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Sorenson Capital invests in companies that have an established success record, strong growth and robust industry dynamics. But even these reputable businesses had to start somewhere. Bullock agrees with Hanks that finding the right partners can make or break a company.
“Partner with someone you can absolutely trust,” Bullock says. “Someone with integrity. Someone who will work hard and pull their own weight. Someone who will collaborate. Choose your partner very carefully because you want to enjoy coming to work and seeing this person every day.”
Be sure to perform due diligence in researching how a potential partner has performed in their past work experience. Looking at their track record is a good indication for future performance. They could be competent and reliable, but be at a disadvantage because of lack of experience in a particular discipline. And make sure their skills match up with the job you want them to do. Just because he’s your best friend doesn’t necessarily mean he should be the finance director if his background is in marketing.
“You want someone who can hit the ground running and accelerate quickly,” Bullock says.
Adaptability is crucial in creating a startup team that will go through the growing pains associated with a new business. Often a company, especially in the tech industry, will have to migrate its offering or change its sector once they get feedback from customers. It can be challenging to change, and hard on a partnership.
“The market changes so quickly. You need leadership who can adapt and migrate very quickly,” Bullock says. “Competition enters from several angles and you need to adapt before the competition makes their move.”
Partners are not Created Equal
So you’ve found your dream startup team and are ready to create the next Fortune 500 company. But Kent Thomas, CEO and founder of Advanced CFO Solutions, advises that founding partners be careful, because not all startup team partners should be treated alike. Ownership should never be divided equally between the founding partners.
In many situations, founders create a company and divide the company shares equally between them. But what happens if six months down the road, one of the partners wants to bail? The company isn’t making money yet and is worth nothing, but the exiting partner wants to be bought out. More than likely, there has been no provision made for a “buy-back” situation.
“I’ve literally seen it destroy a company,” Thomas says.
Getting professional advice regarding the structure of ownership, taxes and other business organization matters can bolster a startup team and set it up for success.
“You have to know what you don’t know. You have to surround yourself with people who can give you good advice,” Thomas says. “There will be an initial investment, but pay the price to get things done correctly from the beginning.”
Structuring a business will make a difference to a company’s tax bill, depending on what type of business is created. Should it be an LLC, partnership or corporation? There’s no pat answer for that question, but an experienced adviser will let founders know what they need to do for legal and tax purposes.
Although no one goes into a partnership with the idea of failure, setting up a buy-sell agreement and a vesting schedule could help avoid litigation, and possibly save the business.
Another common mistake is splitting up 100 percent of the company between the founding partners. If all the shares are divided between the startup team, there will be nothing left for future growth like hiring a CEO, CFO or marketing director. Be sure to set aside shares for additional team members.
And founding part-ners shouldn’t receive the same number of shares.
For example, say you have a product developer, a salesperson and a finance director on your startup team. While each position is valuable in the overall scheme of things, early on in the life of the business, the product developer will be the most valuable. Shares should be determined by the value of each position, reserving additional shares for future hiring.
Titles should also be determined based on the value of each team member’s contribution.
Cold Hard Cash
Getting an accurate cash forecast is another essential step founding partners need to take. How much money will it take to develop, build and market your product or service? How long will it take to raise that much money? How long will it take to get a product to the consumer?
Some businesses might create a product and have it ready to sell in one month, but often it takes much longer—sometimes years. Does your business have enough cash to ride through that waiting period, whether it’s one month or two years? It’s important to survey customers, and the competition, to determine what price will be marketable and still be profitable.