Entrepreneur Myths (39 page)

Guideline 17
: Listen, listen and listen

It is a big problem in marriage and business when partners don’t listen to each other. I have been on the phone with partners, giving them updates, and then 30 minutes later they call to ask about something I discussed in full detail during the call. Please don’t multitask when your partner is giving you an update.

A partnership is like a marriage. There is no difference — unless your partner is your spouse or significant other.

My film partner, Jana Arnold, triggered the idea for me to create a partner valuation model along the lines of my company valuation model in Myth 31: Money grows on trees. After much analysis, here is a simple model of it:

Entrepreneurdex Partner Valuation Analysis (EPVA)

(C1)
For management experience: $100,000

(C2)
For entrepreneur experience: $100,000

(C3)
For domain expertise in a startup sector: $100,000

(C4)
For functional domain expertise: $200,000

(C5)
For success under their belt: $300,000

(C6)
For failure under their belt: $100,000

(C7)
For direct access to capital: $200,000

(C8)
For character or moral fiber references: $200,000

(C9)
For personal brand equity: $200,000

(C10)
For access to customers: $100,000

(C11)
For large social network of influence: $200,000

(C12)
For working together with others in the past: $200,000

Total partner value in startup: $2,000,000

Note: Each partner should be worth $1 million to $2 million on paper or I think twice about investing. If one partner has a value below $250,000, it causes serious concern because experienced partners are working with inexperienced partners, which can be a clusterfuck. The total valuation of a startup should be between $1 million and $6 million for the early stage (see the entrepreneurdex valuation model in Myth 31). However, there are exceptions to every rule.

Here is an explanation notes for each point of valuation:

(N1)
In regard to management experience, the more experience in business the better. If the experience is in the same or similar sector as the venture, this adds additional value.

(N2)
Whether the entrepreneurial experience was good or bad, any past entrepreneurial experience adds value because the partner understands the reality of being an entrepreneur.

(N3)
Domain expertise is critical, so at least one partner in the venture must have the educational background or experience in the sector. The more the better, however thinking outside the circle is just as important.

(N4)
Functional domain expertise is critical. You can’t place a founder into a CFO function if they don’t know accounting. I have come across startups in this scenario: founders without functional expertise with CXO titles. Ridiculous. 

(N5)
Success under the partner’s belt adds value in more ways than one. They might even have the ability to throw in some cash and invest.

(N6)
A partner who has experienced failure is a plus because, hopefully, they already made most of their mistakes on their own or someone else’s dime before joining your company.

(N7)
Access to capital is a huge plus — regardless of their function. If the founder comes from a rich family, that’s even better.

(N8)
Moral fiber is critical. If your partner lacks moral fiber, you will get fucked sooner than later.

(N9)
If your partner is well known in the industry, media or finance sector — great news. They have a brand and you need to pimp them. It’s worth a substantial amount of capital.

(N10)
Having partners with access to a large amount of potential customers enables the venture to possibly reduce their funding needs by having customers advance money for future services to be rendered.

(N11)
Partners with access to influential friends are extremely beneficial. For example, what if Mark Cuban was one of the co-founders of your company?

(N12)
Having worked together previously obviously adds value because you already know how to work together. 

(N13)
When you finish calculating the value of each partner, tally it up and make sure the total value of all founders is $1,000,000 minimum. If they're worth less, you have a founder problem. If they're worth more, you can increase your company valuation, or discount it so you don’t look like a bubblepreneur.

Business relationships do not have to end after the company fails or becomes successful. During the course of your venture’s journey, some partners may lose interest, others may not want to take additional risks, and others just may not want to work as hard anymore. You have to make sure everyone knows the associated costs of exiting early from the venture. If you have a partner who started with you, but in year two decides to quit or move on, then you’ll be glad you had a written agreement outlining the conditions for any partner exiting early.

A partnership agreement should include considerations such as (1) how much equity a partner has if they quit before some specific time period, (2) the current equity that is earned, and (3) cashing out the partner shares. Some partners might not go for this because they are positive they’ll stick around through thick or thin. But it’s better to agree, early on, regarding exit options for partners, to avoid potential clusterfucks. One partner may not realize until the going gets tough that they really don’t have the stomach for a startup. I saw this happen in some of the companies I funded.

