Week 5 assignment

Chapter 8 Management Team and Company Structure

Introduction

This pivotal chapter describes a startup’s management team and company structure. Many investors and others who read business plans 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. This practice stems from the prevalent belief that unless a proposed new venture has a strong management team, little else matters. Affirming this sentiment, Joel Kurtzman, the author and business consultant introduced in  Chapter 6  , said:

In my own view, business is about people first and everything else second. Strategies, processes, structures, and systems are only as good as the people implementing them. Good ideas never succeed on their own. 1

This view, which is widespread in startup circles, illustrates the importance of carefully constructing the management team section of the business plan, particularly for startups that are seeking funding. Investors read more business plans with interesting ideas and exciting markets than they are able to finance. As a result, 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.

In their evaluation of management teams, investors and others 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 2 ✕ 2 matrix shown in  Table 8-1  illustrates this point. The matrix shows four types of new ventures, defined by whether the initial management team is untested or tested and by whether the business idea is tested or untested. As shown, the best candidates for investment reside in Box 2—untested idea and tested management team. In this instance, the tested management team must prove that it is tested (in this portion of the business plan) to have the best chance of attracting investment dollars. Untested ideas typically have more upside potential because they do not reside in crowded markets. Firms that occupy the other boxes are less likely to obtain funding, at least initially, but it depends on the investor or the lender. Many bankers, for example, confine their startup investments to tested ideas and tested management teams to minimize the risk in their loans.

Table 8-1 Combinations of Ideas and Management Teams

	Untested Management Team	Tested Management Team
Untested Idea	1	2
Tested Idea	3	4
Key:
1. Untested idea, untested management team. Untested ideas are exciting, though risky. In this case, the management team will need to build a convincing case that it’s up to the challenge of bringing an untested idea to market. 2. Untested idea, tested management team. This is the strongest combination. Untested ideas, which typically have the largest upside potential, are best launched by a tested management team. 3. Tested idea, untested management team. This is potentially the weakest combination. Tested ideas normally compete in crowded fields with stiff combination. This is a high-risk environment for an untested management team. 4. Tested idea, tested management team. This is an okay combination, but typically will not produce impressive returns. Tested ideas tend to compete in crowded markets with stiff competition. In this environment, even a tested team may produce only average returns.

This part of the business plan is divided into five sections: Management Team, Board of Directors, Board of Advisors, Other Professionals, and Company Structure. The sections should be crisp and to the point, and weighty material, such as the resumes of the key employees, should be placed in an appendix to the entire plan. There are two issues that you should be particularly sensitive to as you write these sections of the plan.

First, 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. For example, along with a description of the management team, Prime Adult Fitness’s business plan shows that it already has a 5-member board of directors, a 4-member general advisory board, and a 10-member customer advisory board. Prime Adult Fitness also reports that it has received advice from several unpaid consultants. These types of efforts are impressive. They show that the people behind Prime Adult Fitness are open to advice, are willing to share power, and are able to garner support for their business idea. The initiatives may also cause a reader of their business plan to think, “If these people are able to fill three volunteer boards in a short period of time, I bet they’ll have no trouble selling their business concept to paying customers.”

The second thing to be sensitive to as you write the management team section of your business plan is to clearly describe how the team will evolve. Almost all new ventures have gaps in their management teams at the business plan stage. That’s normal. What’s important is to describe where the gaps are and how they’ll be filled. In addition, you want to avoid the impression that you’re naive or are unsure about the order in which to fill the gaps. For example, during the various stages of product development, a company such as ZUCA (the backpack on rollers), needs expertise in marketing and sales to make sure the product it’s developing is saleable after it’s produced. In the context of this example, for a startup to say that a marketing and sales person will be hired after the product is developed shows a lack of understanding of the proper upfront role of marketing input. If the startup can’t afford to hire a marketing person during its product development stage, that’s understandable, but evidence should then be provided that shows where the firm is getting access to marketing expertise. Similarly, if a company is proposing a product that it will manufacture but has no manufacturing expertise on its management team, that’s a serious concern. Leaving issues like these unaddressed or unresolved gives the impression that the founders of the firm don’t really know what they’re doing and erodes the credibility of a business plan.

Along with these two issues, you should be aware that if the business will be launched by two or more cofounders, the reader of the plan will try to gain a sense of whether the composition of the cofounding team makes sense. The attributes of an effective cofounding team is explored in the Business Plan Insight Box Feature.

Business Plan Insights Attributes of an Effective Cofounding Team

Many businesses are launched by two or more people. There are four key criteria to consider in putting together an effective cofounding team. You want to get this right because an effective cofounding team can provide a business a significant advantage in terms of bandwidth and the capacity of the cofounders to provide each other emotional support. In contrast, an ineffective cofounding team can lead to conflict, heartache, and multiple business challenges.

