 |
|
|
|
|
 |
|
| Add My Listing | |
| Log-On | |
| Tell A Friend | |
| Venture Stories | |
 |
|
| Premium Services | |
| Venture Guides | |
| Venture Tools | |
| First Steps | |
| Invention Faq's | |
| Resource Center | |
 |
|
| New Innovations | |
| Venture News | |
| Innovation Wanted | |
|
|
|
  |
|
|
|
|
|
|
|
|
|
|
|
|
| Experienced Business Guide | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Venture Process |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
In this Section
It is our experience and belief that business plans assist the development of the overall structure of a company's financial and management needs. The day-to-day success of an enterprise and its ability to attract capital depends to a large degree on the completeness, clarity and precision of the business planning process. