your Claims to IP.”

Good, Functional Code

What I mean by “good, functional code” is a workmanlike (or even artful) product that gets the job done but isn’t unique. For the most part, you hire a talented software developer to produce this kind of code. That’s not to denigrate coders. Transactional lawyers produce much the same thing and we take great pride in our work. But the value is in the thought and care that goes into crafting a product that works well, not the specific text.

So here, also, it’s rarely worth worrying about “theft.” In theory, if the developer keeps some particularly clever code for use on his next job, he might be “stealing” your copyrighted work, but so what? Any benefit the developer gets from the “theft” will not really be to your detriment; you almost certainly benefited from similar minor “thefts” when he wrote your code. So just relax and look to the next section on “Protecting Your Claims to IP” to make sure you own the code in the first place.

“Secret Sauce”

What I mean by “secret sauce” is something that’s important but won’t be apparent to anyone who uses or hears about your business. The classic example is an algorithm. If you use Google, Amazon or Netflix, you’ll notice that they have ways of predicting things you might be looking for, but you won’t have any idea how they do it. Their code incorporates very effective algorithms to accomplish those results. They keep those algorithms under lock and key. For good reason: From a legal perspective, these are “trade secrets” and they are legally protected so long as the owner takes reasonable measures to keep them secret.

It’s definitely worth worrying about the theft of your secret sauce. Legally speaking, you can keep rights in your trade secrets if you use reasonable measures to protect them from disclosure, even if someone actually makes off with them. That said, you want to have secret sauce, not spilled beans and a lawsuit. So if you have trade secrets, try to come up with a strategy to avoid handing them to outsiders at all. Software is, in any event, developed in modules, linked libraries and the like, so this should generally be possible. You can still get a lot of the cost benefit of hiring an offshore developer, even if you have to do some “core” coding yourself or hire an on-shore employee to do it.

Protecting Your Claims to IP

Even if you aren’t worried about protecting yourself against theft (for the reasons discussed above), you still need to think about protecting your claims to IP for two related reasons. First, you need to use your IP to run your business, so you need to make sure that you have a clear right to do that. For example, I’ve applied for federal trademark registration of my logo, not because I think it is or will be hugely valuable but because I want to make sure that no one can disrupt by business by questioning my right to use it down the line. Second, you may need to go through a “legal diligence” review if you seek outside financing or, eventually, if you sell the business. At that point, the lawyers will be looking for evidence that you’ve taken sufficient measures to establish and protect your legal claims. It will go much easier if you pass with flying colors, rather than having to convince a potential investor or buyer that your failures don’t matter.

Luckily, this kind of IP protection is entirely in your control. You just need to know what kind of IP rights you have and then take the appropriate steps to protect your claims to them.

If you’re hiring anyone to work with your IP or produce it for you (e.g. write computer code), it’s important that they sign a comprehensive agreement to keep your confidential information confidential and assign anything they create to you (and, if appropriate, establishing that any copyrightable work product is “work for hire”). Consistently requiring confidentiality agreements is more-or-less the minimum you have to do to establish that you took reasonable steps to keep your trade secrets secret (i.e. to protect your rights in them). Likewise, an effective assignment agreement will establish, or give you the means to establish, your rights in any IP produced. If you’re hiring an offshore developer, make sure your agreement specifies that it will be governed by the laws of a U.S. state (generally, you should choose the one where you’re located) and that all disputes will be resolved in a location in the U.S. (generally, wherever you are). Ideally, it would be nice to make sure the agreement is enforceable under the laws of the developer’s home jurisdiction. Unless it’s a very big deal, however, worrying about that is usually overkill. Again, if you need to enforce it, you’ll pretty much be out of luck, whether or not you succeed in your lawsuit.

If you think you might have patentable inventions, you need to take some additional steps, preferably before you disclose anything about them to anyone (especially anyone who hasn’t signed a confidentiality agreement). The first and most important is to consult with an experienced patent lawyer. Patent prosecution is a very specialized area of practice, so go to someone who specializes in it (for example, not me). A lawyer can help you figure out what might or might not be patentable and take steps to secure your rights, such as filing a patent application or a provisional patent application. Do not,under any circumstances, try to do this on your own. You are guaranteed to mess it up, probably in ways that can’t be fixed later.

I hope this helps. Good luck developing the code and launching the business!

QUESTION:

What are the rules around having unpaid interns? We’re a San Francisco startup. Are we allowed to legally bring on interns without paying them?

ANSWER:

by Steve Hoffman, Cofounder of Founders Space

In California, you must pay your interns at least minimum wage, unless the internship you are offering qualifies as part of an educational course. In most cases, the jobs interns are given do not qualify and I wouldn’t risk it.

It may vary state-to-state, but to be on the safe side, you should pay your interns at least minimum wage. Then you don’t have to worry about getting in trouble with the Labor Department.  Also, by paying interns in a work-for-hire arrangement, you help avoid any disputes over intellectual property.  For example, if an intern contributes ideas to your product but isn’t paid, the intern can claim they own part of it.  This can be a real headache down the road.

Lastly, check out this article in the NY Times:

http://www.nytimes.com/2010/04/03/business/03intern.html

I hope this helps!

QUESTION:

What is the best way to find a partner with some funds? Or advisors who can invest?

ANSWER:

by Naomi Kokubo, Cofounder of Founders Space

It’s hard enough to find the right business partner, let alone the right business partner, who also qualifies as an angel investor.

Remember, getting the “right” partner is the most important thing. If the partner you choose isn’t the right fit, it can doom your business. So choose your partner carefully, and don’t expect this partner to come with a huge bank account. That’s just unrealistic.

I’d recommend separating your search: look for the right partner for your business, while also looking for the right investors. This will make it simpler. If you get really lucky and land an investor who would make an excellent business partner, then jump on it. But don’t hold your breath.

The same goes for advisors. Look for talented advisors regardless of whether they can invest in your company. Find the very best advisors you can, and don’t mix them up with investors. If an advisor turns out to be an investor, that’s just icing on the cake.

QUESTION:

I want to take my company (tech consulting) from one-man show to a bigger one. I have my business plan and know I can make it – but not alone. I need to scale. I would like to bring in people (VP Business Development, CTO) to help with business development and project execution. How do I make sure these guys are “stakeholders”, in it for the long run and not just until they find a good job? More generally, how are “stakes” granted? Can you point me to a good resource to help me understand this (fully)?

ANSWER:

by Steve Hoffman, Cofounder of Founders Space

I’ve been in your shoes, and I know exactly what you’re saying.

You can never be sure that whomever you hire will not jump ship when the going gets tough. The only thing you can be sure of is that people tend to gravitate towards the best opportunities.

As long as the people you bring on feel that your startup is the best opportunity they have, they’ll stick with it.

One way to grant a stake is through a well-structured stock option plan. I’ll let one of our lawyers give you advice on this, since setting one up is quite involved.

But on practical level, you should worry more about how to get to the next level, than whether people will stick around. If you hire people you feel are “loyal” but who aren’t able to get your business to the next level, it won’t do you any good.

You need to think of who can get you to your next major milestone as effectively as possible and bring that person onboard. Don’t worry about whether or not they’ll stick with your company for years. It doesn’t matter. The typical lifespan of startups is one year. What matters is that you succeed in the next year, and to do that you need people who can make a difference immediately.

Maybe it’s not full-time employees you need. Maybe it’s contractors. Or a combination. Identify exactly the type of talent you need, and go after that talent with a deal that is attractive to them in both the short and long term. But don’t expect that talent to stick around unless they see your company taking off.

I hope this helps!

QUESTION:

I’m so busy just trying to get my startup off the ground that I’m wondering if it’s really worth the time and effort to set up a Board of Advisors. That’s a huge investment in time that I have to make, plus legal fees. Any guidance would be appreciated.

ANSWER:

by Nathan Beckord at VentureArchetypes

I’m coming at this question from a particular perspective– that of an Advisor to four startups– but my answer is that it’s absolutely worth it, IF you can find the time and be disciplined in actually using your Advisory Board.

Building an Advisory Board can be a fairly cheap way of gaining access to talent, experience and rolodexes without having to actually hire people. In most cases, advisors will participate for 0.25% – 0.75% each, meaning you can build a solid group of 4-5 folks who will contribute for a couple years for just a point or two of total company equity. For most early stage startups, that’s a tremendous bang for the (equity) buck.

Now back to my caveat above– it’s only worth it if you can find the time to actively use your Board. My advice here is to keep it straightforward and exceedingly simple. I suggest having a set, standing meeting– say, once every other month or once a quarter– where you review progress made during the previous period, set new ‘reach’ goals, and brainstorm solutions to problems. In this way, you get into a rhythm with your Board, and you get the most value out of them.

Of course, you should feel free to lean on your advisors to help solve problems or make introductions at other times, too- particularly during a deal phase, such as a fundraising or acquisition. But don’t abuse the privilege (remember, these are “advisors” not employees, so while most will freely open their network, they will stop short of doing the heavy lifting of putting together an investor roadshow, for example).

If you’d like to read a long and rambling essay on Advisory Boards, I wrote a blog post on it awhile ago, found here: http://bit.ly/aTyknB

ADDITIONAL ANSWER:

by John Hollier, Collaborative Xceleration

First, let me say that I agree with everything that Nathan said in his response.

I would just like to make a distinction between paid and unpaid advisors, and also make a comment about the ‘time commitment’ issue.

In Nathan’s response he discusses a formal, paid advisory board.

Another option is an unpaid Advisory Team. These would be people who have expertise and experience that you don’t have but need. You would interact with them when you needed input on an issue in their area of expertise, BUT you would limit the usage of their time to no more than an hour or two a month.

This arrangement can be handled with a simple letter between you and the advisor – it doesn’t have to be a legal (i.e., lawyer drafted and reviewed) document.

The guidance that one of these advisors can offer you in half an hour may save you days or weeks of effort.

Which brings me to the time issue.

Do you think it is worth spending time doing research before starting your business?
Do you think it is worth spending time planning before starting your business?
Would you agree that spending this time up front saves time and resources later?
Using advisors is the same investment – a little time now to save time and resources later.

Good luck.

QUESTION:

I have formed a LLC in Sate of Nebraska in order to pursue a small business idea. My challenge is that they I require certain skills/knowledge that I don’t have. Because my business has $0 value, I cannot yet afford to hire individuals with these skills. I want to form business relationships with individuals with these skills in order to start a business together (“entrepreneurial partners”). Can I offer some sort of limited private stock options to these “entrepreneurial partners” which would increase in value as the company grew, and potentially be sold on the open market years later, if the company goes public? What is this called, and what does it look like?

ANSWER:

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

I should add that I’m not a Nebraska lawyer and don’t know anything about Nebraska LLC, securities or employment law, all of which are highly relevant. If you are going to proceed with or even seriously consider what you are proposing, you absolutely need experienced Nebraska counsel to help you think through these and other legal issues.

All of that said, I’ll lay out a few pointers on the main issues you have to resolve.

First, an LLC is not generally a good vehicle to compensate people with options. It is possible to grant options in LLC membership interests, but it isn’t easy. So if you really want to compensate people with stock options, you’ll probably want to convert your LLC into a C corporation.

An LLC is a good vehicle if you want to unbundle equity, for example by splitting interests in profits from interests in capital and governance rights. But you need very sophisticated corporate and tax counsel to make those creative variations on equity work properly. If you try to do it yourself, you’re almost guaranteed to create an unholy mess that, you, your employees, the courts and the IRS will spend many miserable years trying to sort out.

The second issue is securities law. On the federal side, there are fairly standard ways to deal with this, but you need legal counsel to make sure you get it right (getting it wrong has very serious consequences). On the state side, the securities rules vary a lot on paying people with equity interests. So if you’re in Nebraska, you absolutely must go to Nebraska counsel. For more information on this, take a look at my post here: https://www.foundersspace.com/company-formation/are-there-any-laws-i-need-to-follow-when-issuing-stock-to-founders-in-different-states/.

Finally, there’s the pesky question of state and federal employment laws. Again, if you’re operating in Nebraska, there is no alternative to going to local counsel who understands Nebraska’s laws. That’s not me and I won’t hazard a guess at what they say. On the federal level, you’ll have to comply with federal wage and hour laws, as well as the tax laws (in particular Section 409A of the Internal Revenue Code and the regulations under it). Depending on who is involved, how much equity they have and what the service arrangements are, it is possible that they might be considered owners or independent contractors, rather than employees (i.e. exempt from most wage and hours laws). That is simply not a judgment you can make on your own. 409A compliance also requires expertise. Again, if you try to wing it here, you are almost guaranteed to run afoul of reams of complex regulations and unwritten or partially written policies of the IRS and federal Department of Labor. The results can be extremely painful.

Those are the main legal issues involved. It’s worth stepping back and noting that well-advised entrepreneurs rarely try to do this. That’s partially because of the legal complications discussed above. It’s also because of the business complications that arise if you try to get people to work on the basis of equity alone. As a rule, good, skilled people won’t work on that basis. Most of them need cash to feed their families and pay their mortgages. So before you go that route, it’s worth thinking hard about who is going to remain in your applicant pool. Another problem is disappointment. People can develop very unrealistic notions of how much equity compensation is worth. In fact, if that’s all you’re offering, you’re effectively selecting for people who are exaggerating the probable value of your equity. Extreme disappointment often leads to fights, unhappy departures and, whether justified or not, lawsuits. That kind of disappointment is rarely a problem with people who get paid mainly in cash. Finally, if everything goes well, you’re likely to end up with a lot of small, unsophisticated people holding your equity. That is, in itself, a problematic situation, as I have discussed in this post: https://www.foundersspace.com/news-announcements/considering-the-alternatives-to-angel-and-venture-funding/.

I’m sorry if this isn’t very encouraging. I don’t want to rain on your parade, but I do want you to understand the difficulties you’re facing. Depending on your specific circumstances and goals, it’s possible that your plan (or some variation on it) could be legally feasible and make a lot of sense. To get to that conclusion, however, I’m sorry to say that you will really need a Nebraska lawyer who can give you sophisticated, personalized legal advice.

Good luck with the venture!

QUESTION:

I’m so busy just trying to get my startup off the ground that I’m wondering if it’s really worth the time and effort to set up a Board of Advisors. That’s a huge investment in time that I have to make, plus legal fees. Any guidance would be appreciated.

ANSWER:

by Nathan Beckord at VentureArchetypes

I’m coming at this question from a particular perspective– that of an Advisor to four startups– but my answer is that it’s absolutely worth it, IF you can find the time and be disciplined in actually using your Advisory Board.

Building an Advisory Board can be a fairly cheap way of gaining access to talent, experience and rolodexes without having to actually hire people. In most cases, advisors will participate for 0.25% – 0.75% each, meaning you can build a solid group of 4-5 folks who will contribute for a couple years for just a point or two of total company equity. For most early stage startups, that’s a tremendous bang for the (equity) buck.

Now back to my caveat above– it’s only worth it if you can find the time to actively use your Board. My advice here is to keep it straightforward and exceedingly simple. I suggest having a set, standing meeting– say, once every other month or once a quarter– where you review progress made during the previous period, set new ‘reach’ goals, and brainstorm solutions to problems. In this way, you get into a rhythm with your Board, and you get the most value out of them.

Of course, you should feel free to lean on your advisors to help solve problems or make introductions at other times, too- particularly during a deal phase, such as a fundraising or acquisition. But don’t abuse the privilege (remember, these are “advisors” not employees, so while most will freely open their network, they will stop short of doing the heavy lifting of putting together an investor roadshow, for example).

If you’d like to read a long and rambling essay on Advisory Boards, I wrote a blog post on it awhile ago, found here: http://bit.ly/aTyknB Cheers, Nathan Beckord, VentureArchetypes

QUESTION:

I brought on a high-powered advisor for a considerable amount of stock, which vests over 4 years. But the advisor isn’t adding much value, and it’s been nearly a year. Should I let the advisor go? This advisor is well-known in the industry, so I don’t want to make enemies.

ANSWER:

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

I assume that you’re thinking of terminating the advisor before his one-year “cliff” vesting date, so that he gets no equity. From a legal perspective, the danger is that he will claim you took advantage of him, terminating him right before the cliff so as to get all of his good work and not pay him for it. I know that’s not what’s going on, but that doesn’t prevent him from thinking it, working himself into a rage and suing you. If the original grant and the termination are well-documented, that suit should eventually fail. But it might not fail quickly or cheaply and it could possibly succeed. While it persists, it puts the company’s cap table into uncertainty, which could complicate financing transactions and acquisitions of the business. The more equity on the line, of course, the higher the stakes for you and the advisor and the harder your choice. Bear in mind that the economic value that makes it hard for you to give him the equity also makes it more likely that he will sue, whether or not he has a good case.

The upshot is that you should think carefully about whether you want to terminate him before or right after the cliff. If you choose before, get an employment litigator involved in advance to help you think through how to do it in the most defensible way (e.g. by properly documenting your reasons).

Legalities aside, if you terminate someone very close to the cliff, you’re very likely to make him angry. It sounds like you don’t think he shares your view of his performance, which raises the risk. So if you’re worried about making him your enemy, terminating him right before the cliff is a bad idea. In this regard, you might take a look at what Fred Wilson posted recently on this topic here: http://www.avc.com/a_vc/2010/11/employee-equity-vesting.html. His view (as a VC!) is that it is generally poor form to terminate someone close to the cliff. The advisor is likely to share that view.

One other thing to bear in mind. Although it may gall you to give the advisor equity, doing that will give him an ongoing stake in your success. If he is well known in the industry, that’s worth something. At very least, it might keep him from badmouthing you around town to justify his departure. By itself, this upside isn’t usually a good enough reason to give someone equity, but it’s there, so you might as well play it for what it’s worth and take some comfort in that.

Before you think through the costs and benefits, try to put aside your frustration, no matter how justified you are, and to take a realistic view of how the advisor will see your actions and respond, no matter how unjustified he will be. Justice can be very expensive. Peace is often cheaper and sometimes profitable.

I hope this helps.