1. Complementary rather than redundant skills. The founding team should have complementary rather than redundant skills. For example, if one cofounder is a computer programmer, the other cofounder or cofounders should be people with different skills, such as marketing, operations, or finance.

2. Priorities and work habits should be in sync. While the cofounders don’t need to be clones of one another, they do need to have similar priorities and work habits. For example, if one cofounder is willing to work 16 hours a day to get a project done on time, and the other cofounder or cofounders would rather quit after eight hours a day and try to renegotiate the contract due date for the project, that difference in work style will invariably cause conflict. Similarly, if one cofounder believes that wearing a coat and tie when meeting with clients should be the norm and other cofounder or cofounders insist on wearing blue jeans and t-shirts, obvious disagreement could arise.

3. Common goals and aspirations. It’s critical that the cofounders have common goals and aspirations for the business. For example, if it’s the goal of one cofounder to build a billion dollar business, and the other cofounder or cofounders would be perfectly satisfied growing the business to $10 million in sales and then selling out, problems could ensue.

4. Have a Founder’s Agreement. A founders’ (or shareholders’) agreement is a written agreement that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or “sweat” equity they put into the firm, and how long the founders have to remain with the firm for their shares to fully vest. The time to work these issues out is before, not after, a business launches. The agreement should be prepared by an attorney who is experienced in dealing with startups. A copy of the agreement should be placed in the appendix of the business plan.

Now, let’s look at each individual section of the management team and company structure of a business plan.

Management Team

The management team of a new firm typically consists of the founder or founders and a handful of key management personnel. Early stage firms may have only the founder or founders and plans to add additional personnel. The description of a firm’s management team 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.

The introduction to this section should cover the basics. 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. Keep the introduction brief—you’ll have chances to fill in the details later.

Introduction

Prime Adult Fitness’s management philosophy focuses on integrity, teamwork, enthusiasm, and providing a stimulating environment for both the company’s employees and its members. Employees will be selected based on their qualifications for the job and their commitment to serving the physical and mental health needs of our 50+-year-old members.

Management Team

Jeremy Ryan, Cofounder and CEO, Age 46

Responsible for strategy formulation and the overall success of the company. Jeremy started a successful fitness franchise in South Florida and grew it to 38 units in 3 years before selling to a larger company. Prior to that, he spent 11 years as VP of operations and 3 years as VP of sales for a privately held Miami fitness center that grew to 5,500 members. Jeremy has an MBA from Miami University and has published more than 30 articles in fitness trade journals and national magazines regarding the fitness needs of older people. Jeremy’s passion for fitness is drawn largely from his father who, after surviving a heart attack at age 49, pledged to improve his quality of life by joining a fitness center and exercising regularly. Today, Jeremy’s father is an active 73-year-old retiree.

Elizabeth Sims, Cofounder and CFO, Age 49

Responsible for raising capital and for the financial management of the company. Elizabeth served as the CFO of Jeremy Ryan’s fitness franchise in South Florida and left the company when it was sold. Prior to that, Elizabeth, who is a CPA, spent 9 years with a Big 5 accounting company, and 10 years as a cost accountant for a Fortune 500 company. While with the Big 5 accounting company, she supervised the accounting practices of 3 publicly traded fitness franchises and 11 privately owned fitness chains.

Sarah Peterson, COO, Age 51

Responsible for the day-to-day operations of the company, the maintenance of the company’s facilities, and the acquisition and installation of new equipment. Sarah has 9 years of experience as the COO of a 250-bed nursing home and 17 years as a public school teacher and principal. Sarah is the cofounder of a nonprofit organization named Healthy After 50, which disseminates information to aged 50+ individuals about nutrition, physical fitness, and mental health. Sarah has a master’s degree in education from the University of Virginia.

Jill Campbell, Program Manager, Age 52

Responsible for all the fitness and related classes that will be offered by the company. Jill is an exercise physiologist and has spent the past 12 years practicing in a private wellness/exercise center in Jacksonville, Florida. Prior to that, she was a registered nurse, assigned to the trauma center of an urban hospital. Jill has a master’s degree in exercise physiology from the University of Missouri and a nursing degree from Creighton University in Omaha, Nebraska.

Alex Jackson, Marketing and Sales, Age 57

Responsible for marketing, sales, and membership growth of the company. Alex has 11 years’ experience as a senior marketing executive for a major fitness machine manufacturer, where he won several “salesperson of the year” awards. Prior to that, he spent 25 years in the U.S. Marine Corps (11 years as a recruiter). Alex is a world-class triathlete for his age group.

Skill Profile and Gaps in Management Team

The following skill profile depicts the most important skills required at the top management team level of the company and where the gaps exist.

Summary: Two significant gaps exist in the management team: the director of HR/Recruiting and the director of Member Care and Relations. Both positions will be recruited and filled within six months. Currently, the HR/Recruiting position is being filled on a volunteer basis by Timothy Kemp, a Prime Adult Fitness board member and angel investor. The Member Care and Relations position is not currently open. It will become a functioning position when Prime Adult Fitness begins actively recruiting members.

