Note on Accountability and goal setting by Simon Westbrook of Aargo, Inc.

I am often asked by start-up entrepreneurs how they can be more efficient in running their business, particularly at an early stage where there are few people, and everyone is involved in multiple activities.  The answer is in setting and communicating goals or action plans, and measuring performance against those goals.  This is no more than setting your corporate “To Do” list, arranging priorities and crossing off the tasks as they are completed.

• Discuss, agree and write down your overall corporate goals so that every member of your management team is involved, aware and fully bought into the goals.
• Establish goals for each team member with a clearly defined timetable for delivery. These goals may be actions for today, this week, or longer. For longer term goals make sure that interim milestones are defined so that any variance from goal may be identified as soon as it gets off track, rather than appearing by default when the goal is not delivered in the scheduled delivery date.
• Obtain commitment from managers that the goals are realistic and can be achieved.
• Write down goal or action lists and distribute so that there is no doubt as to what is expected from every team member. Do not be tempted to delegate this task to an assistant who may not be able to clearly define the actions or timings.
• Circulate the list to all team members so that everyone has visibility of the wide spectrum of corporate goals as well as their own.  By publicizing the goals among the management team, members become accountable to their peer managers as well as themselves, and this adds peer pressure to achieve the stated goals.
• Hold regular management meetings at which management are required to report on their achievements in relation to their goals and action lists, so as to create an appropriate level of urgency.  Ensure that achievements and failures in relation to goal achievements are recognized, and documented.
• Maintain trails of extensions so that there is a record of how many times an action has been deferred or amended.
• Ensure that all management is held accountable, with the Founder/CEO being accountable to the Board, or to the management team for any non-performance.
• Retain goal performance documents for future reference in case of bonus, vesting, or annual review considerations.

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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Credibility of your corporate web site

These days every start up needs a web site simply to prove it exists. Whenever you meet prospective employees, bankers, investors, customers, and strategic partners, they take your card, listen to what you say, and then go and check out your business web site. This action reinforces what they have heard, fills in details, provides consistency and more information, and enables them to do more research on your products, management, etc.

You are marketing your company to tell the world that you are real, that you intend to be successful, and will be a worthy business partner, hence the quality and content of your web site is vital to create the right impressions. The web site is typically a multi person job, with varying in house and third party functions like planning the message and image, drafting the scripts and data, designing the layout and graphics image, and coding the pages. Before you go live, and monthly thereafter, you should check your web site carefully to avoid the following common mistakes

• Make sure that there are no spelling mistakes and typos
• Read through carefully to make sure it makes sense and that the language is simple, easy to read, and good English.
• Update event and news reporting. A lack of current news or posted notices of forthcoming events that have long expired indicate a company that has run out of steam or money!
• Check your Careers page. A company with no openings appears to have no growth and no future. You should always be looking for good people even if you have no specific openings at this time.
• Make sure you have authority to quote any third party, or use third party photos or content.
• Do not make claims that can very soon be proved to be false as a result of the outcome of forthcoming events.
• Update your management page whenever you have a change in personnel.
• Remember that anyone and everyone may read your web site even though you regard it as primarily for marketing value. For example, the IRS may read the content and observe that you boast of sales rep presence in all states, or claim to be head quartered in California, whereas you had registered the Company in a no tax state like Nevada.

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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Note on Effective Communication in a Start-up by Simon Westbrook of Aargo Inc.

The problem with being an early stage company is that nobody has heard of you. This makes it difficult when you need to contact prospective and potential bankers, venture capitalists, investors, employees, management candidates, suppliers, customers, and other strategic partners especially if you don’t have direct relationships and are cold calling.  There is no guaranteed way to succeed, even if you manage to make contact: if you start at the top your contact may not have time for you and you may be passed down to juniors; if you start at the bottom your junior may have time but may not be effective in passing you up the chain. Regardless, the following tips may assist in enhancing your success rate:

• Use Google, web sites, Linkedin.com and other sources to identify your target candidate and if you are lucky his email address or phone number.
• If you know anyone who knows your target ask for an introduction so you have at least a warm call.
• Rehearse your message before you call so you have a clear idea, and supporting facts available.
• Establish a relationship by thanking your target for taking the call and explain quickly what you think you can do for him.
• Make sure there is something memorable in your call so target will remember you and more likely take your next call. Examples are accent, name, greeting comments, joke, etc.
• If you are routed through an assistant to your target, take his/her name and establish a relationship so you can obtain follow up information on the best way to reach your target.
• At the end of the call, re-state your message,  say that you will send written materials, and that you will call back in a week. Obtain direct email and telephone contact details.
• Promptly log all calls with details, content, date, other contact names and actions required.
• Follow up regularly with an alternating  combination of email and phone pings until you are told “NO”.
• Refer back to prior contact points as reminder, and state dates contacted. When you show persistence in repeated contacts eventually target will feel guilty and respond.
• Use your contact with target’s assistant and ask them to let you know when target is in office and when is the best time to try and make contact.

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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Note on Meeting Management in a Start-up by Simon Westbrook of Aargo Inc.

Big companies have meetings and small companies have meetings, but big companies have more people to have more meetings. As an early stage company there are a lot of problems to solve, decisions to make and ideas to create, and meetings, whether face to face, or via phone and video conference, can be a great way of brainstorming, testing the checks and balances, and establishing consensus. However, your time is limited and meetings can easily eat into your business development and sales time if you have a big talker in the meeting.

To get value out of your meetings I recommend a few simple tips

1. Send written invitations with agenda (Outlook) in advance and issues reminders to attendees so people come on time, and prepared.
2. Start the meeting on time. If you are late in starting, people will avoid the “waiting” time by coming late to your next meeting.
3. Review the Agenda setting defined target start and end times, and follow the agenda to ensure focus, and inclusion of all intended items.
4. Clarify the objectives of the meeting, and what each person is expected to contribute.
5. Control disruptive behavior (rambling, gossip, speculation, phone calls, blackberrying, etc)
6. Invite every attendees individually to contribute something specific to the meeting
7. Summarise your understanding of the results of the meeting
8. Take your own minutes to ensure reporting matches your understanding of the meeting outcome
9. Assign specific written actions, and “by-dates” to meeting attendees and invite/explain questions
10. Circulate minutes promptly to attendees on day of meeting while you remember, and while they still have time to deal with assigned action points before the next meeting.
11. Make first item on next meeting agenda “Action items from last meeting”

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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Note on Management Structure in a Start-up by Simon Westbrook of Aargo Inc.

While generally, the idea for a new business or business idea, may be inspired by a creative individual, the process usually becomes more of a group effort. The original thinker may need help in validating his idea, assistance with finance or additional functional management input, or may simply want to show off his idea to friends, and so the management team is borne. In the enthusiasm of the moment, the host, or idea contributor usually becomes the CEO and other senior titles are spread around vaguely reflecting the functional expertise if any of the other team members.  The Company now looks like a real company as the team begins the process of market identification, channel development, engineering specs and solutions, IP recognition, fund raising and so on. However since there is no funding at this stage, and the team are not therefore paid employees, the usual cycles of management responsibility, accountability and sanction/reward do not operate as in a traditional employer/employee relationship and it can become difficult to set, measure and enforce the goals and assignments of the team members.  This situation can be aggravated by the fact that some or all of the team members may have and depend on their day jobs, with varying degrees of availability to fulfill their roles in the new venture on a timely basis.

In this situation, a democracy of enthusiastic shareholder/founders will find it hard to focus on executive management and it is important to have a clearly defined line of management responsibility and accountability to the CEO.   I suggest that the founders review the true strengths and qualifications of the team members and consider appointing their most qualified member as CEO rather than leaving the title as the prize for the creator. If nobody appears to be strongly qualified this is a signal to look around, and possibly recruit a new candidate. Executive skills will be important to the success and progress of the organization, and better a candidate chosen by the team, than one that may later be imposed by investors from outside. I recommend creating an executive review process to review team operations. This could include weekly meetings, written review and promptly distributed action lists with names, tasks and due dates, so that accountability will be demanded to avoid being exposed as a non performer at the next regular meeting.

As the Company progresses in its development it will become apparent as to whether the skills and experience of the other founder members are sufficient to perform the functional roles they represent. Once again the question arises of whether to make do with the most relevant team member, or recruit new and experienced outsiders from outside to fill the role. Clearly the sense of demotion, or failure to achieve goals, can have significant psychological impact and adversely affect the workings of the team. In order to minimize this risk I recommend that formal titles not be granted all round at the early stages since it is easier to undo an assumed role that was never formalized,  than to take away a title that was granted no matter how half heartedly. The early founder stage frequently sees friction and defections, usually because of changes in expectations, and those expectations should be set early!

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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Note on Independent Contractor vs Employee Status by Simon Westbrook of Aargo Inc.

During the start-up stage, companies may be tempted to hire independent contractors rather than employees thinking they can avoid the administrative and regulatory issues associated with formal employment, and avoiding workers comp and employer taxes, not to mention employee benefit plans. However, companies looking to save money by hiring independent contractors should be careful; a recent report by the Associated Press shows that the Internal Revenue Service and most states have started a crackdown on companies that misclassify full-time employees as independent contractors and misclassifying an employee can get your business in trouble with the IRS and expose your company to employee lawsuits.

The standard question in determining whether a worker is an independent contractor or a full-time employee is how much control the company has over the worker and how much independence the worker has from the company. The IRS lists three factors that often go into this question of control and independence:

Behavioral control: Generally, the more control the company has over how the worker does their job, the more likely that worker should be properly classified as an employee. If the employer controls when, where and how the worker does the job, they are more likely to be an employee. If the employer provides the tools, specifies where to buy supplies and controls the sequence of how a job is to be done, it is more likely that the person is an employee. Also, if the employer gives detailed instructions on how to perform the job, performs detailed evaluation on how the job was completed and provides training on how to do the job, it is more likely that the worker should be classified as an employee.
Financial control: This factor shows whether the worker has the right to control the economic areas of the job. If the worker has put up a significant investment, is not reimbursed for expenses, has the opportunity to make a profit or a loss and is able to provide their services to other clients, it is more likely the person is an independent contractor. Also relevant is the method of payment. If a worker is paid by the amount of time worked, rather than by the job, it is more likely they are an employee.
Type of relationship: This factor considers how the parties have come to their agreement and how they view it. If there is a contract for services, it is more likely that the worker is a contractor. If the person gets benefits and is hired indefinitely, as opposed to for some limited amount of time, they are likely to be an employee.

It is important to remember that there is no set formula to determine whether someone is an employee or an independent contractor. Courts will weigh these factors to make a determination. Some states may have laws that change these common law default rules and so it is important to determine the laws of your state before deciding on the classification of a worker.

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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Note on Naming Companies by Simon Westbrook of Aargo Inc.

Every corporate entity is identified by its state registration and federal tax Identification number at the
early stages of its life. While names can be changed this is burdensome because of the confusion of two
names among old and new business partners and the need to keep explaining the change, not to
mention the cost of changing stationery, business cards, contracts, etc.   Additionally, as your company
name becomes widely known, the Company develops goodwill and publicity which will be lost if the
name is ever changed. It is therefore convenient if the founders can select a perfect name on day one.
While naming a company for the founder may be a no-brainer, I recommend that the Company be given
its own name, since it is a legal entity with an ongoing life of its own.  Factors to consider when selecting
a name include:

Check with domain registries to check whether the domain name you hope to use is available. ( Since
most people want a .com or .net there are fewer combinations available for domain registrations than
there are for legal names.)

Having selected your state of registration, check with that State business portal whether the name is
already registered, or by default available. Note by adding  appropriate  adjectives  like  “International”
“United”, “Laboratories” etc  and the choice of Inc, Incorporated, Corp, Corporation it is possible to
create a substantial number of passable names around a single search word. Ultimately, the Secretary of
State will have to be satisfied that the name choice is not likely to cause confusion, or embarrassment.
Do not use the names of founding persons or the city or state in the name, since this will create
confusion whenever there is a change of founders or location.

Do not be too specific in including reference to the Company’s business activity in the name. At some
point the Company may want to change, or add new activities to its lines of business which are not
consistent with the current descriptive name of the Company.

Consider whether your chosen name sounds similar to any well known Companies. Even though your
chosen name may pass the approval of the State registration process, it is possible a large brand name
company may object to your name at a later date, usually when your company has become larger and
more successful, with more to lose by having to change name. Typically they may argue that you are
causing confusion among their customers, or passing yourself off as connected to their company to
obtain commercial benefit. Such actions can be expensive and time consuming to defend.
Keep the name short. Remember that long names give rise to long email addresses with more likelihood
that your business partners will be unable to remember, or enter the correct name.
Check whether your selected name has any unfortunate meaning in the languages of the countries
where you may be doing business.  

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Note on the Protection of Corporate IP by Simon Westbrook of Aargo Inc.

While employees come and go, finding new jobs, moving to new locations, going back to school or retiring, the life of the corporate entity lasts forever. Shareholders may change, the address may change, and the products offered may change, but the one thing that doesn’t change is the Company’s accumulation and ownership of intellectual property (“IP”) which may be expressed as its patents, processes, secrets, technology and business experience.  This IP may be purchased outright, or as license to use from third parties, or it may be created by the Company’s employees during the course of their work, and, since the Company is paying the employees to work, the Company has the right to ownership of the resulting IP. This IP is expensive and is the key differentiator between a company and its competitors, so it must be protected from theft, dilution and unauthorised exploitation. Important protections include:

Take out background checks on new employees BEFORE they are hired to see if candidates are working for a competitor, there is a risk they may go back;

Have all new employees complete an IP and confidentiality agreement as a condition of being hired and read carefully if they document any exclusions or reservations of any IP. These agreements are widely available or can be obtained from your legal advisor. Retain in employee files for reference;

Implement data and network security measures, ensure these are clearly documented in your employee handbook, and read, understood, and acknowledged in writing by all employees, with formal written re-affirmations at least once every year, even if there have not been any changes;

Through meetings, supervision, and management process ensure that IP development status reports are worked on at all times by more than one employee , and that senior management has a confidential list of what projects are current and planned at any time

Educate and motivate employees to maintain formal ideas notebooks and to consider filing patents. I recommend working with an IP consultant to ensure all employees (not just engineers) are trained to identify and understand what may have patentable potential;

Have your IP consultant interview and solicit patent ideas from all employees and analyse and document an IP matrix ranking the potential applications by both strength of the IP claims, and business relevance ;

If you cant afford to patent every candidate pick the highest ranking candidates for starters. You can cover a lot of ground cheaply with provisional patents and limited geographic filings;

Have a clear document retention policy and routinely and regularly shred or otherwise destroy unwanted company files and materials.

Ensure employees have convenient access to a shredder of confidential document disposal facility;

Have office cleaners and repair persons perform their job when employees are around to watch.

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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Note on the Benefit of Teamwork by Simon Westbrook of Aargo Inc.

The creation of a new company is typically sponsored by an individual entrepreneur who sees a market need, develops a product idea, or in some other way sees a business opportunity. As the company is registered, or patent filed, or business plan put together ready for investors, a founder may be working alone, or may be building a team to support him. The sole founder, or founder with say a single partner may be reluctant to bring in others because they don’t want to take any dilution in their ownership share, or because they don’t have time to delegate or bring new partners up to speed, or because they fear the risk of competition if new partners drop out after seeing what is happening.

While these are all valid reasons I argue strongly in favor of building a core management team at an early stage of the corporate cycle, locked in with equity ownership. The benefits of such an arrangement include

1. The ability to work with functional specialists across all aspects of the business proposal; marketing, engineering, operations, sales, and accounting to ensure that all issues are properly and professionally addressed ,
2. The ability to present potential investors with the appearance of substance and professional organization with an across-the-board, ready-to-go management team to run the business,
3. The ability to install credibility in customer and supplier relationships with an organization that has experienced managers and specialists,
4. The ability to play-off checks and balances between team members when the company comes to every critical decision point,
5. The existence of accountability and consequences, so that each person has a team to answer to for timely completion of the commitments, projects and deadlines that they take on,
6. The ability to field more than one manager at meetings, and thereby obtain different perspectives on the proposals, concerns and commitments discussed by potential third party business partners, as well as provision of feedback on the manner, focus and quality of presentations and proposals being made by company representatives,
7. The use of managers in the early stages of business development, working for equity, saves the cash burden of hiring employees and consultants to build the Company up to a point where it has the potential to secure investment funding.

And as for the dilution, I argue that with a team of management all working in the same direction, the value of the Company as a whole will grow much faster, and that a smaller ownership percentage will be offset by greater corporate valuation to provide the founder with a more valuable shareholding.

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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Note on Equity incentive and retention by Simon Westbrook of Aargo Inc.

When founders and executives get together to start a new company there is a lot of excitement and jockeying for equity ownership positions. I have discussed the considerations for carving up the equity pie in an earlier posting; in this note I want to talk about restrictions on equity linked to retention of these founders and executives. 

Obviously, investors and other management team members are depending on the input and efforts made by the founders and key executives and have a vested interest in them remaining in the service of the Company. Often, in the early days the Company is short on cash and so either does not pay these executives for services provided, or pays them only a limited compensation, relying on the perceived upside valuation potential of equity holdings. Frequently, one of the founders or key executives may decide to leave in the early stages of the Company, perhaps because they cannot bear to make the transition from a secure day job, or accept no or lower compensation, or reconcile the time pressures of a start-up with the needs of family life, or maybe they just end up disagreeing on politics or management direction or style. In this situation it is equitable that the leaver should cease to participate in the benefit of equity ownership.

Typically the management and control of equity ownership is managed through vesting of options, or restricted stock repurchase rights. If a founder is granted options to purchase shares vesting over, say,  four years, then if he decides to leave after two years, he will have vested 50% of his options and be entitled to purchase those 50% of the shares under the terms of his option agreement. The unvested options will be cancelled and returned to the option pool for re-use under the general Company option plan. 

Because options are not shares of stock and do not have shareholder voting rights, Companies often use an alternate method of equity management, selling or granting actual share ownership to a founder, but reserving the right to repurchase any shares that may not have vested, if the employee again leaves. This is essentially the same process. If an employee was issued with restricted stock whose repurchase option lapsed in equal instalments over four years, and left after two years, the company would have the right to repurchase 50% of the shares.  The restricted shares may be purchased for cash, in exchange for contributed IP or services , or against an at-risk, interest-bearing  promissory note based on the purchase price of the stock which should be priced at fair market value to avoid tax issues.  It is important for both employee and the company that the employees, within 30 days, files a completed form 83B election with the IRS otherwise the difference between the stock purchase price and the fair market value of the shares that vest on any vesting date may be regarded as distribution of income and subject to tax on both employee and company. (Always check with your tax service advisor in advance of receiving restricted stock.) Typically, the stock certificate is held in escrow by the Company until the restrictions have fully lapsed, however the employee has full shareholder rights to the shares, pride of ownership, and the beneficial  long-term capital gains tax rate clock starts ticking at the time of beneficial ownership.

Warning: The information contained in this blog is for guidance only and readers should contact their accountant, lawyer or tax professional for advice on the facts of their own specific case.

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