I have experienced the good, the bad and the ugly in partnerships. Most of these partnership myths focus on the negative. On a positive note, the easiest way to work with other partners is to find partners who have a similar working style to yours, from a cultural perspective, along with the ability to do complementary functions of the business.

Notice: “Opposites attract” is not the case when it comes to building successful business partnerships.

Brain Candy: questions to consider and ponder

(Q1)
Do you have a business partner? If so, what exit conditions did you agree on, in case one of you quits early?

(Q2)
Do you and your partner share the same management principles?

(Q3)
How do you each prefer to manage employees? Is one of you more of a disciplinarian while the other is more of a pushover?

(Q4)
Do you fight or bicker in front of your employees? Do you overthrow each other’s decisions in front of employees or behind each other’s backs?

Entrepreneur
Myth 55
| Boards and advisory boards are critical to the success of your venture

Company boards and advisory boards are important to your venture but not
critical
. Their importance depends on the sector, life cycle of the company, amount of capital being raised, current sales growth of the company and whether you already have investors in your deal.

Customers don’t care about your board of directors or advisory board. Most investors look for impressive board members and advisory board, but it won’t make or break you when raising capital. It’s more important to have a finished product. Sure, cool boards can help startup companies gain market momentum, but Facebook didn’t have a great board when it was founded, until Peter Thiel stepped into the picture and funded them.

Did you wonder if Groupon had a kick-ass board of directors or advisory board when you used their service to get a discount on some product? I doubt it. Do you know who sits on the board of Apple, IBM, Exxon, Google, Microsoft, Starbucks, or McDonald’s? I don’t know either. And before you signed up for Facebook or Twitter, did you find out who sat on their board? I am sure you didn’t.

Forget about setting up a board of directors with external members if you just formed your startup. Customers are more important. Customers pay your bills; a board of directors, and to some extent an advisory board, can cost you money, time and equity. If you’ve already raised money, the investor will most likely demand a board position or two so they can (1) feel important, and (2) watch their investment closely. I don’t blame them.

Based on my experience, boards (with external members) can be a fucking headache. I invested a substantial amount of money into a software company that had an extremely reputable board. The people on the board had high pedigrees and came from fancy-schmancy universities. The chairman of the board was knowledgeable, experienced and had a stellar business reputation. The problem with this board was that there were so many huge egos involved that I wondered how the hell anything ever got accomplished. I wonder how any of them walked into the boardroom with their heads so big. The CEO was an excellent manager, but he had inherited these board members after being promoted to the position. It ended up being the war of attrition. 

In the seed or early stages of your venture, don't worry about forming a reputable board with outsiders. Smart business people will be reluctant to join because there are liabilities associated with being a board member. Besides, investors putting in the money will want the board spots for themselves.

Advisory boards are the best route for a startup, but they can be a fucking headache during the early stages of a venture. Don’t spend a lot of time forming advisory boards during the seed stages. It’s better just to have a few friends help you by offering advice, contacts or even bringing potential investors, employees, customers or suppliers to the table. I call this an informal board.

Most people don’t want to do anything for free — including me. So if you do ask someone to help you as a formal or informal advisor, make sure they understand that you will compensate them with equity, cash or both — when the venture is in a better financial position.

My advice: Don’t be a fucking, greedy cheapskate. If your advisory friend opens the door to investment capital, make sure you compensate them fairly, even if they don’t ask to be compensated. It’s the right thing to do. And obviously, it’s not right to throw them a few pennies if they open doors that help you raise millions.

Never forget who helped you get there — wherever “there” is.

Brain Candy: questions to consider and ponder

(Q1)
What do you think about having board members in your company? If you have them, has it been good for your venture, or has it created problems?

(Q2)
How do you compensate board members?

(Q3)
How do you compensate advisory board members?

(Q4)
Do you know how to run a proper board meeting?

(Q5)
Do you think you should have a board or advisory board during the startup phase?

(Q6)
What did you do if you had a clusterfuck board jerking you around? Did they kick you off or did you take no prisoners?

(Q7)
What are some additional liabilities of being a board member — even if there is board insurance?