Ownership and Compensation

Figure 8-1 Management Team and Company Structure (Prime Adult Fitness Business Plan)

The three major parts to this section are management team personnel, management team ownership and compensation, and common mistakes to avoid. This section of Prime Adult Fitness’s business plan is shown in  Figure 8-1 .

Management Team Personnel

A brief profile of each member of the management team should be provided, starting with the founder or founders of the firm. Each profile should include the following information:

· Title of the position.

· Duties and responsibility of the position. This item should explain specifically what the individual will do and how the individual’s work will contribute to the development of the firm.

· Previous industry and related experience. This item should explain who the individual has worked for and how the individual’s past experiences relate to the new firm.

· Previous successes. This item should highlight the individual’s past successes and accomplishments, particularly as they relate to the challenges of helping launch a new firm. For example, has the individual been involved in previous startups, launched divisions within larger firms, spearheaded successful teams and projects, and so forth.

· Education background.

Although they should be kept brief, the profiles should illustrate why each individual is qualified and will uniquely contribute to the success of the firm. Certain attributes of a management team should also be highlighted if they apply in your case. Investors and others tend to prefer team members who’ve worked together before. The thinking here is that if people have worked together before and have decided to partner to start a new firm, it usually means that they get along personally and trust one another. 2  This scenario helps relieve a persistent worry—that the initial managers of a firm won’t get along with one another. In Prime Adult Fitness’s business plan, Elizabeth Sims’ short bio indicates that she worked with Jeremy Ryan, Prime Adult Fitness’s CEO, in his previous venture. In addition, the skills and ability of the members of the team should complement one another rather than reinforce a single skill or competency. Many companies initially develop around a single competency, such as writing software code, producing music, managing logistics, and so on. This factor often defines the nature of the initial management team, and the management team gets stacked with people from the same discipline. A startup that resists this tendency and develops a more well-rounded management team from the beginning has a leg up on others. It’s also appropriate to include personal information about the members of the management team, if it’s pertinent. For example, Jeremy Ryan’s bio indicates that his passion for fitness is drawn largely from his father who, after suffering a heart attack at the age of 49, pledged to improve his quality of life by joining a fitness center and exercising regularly.

The next step in describing the management team is to identify the gaps that exist. A good way to do this, and simultaneously depict the skills that exist in the initial team, is to develop a management team skill profile. This is what Prime Adult Fitness did, as depicted in its business plan shown earlier in  Figure 8-1 . A management team skill profile is a grid that lists the major skills needed in a firm on the horizontal axis (marketing, finance, manufacturing, IT, etc.) and the current members of the management team on the vertical axis. The grid is completed by indicating which skills are satisfied by each management team member. The skills with no coverage represent gaps in the management team. The best way to draw attention to the gaps is to list under the current management team member’s names Gap 1, Gap 2, Gap 3, and so forth, depending on the number of gaps that exist. This procedure illustrated the skills or competencies that currently have no coverage and roughly the number of people who need to be hired. You can then briefly discuss the nature of the gaps and your plans for rectifying them. Some of the gaps may currently be filled through access to expertise other than a full-time employee. For example, a particular gap may be filled by an advisory team member, a part-time management employee, or an outsource provider. Simply explain how you are dealing with each of these individual situations. In Prime Adult Fitness’s case, its gap in HR/Recruiting is currently being filled by Timothy Kemp, one of its board members and investors, as shown in  Figure 8-1 .

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. This should be done in a table format because it’s easier to quickly assess the information. The owners of the firm may include management team members and outside investors. Prime Adult Fitness, as shown in  Figure 8-1 , listed each owners, their percent ownership in the company, and their base compensation, if they are employed by the firm. The ownership percentages may not always add up to 100 percent, if the firm has established an options pool for future hires, as in the case with Prime Adult Fitness. An options pool is an inventory of company stock, usually in the neighborhood of 15 to 20 percent of the total stock, which is set aside for future employees. Having an options pool is particularly important if a firm is looking for investors. Attracting high-quality people to a startup often necessitates the granting of stock options as an incentive form of compensation. Investors know this and will be reassured if the owners of the firm also realize this and have made provisions to make stock options available to future key hires.

Finally, it should be clear, in the table or in another part of this section, how the money for the firm has been raised so far. As explained earlier in this book, most investors like to see that the founders, at a minimum, have “skin in the game,” meaning they have invested their own money. If the founders don’t have enough confidence in the venture to invest their own money, why should anyone else invest?

Common Mistakes to Avoid

There is a common set of mistakes to avoid when putting together your initial management team and writing this section of the business plan. These mistakes raise red flags and undermine the credibility of your plan. The most common mistakes are as follows:

· Placing unqualified friends or family members in key management positions

· Assuming that previous success in other industries automatically translates to your industry

· Presenting a “one-man team” philosophy—meaning that one person (or a small group of people) is wearing all hats with no plans to bolster the team

· Hiring top managers without sharing ownership in the firm

· Not disclosing management team skill or competency gaps

· Vague or unclear plans for filling the skill or competency gaps that are disclosed or clearly exist

If any of these items are present in your management team and your business plan, you should review them to contemplate if they should be revised or corrected.

The next section of the plan focuses on the role of a new firm’s board of directors in regard to its management team. This section of Prime Adult Fitness’s business plan is shown in  Figure 8-2 .

Board of Directors

The importance of this section varies by plan. If a new venture organizes as a corporation, it is legally required to have a board of directors. A board of directors is a panel of individuals elected by a corporation’s shareholders to oversee the management of the firm. In a very early stage firm, or a small firm, the board may be restricted to the principles running the firm. In these instances, the board serves little more than a legal function. In other instances, however, the board plays an active role in the management and oversight of the firm.

Prime Adult Fitness’s board of directors was formed when the company was incorporated. All board members serve on a volunteer basis. There are three outside directors and two inside directors. There are no plans to compensate board members. All of the board members live in Central Florida. The board meets monthly. Individual board members interact with Prime Adult Fitness’s top management team frequently.

Outside Directors

Dr. Kenneth Jamison, Family Practice Physician, Age 62

Dr. Jamison practices medicine in Oviedo, Florida, the home of Prime Adult Fitness, and is an outspoken advocate of fitness and preventive health care for people 50 years old and older. Dr. Jamison received his MD from Duke University and is board certified in family practice medicine. Dr. Jamison writes a widely read column for a local paper on health-related issues.

Martha Ford, Attorney, Age 52

Ms. Ford is a partner in the law company Campbell, Campbell & Ford. She specializes in providing legal advice to startups and small businesses. Ms. Ford received her law degree from the University of Iowa.

Timothy Kemp, Retired Entrepreneur, Angel Investor, Age 64

Mr. Kemp is a retired entrepreneur, having started and sold five successful companies. He has won several “entrepreneur of the year” awards. Mr. Kemp’s last startup, K9 Medical Services, was purchased by a large pharmaceutical company and is still in business under its original name.

Inside Directors

Jeremy Ryan, Cofounder and CEO, Prime Adult Fitness

Elizabeth Sims, Cofounder and CFO, Prime Adult Fitness

Figure 8-2 Board of Directors (Prime Adult Fitness Business Plan)

If your firm has a board of directors, and it plays an active role in the management of your firm, it should be included as part of your management team. 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. 3  The optimal size of a board of directors for a startup is three to five people. A board is typically made up of both inside and outside members. 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. A three-member board of directors normally consists of one inside director and two outside directors, and a five-member board has two inside directors and three outside directors. A list of the most desirable qualities in a board of directors and the most desirable qualities in individual board members is provided in  Table 8-2 .

If you include this section in your plan, you should list your board members and provide a very brief bio for each member. You don’t need to provide a separate bio for the inside directors (i.e., members of the management team) who were discussed earlier. An active board of directors provides guidance and lends legitimacy to a firm. These attributes are discussed next.

Provide Guidance

Although a board of directors has formal oversight responsibilities, its most useful role is to provide guidance and support to the managers of the firm. Many well-intended entrepreneurs and management teams simply “don’t know what they don’t know,” which often results in missteps early in the life of a startup. Experienced board members often see these potential missteps before they occur and help management teams avoid them. Many CEOs interact with their board members frequently and obtain important input. The key to making this happen is to select board members with needed skills and useful experiences who are willing to give advice and ask insightful and probing questions. The extent to which an effective board can help shape a firm and provide it a competitive advantage in the marketplace is expressed by Ram Charan, an expert on the role of boards of directors in corporations:

They (effective boards) listen, probe, debate, and become engaged in the company’s most pressing issues. Directors share their expertise and wisdom as a matter of course. As they do, management and the board learn together, a collective wisdom emerges, and managerial judgment improves. The on-site coaching and consulting expand the mental capacity of the CEO and the top management team and give the company a competitive edge out there in the marketplace. 4

Table 8-2 Attributes of an Effective Board of Directors

· Strong communication with the CEO · Customer-focused point of view · Complementary mix of talents · Decisiveness · Mutual respect and regard for each other and the top managers of the firm · Ability and willingness to stand up to the CEO and the top managers of the firm · Ability to focus · Strong ethics

Attributes of Strong Board Members

· Strong personal and professional networks · Willingness to make personal introductions on behalf of the firm · Emotional stability · Strong interpersonal communication skills · Pattern recognition skills · Ability to partner · Investment and operating experience · Ability and willingness to mentor the CEO and top managers of the firm

Source: Adapted from D. Jaffe and P. Levensohn, “After the Term Sheet: How Venture Boards Influence the Success or Failure of Technology Companies,” White paper, Levensohn Venture Partners ( http://www.levp.com ), November, 2003.

Boards can also help fill competency gaps at the time a company is started and on an ongoing basis. It’s not uncommon for a company to shift the emphasis of its board to match its stage of development. For example, startups that are focused primarily on product development at the outset may include several product development experts on their board and replace these individuals with marketing specialists when their product comes to market. If a firm gets investment capital, the investor will normally occupy a seat on its board of directors. Investors do this to not only protect their investment but also assume a formal role in lending advice and assistance to the firm.

Lend Legitimacy

Providing legitimacy for a firm is another important function of a board of directors. Well-known and respected board members bring instant credibility to the firm. For example, just imagine the positive buzz a firm could generate if it could say that Mark Cuban, owner of the Dallas Mavericks, Landmark Theatres, Magnolia Pictures, and Chairman of the HDTV cable network AXS TV, joined its board. This phenomenon is referred to as signaling. Presumably, a high-quality individual would be reluctant to serve on the board of a low-quality firm because that would put his or her reputation at risk. So when a high-quality individual does agree to serve on a board of a new firm, the individual is in essence “signaling” that the company has the potential to be successful. 5

Achieving legitimacy through high-quality board members can result in other positive outcomes. Investors and others 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. Board members are also often instrumental in helping young firms arrange financing or funding.

These guidance and legitimacy issues should be woven into the short descriptions of the board members provided in the business plan, as appropriate. A final point is that the majority of firms will have an active board of directors at some point if they grow to any appreciable size. As a result, if a company currently doesn’t have a board of directors, it may be prudent for the business plan to indicate that it anticipates having a board of directors at some point in the future and will make the board part of its overall management team.

The next section focuses on the board of advisors, a source of counsel and advice that all firms, regardless of size, can take advantage of. This section of Prime Adult Fitness’s business plan is shown in  Figure 8-3 .

Prime Adult Fitness has two active boards of advisors. The general advisory board consists of 4 members, and the customer advisory board consists of 10 members.

General Advisory Board

Dr. Jason Steele, Sports Medicine Specialist, Age 37

Dr. Steele is a sports medicine specialist practicing at a local clinic. He has a passion for the care of older people and attracts many active older adults to his practice. Dr. Steel’s passion for the care of older adults stems partially from personal experience. He and his wife are the primary caregivers to his maternal grandfather and his wife’s paternal grandmother.

Primary role: To provide medical advice on the selection of exercise equipment and classes, and to provide training to Prime Adult Fitness’s instructors regarding how to help older people (particularly those who have not been exercising) establish an appropriate and safe exercise regime.

Cynthia Rains, Public School Teacher, Age 66

Ms. Rains is a lifelong resident of Central Florida and has taught at Oviedo High School for 26 years. She is active and has belonged to fitness clubs for many years.

Primary role: To provide a layperson’s advice on the selection of exercise equipment and classes, and to provide tours, on a volunteer basis, of Prime Adult Fitness’s facility.

Rosa Torres, Clinical Psychologist, Age 46

Ms. Torres is a clinical psychologist, having spent the last 10 years of her career working in the wellness field for older adults. Her particular specialty is neurobics, which is a relatively new field that focuses on mental exercise. Prime Adult Fitness will have several classes focused on neurobics and will feature a neurobics center in its facility.

Primary role: To help shape Prime Adult Fitness’s approach to neurobics.

Bradley Manning, Retired Fund-raiser, Age 66

Mr. Manning spent the majority of his professional life in various fund-raising roles, primarily for nonprofit organizations.

Primary role: To provide advice for building membership.

Customer Advisory Board

Prime Adult Fitness maintains a 10-member customer advisory board. The board members participate in focus groups, serve on committees that are helping shape the activities of the company, and participate in related activities. Board members serve on a volunteer basis for a one-year term.

Figure 8-3 Board of Advisors (Prime Adult Fitness Business Plan)

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. Listening to advice from experienced individuals can be extremely helpful, particularly in areas where the founders of a firm lack experience. 6  Unlike a board of directors, a board of advisors possesses no legal responsibility for the firm and gives nonbinding advice. 7  As a result, many people are more willing to serve on a company’s board of advisors than on its board of directors because it requires less time and no legal liability is involved. A board of advisors can be established for general purposes or can be set up to address a specific issue or need. For example, some startups set up customer advisory boards shortly after they are founded to help them fine-tune their initial offerings. Prime Adult Fitness, as noted earlier, has a 10-member customer advisory board to help select exercise equipment and decide on the schedule of fitness classes and activities. Similar to a board of directors, the main purposes of a board of advisors is to provide guidance and lend legitimacy to a firm. Both of these attributes are seen in the advisory board set up by Laura Udall, the entrepreneur who started ZUCA backpack on rollers company ( http://www.zuca.com ). When asked about the types of advice and support she gets from people outside her immediate management team, Udall said:

The company has a board of directors, but I also have created a wonderful board of volunteer advisors that has been very helpful with tactical and strategic decisions. The advisory board has evolved over the years as a result of my network. I asked each of the members to join as a result of their specific expertise. It now includes a CFO/COO of a prominent corporation, an executive in the luggage industry, a mom inventor who has founded several successful companies, a product designer, and a manufacturing expert. 8

Imagine the type of advice and support Udall gleans from this group of advisors. Most boards of advisors have between 5 and 15 members and interact with each other and with a firm’s managers in several ways. Some advisory boards meet three or four times a year at the company’s offices or in another location. Other advisory boards meet in an online environment. In some cases, a firm’s board of advisors will be scattered across the country, making it more cost-effective for a firm’s managers to interact with the members of the board on the telephone, through video conferencing or via e-mail rather than bringing them together physically. In these situations, board members don’t interact with each other at all on a face-to-face basis, yet they still provide high levels of counsel and advice. The fact that a startup has a board of directors does not preclude it from establishing one or more advisory boards. For example, Coolibar ( www.coolibar.com ), a maker of sun protective clothing, has a board of directors and a medical advisory board. According to Coolibar, its medical advisory board “provides advice to the company regarding UV radiation, sunburn, and the science of detecting, preventing, and treating skin cancer and other UV-related medical disorders, such as lupus.” 9  The board currently consists of nine medical doctors, all with impressive credentials. Similarly, Intouch Technologies ( www.intouchhealth.com ), a medical robotics company, has a board of directors along with a business and strategy advisory board, an applications and clinical advisory board, and a scientific and technical advisory board. 10

Although having a board of advisors is widely recommended in startup circles, most startups do not have one. As a result, one way you can make your startup stand out is to have one or more boards of advisors. In terms of your business plan, you should identify your boards of advisors and provide a brief bio for each member. A description of Prime Adult Fitness’s general advisory board and its customer advisory board is provided in its business plan as shown previously in  Figure 8-3 .

The next section of this part of the business plan focuses on the role of “other professionals” in rounding out a company’s management team. This portion of Prime Adult Fitness’s business plan is shown in  Figure 8-4 .

Prime Adult Fitness relies on the advice, counsel, and encouragement of professionals in our community on an as-needed basis. None of our professional advisors are paid a regular retainer.

Other Professionals

Attorney, Cameron Campbell, partner in the law firm of Campbell, Campbell & Ford. Mr. Campbell is a well-known Orlando, Florida, attorney with 23 years of experience. Mr. Campbell is the partner of Prime Adult Fitness board member Martha Ford.

CPA, Katherine Chen, Private Practice. Ms. Chen has 19 years of auditing and general accounting experience.

SBDC, SCORE, and the Central Florida Technology Incubator. Prime Adult Fitness has sought the advice from counselors associated with each of these agencies.

Figure 8-4 Other Professionals (Prime Adult Fitness Business Plan)

Other Professionals

At times, other professionals assume important roles in a new venture’s success. If this applies in your case, a separate heading should be included in the management team section of your business plan to make note of these individuals or their firms. The other professionals that are often mentioned include attorneys, bankers, investors, college professors, and business consultants.

Briefly identify the professionals, including attorneys and accountants, that apply in your case and provide a short bio if appropriate. The objective is to not only disclose who you’re working with but also assure the readers of your plan that you’re getting good quality advice. Similarly, if you have a relationship with a banker or investor, that should be disclosed. Other potentially key relationships, such as a relationship with a college professor who is helping you develop your product and/or is mentoring you through the business startup process, should be mentioned. Often, the substance of a particular relationship isn’t as important to the reader of your plan as the fact that the relationship exists. There is an oft-repeated story about the early days of eBay that illustrates this point. During its beginning stages, eBay’s partners, Pierre Omidyar and Jeff Skoll, decided to recruit a CEO. They wanted someone who was not only experienced but also had the types of credentials that Wall Street investors’ value. They soon discovered that every experienced manager they tried to recruit asked if they had venture capital backing, which at the time they did not. For a firm trying to recruit a seasoned executive, at least at that time, venture capital backing was a sort of seal of legitimacy. To get this valuable seal, Omidyar and Skoll obtained funding from Benchmark Venture Capital, even though eBay didn’t really need the money. Writer Randall Stross recalls this event as follows:

eBay was an anomaly: a profitable company that was able to self-fund its growth and that turned to venture capital solely for contacts and counsel. No larger lesson can be drawn. When Benchmark wired the first millions to eBay’s bank account, the figurative check was tossed into the vault—and there it would sit, unneeded and undisturbed. 11

This strategy worked for eBay. Soon after affiliating with Benchmark, Bob Kagle, one of Benchmark’s general partners, led eBay to Meg Whitman, an executive who had experience working for several top firms, including Procter & Gamble, Disney, and Hasbro. Whitman served as eBay’s CEO from 1998 to 2007.

