Chapter 1 - Taking the Plunge

Individuals start businesses for a number of reasons:

to be their own boss, to pursue a passion, to help those who are less advantaged, to achieve financial rewards, to establish a new livelihood after corporate downsizing, to fill an unmet need with an innovative product or service, or to create something enduring

Before starting a business, the would-be entrepreneur should consider the sacrifices that will be required. These include:

professional, financial, and personal sacrifices

What are ways to be entrepreneurial without quitting your day job?

being an angel investor or an advisor or board member in exchange for equity in the startup

Risk takers are people who:

attempt to manage the risks inherent in pursuing new opportunities by making staged commitments and conducting a series of experiments

One key to being successful is to:

make fewer mistakes than your competitors and to build in the flexibility to “pivot”—to change the business plan when new information becomes available or when the original product or service idea fails or turns out to be less attractive than originally contemplated

value proposition =

focuses on customers’ needs and the relative price they are willing to pay for a certain feature or service

What does Michael Porter say?

“[S]uperior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price.”

Founders of tech companies often first:

develop a new technology then form a company to exploit it

In contrast, the PrimeSense founders first:

identified the user experience missing from the marketplace then set out to create the innovations needed to provide that experience

Ask chat to explain table 1.1

on section 1.2

“five forces” that determine the attractiveness of an industry:

buyer power, supplier power, the power of competitors, barriers to entry, and product substitutes

The most attractive markets are those in which there is:

weak buyer and supplier power, weak competitors, high barriers to entry, and no substitutes for the company’s product or service

Ask chat to explain figure 1.2.

found in section 1.2

Entrepreneurs need to ask:

“What regulations govern the proposed business and can I work within them or change them as needed?”

Dynamic capabilities include:

the capacity to:

1. to sense and shape opportunities and threats

2. to seize opportunities

3. to maintain competitiveness through enhancing, combining, protecting, and, when necessary, reconfiguring the business enterprise’s intangible and tangible assets

When harnessed correctly, the law and the legal system can be a positive force that helps:

entrepreneurs create options, including the ability to abandon a path that has proved unprofitable; increase predictability; strengthen relationships; and marshal, leverage, and transform the human and capital resources needed to pursue opportunities

The law offers a variety of tools legally astute entrepreneurs can use to:

grow the business and increase realizable value, enhancing the ability of the firm to capture the value it creates while managing the attendant legal and business risks and keeping legal costs under control

Legal astuteness =

the ability of a firm's management team to communicate effectively with legal counsel and work together to solve complex business problems

There are five components of legal astuteness:

1. a set of value-laden attitudes

2. a proactive approach

3. the exercise of informed judgment

4. context-specific knowledge of the law and legal tools

5. advice from strategically astute lawyers who understand the business and work with the management team to help the firm win in the marketplace with integrity

Create and Capture Value: Evaluating the Opportunity and Defining the Value Proposition

• Ask whether idea is patentable or otherwise protectable

• Examine branding possibilities

Create and Capture Value: Assembling the Team

• Choose appropriate form of business entity and issue equity to founders early

• Structure appropriate equity incentives for employees

• Secure intellectual property protection and enter into nondisclosure agreements and assignments of inventions

Create and Capture Value: Raising Capital

• Be prepared to negotiate downside and sideways protection and upside rights for preferred stock

• Be prepared to subject at least some founder stock to vesting

• Sell stock in exempt transaction

Manage Risk: Evaluating the Opportunity and Defining the Value Proposition

Determine whether anyone else has rights to opportunity

Manage Risk: Assembling the Team

• Document founder arrangements and subject their shares to vesting

• Analyze any covenants not to compete or trade secret issues

• Require arbitration or mediation of disputes

• Comply with antidiscrimination laws in hiring and firing. Institute antiharassment policy

• Avoid wrongful termination by documenting performance issues

• Caution employees on discoverability of email and provide whistle-blower protection

Manage Risk: Raising Capital

• Be prepared to make representations and warranties in stock purchase agreement with or without knowledge qualifiers

• Choose business entity with limited liability

• Respect corporate form to avoid piercing of corporate veil

Create and Capture Value: Developing, Producing, Marketing, and Selling the Product or Service

• Protect intellectual property: Implement trade secret policy. Consider patent protection for new business processes and other inventions. Select a strong trademark and protect it. Register copyrights

• Consider entering into licensing agreements. Create options to buy and sell. Secure distribution rights. Decide whether to buy or build, then enter into appropriate contracts

Create and Capture Value: Harvesting

• Determine whether employee vesting accelerates on an initial public offering or sale

• If investor, exercise demand registration rights or board control if necessary to force IPO or sale of company

• Rely on exemptions for sale of restricted stock

• Negotiate and document arrangements with underwriter or investment banker

Manage Risk: Developing, Producing, Marketing, and Selling the Product or Service

• Enter into purchase and sale contracts

• Impose limitations on liability and use releases

• Recall unsafe products. Buy insurance for product liability

• Create safe workplace

• Install compliance system

• Conduct due diligence before buying or leasing property to avoid environmental problems

• Avoid antitrust violations: No tying or horizontal price fixing; integrate products; and no illegal tying

• Be active in finding business solutions to legal disputes

• Avoid misleading advertising

• Do tax planning; file tax returns on time; and pay taxes when due

Manage Risk: Harvesting

• Determine whether employee vesting accelerates on an initial public offering or sale

• If investor, exercise demand registration rights or board control if necessary to force IPO or sale of company

• Rely on exemptions for sale of restricted stock

• Negotiate and document arrangements with underwriter or investment banker

• When doing an acquisition: be mindful of difference between letter of intent and contract of sale; consider entering into noshop agreement if buyer; negotiate “fiduciary out” if seller

• Allocate risk of unknown

• Secure indemnity rights

• Disclose fully in prospectus or acquisition agreement

• Perform due diligence

• Make sure board of directors is informed and disinterested

• Ban insider trading and police trades

What are the stages of business development?

1. Evaluating the Opportunity and Defining the Value Proposition

2. Assembling the Team

3. Raising Capital

4. Developing, Producing, Marketing, and Selling the Product or Service

5. Harvesting