Consultants make up another important source of advice for many startup firms. A consultant is an individual who gives professional or expert advice. Consultants fall into two categories: paid consultants and unpaid consultants. Unpaid consultants include organizations such as the Small Business Development Center ( www.sba.gov/sbdc ) and SCORE ( www.score.org ). These sources often prove to be very useful. Startups generally use paid consultants sparingly because of the costs involved. An exception might be a startup that needs help in a specialized area, such as building a product prototype or providing independent certification of the technical merits or safety of a particular product. In addition, some startups use services of consulting companies such as Bain & Company ( http://www.bain.com ) and Accenture ( http://www.accenture.com ) but usually on a limited basis. In all cases, sources of advice should be noted in the business plan if they are substantive and worth mention. Again, the impression you want to give is that you are actively engaged and are seeking advice regarding your business venture.

The next section of this part of the business plan focuses on company structure. This section of Prime Adult Fitness’s business plan is shown in  Figure 8-5 .

Company Structure

This section focuses on how your company will be structured. 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. It’s important that the internal structure of a company makes sense and that the lines of communication and accountability are clear. Including a description of your company’s structure also reassures the people who read the plan that you know how to translate your business idea into a functioning firm. Company structure is a “nuts-and-bolts” type of issue that deals within the interworkings of a firm. It’s exactly this type of issue, however, that entrepreneurs must take seriously to develop smoothly functioning firms.

Prime Adult Fitness Organizational Chart

The senior staff reports to CEO Jeremy Ryan as shown below. Finance & Accounting is a senior vice president position. COO, program manager, Marketing & Sales, HR/Recruiting, and Member Care & Relations are vice president positions. Each VP will be responsible for their respective employees.

Figure 8-5 Organizational Chart (Prime Adult Fitness Business Plan)

The most effective way to illustrate how a company will be structured and the lines of authority and accountability that will be in place is to include an organizational chart in the plan. An organizational chart is a graphic representation of how authority and responsibility are distributed within a company. 12  The organizational chart should be presented in a graphical format, similar to the manner in which Prime Adult Fitness’s organizational chart is shown in its business plan in  Figure 8-5 . If you’re unable to display your organizational chart in a graphical format, a narrative discussion of the key reporting relationships in your firm should be provided. Companies are generally organized along functional, product, or geographical lines. If you’re not familiar with these distinctions, you should consult an organizational behavior or a principles of management textbook, so your organizational chart conforms to the norms your readers expect. The organization chart needs to show what the business looks like today and what it intends to become in the short-term or intermediate-term future. As a result, there may be some unfilled boxes on the organizational chart, consistent with the “gaps” in management personnel shown in the skill profile discussed earlier. In all cases, you should provide a brief interpretation of the organizational chart and discuss the most signification relationships that are displayed.

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. A frequent source of tension in new ventures, particularly if two or more founders start out as “equals,” is a failure to delineate the specific roles they will fill. The organization chart is an effective tool for showing that the founders have worked out which of the “boxes” each will fill. Knowing that this issue has been resolved will be reassuring to the readers of your plan.

Some business plans complement their discussion of company structure with a brief analysis of how the firm will be managed from a leadership, motivational, and corporate culture point of view. If you feel it is appropriate, you should include a short section in your plan that covers these topics.

Chapter Summary

1. The management team and company structure section is pivotal in a business plan. Many investors and others who read business plans look first at the executive summary and then go directly to the management team section to assess the strengths of the people who will be starting the firm.

2. There are two issues that you should be particularly sensitive to as you write the management team and company structure section of your business plan. First, the way your management team is assembled provides an indication of the extent to which you’re open to advice and are able to generate enthusiasm for your firm. Second, as you write the management team section of your business plan, you should clearly describe how the management team will evolve.

3. The three major parts to the “management team” portion of this section of the business plan are management team personnel, management team ownership and compensation, and common mistakes to avoid.

4. A good way to describe the gaps that exist in a management team is to develop a management team skill profile.

5. You must fully disclose the ownership structure of the new venture and the compensation of the members of the management team in the business plan. A table that shows the names of each of the owners of the firm, along with their age, their percent ownership in the company, and their compensation if they work for the firm is the best method.

6. There are a set of common mistakes to avoid when putting together your initial management team and writing your business plan. These common mistakes include placing unqualified friends or family members in key management positions, assuming that previous success in other industries automatically translates to your industry, presenting a “one-man team” philosophy, hiring top managers without sharing ownership in the firm, not disclosing management team skill or competency gaps, and having vague or unclear plans for filling the skill or competency gaps that are disclosed or clearly exist.

7. A board of directors is a panel of individuals elected by a corporation’s shareholders to oversee the management of the firm. Many firms have active boards of directors that provide guidance and lend legitimacy to the firm.

8. An advisory board is a panel of experts asked by a firm’s managers to provide counsel and advice on an ongoing basis.

9. At times, professional, such as attorneys, bankers, investors, and consultants, assume important roles in a new venture’s success. These individuals and firms should be identified and included as part of a firm’s overall management team in its business plan.

10. The most effective way to illustrate how a company will be structured and the lines of authority and accountability that will be in place is to include an organizational chart in the business plan.

Review Questions

1. Why is the “management team and company structure” section referred to as pivotal in a business plan?

2. To what degree does the way a firm assembles its management team provide an indication of the extent to which the managers of the firm are open to advice and are able to generate enthusiasm for their firm?

3. Why is it important to show how a company will evolve in regard to the composition of its management team?

4. Why do investors tend to prefer management teams members who have worked together before?

5. Describe what a management team skill profile is and how it is set up.

6. Why is it important to fully disclose the ownership structure of a new venture and the compensation of the members of its management team in the business plan?

7. What are some of the common mistakes to avoid in putting together an initial management team?

8. What role does a company’s board of directors play in its overall management team?

9. What is a board of advisors? What role does a board of advisors play in the management of a firm?

10. Describe the purpose of an organizational chart.

Application Questions

1. Steve Perkins developed and launched a successful smartphone app that helps people manage their finances. He just received funding and plans to develop several additional smartphone apps that deal with personal finances, investing, and planning for retirement. Steve will need to hire several employees to ramp up his company and is concerned about making smart hiring decisions. Up to this point, he’s been his company’s only employee. Steve’s question to you is, “What are the factors I should be thinking about in terms of building my management team and roster of employees?”

2. Melanie Ford has read several books on how to write a business plan. All of the books explained the importance of the management team section, stressing the number one thing that investors focus on is the strength of a new venture’s management team. Melanie can’t figure out why this is true. Recently, she wrote a letter to the editor of Inc. magazine and asked, “Why do investors put so much stock in the portion of a business plan that deals with the strength of the management team? If a startup’s product doesn’t do well in the marketplace, what’s the value of having a top notch management team?” If you were the editor of Inc. how would you reply to Melanie’s letter?

3. If you were one of the founders of Prime Adult Fitness, make a list of the activities that your 4-member general advisory board and your 10-member customer advisory board could help you with.

4. Imagine you are starting a firm with a partner, and you are both college seniors with limited work experience. You don’t have impressive credentials to include in the management team section of your business plan. How can you construct this section of the plan, and the company itself, in a way that reassures the readers of the plan that you know what you are doing and will get the advice you need to launch a successful business?

5. Kim Smith, David Whitten, and Shelly Andersen are proposing to launch a company that will help college students streamline the process of applying for student loans and other forms of financial aid. They submitted their business plan to an investor, who just sent them a text that read, “I’m going through the Management Team section of your business plan, and don’t see an organization chart. Can you submit it to me?” They replied to the text by saying, “We haven’t fleshed out a formal organization chart yet. Once we launch the firm, we’ll sort out what our specific roles will be and develop the organization chart.” To what degree do you think this reply will satisfy the investor? Why is it important to have a formal organization chart agreed upon and in place prior to the launch of a business?

Endnotes

1. J. Kurtzman, Startups That Work (New York: Portfolio, 2005), 6.

2. K. Eisenhardt and C. Schoonhoven, “Organizational Growth: Linking Founding Team Strategy, Environment, and Growth among U.S. Semiconductor Ventures, 1978–1988,” Administrative Science Quarterly 35 (1990): 504–529.

3. B. Barringer, The Truth About Starting a Business (Upper Saddle River, NJ: FT Press, 2009).

4. R. Charan, Boards at Work (San Francisco: Jossey-Bass Publishers, 1998), 3.

5. L. W. Busenitz, J. O. Fiet, and D. D. Mosel, “Signaling in Venture Capitalist-New Venture Team Funding Decisions: Does It Indicate Long-Term Venture Outcomes?” Entrepreneurship Theory and Practice 29 (2005): 1–12.

6. S. Blank and Bob Dorf, The Startup Owner’s Manual (Pescadero, CA: K&S Ranch, Inc., 2012).

7. A. Sherman, Fast-Track Business Growth (Washington, DC: Kiplinger Books, 2001).

8. “Featured Mom Inventors: Laura Udall,” Mom Inventors, Posted March 5, 2009 (accessed August 25, 2013).

9. Coolibar homepage,  www.coolibar.com  (September 1, 2013).

10. Intouch Health homepage,  http://www.intouchhealth.com  (September 1, 2013).

11. R. Stross, eBoys (New York: Crown Books, 2000), 29.

12.  Investorwords.com  homepage,  http://www.investorwords.com  (August 24, 2013).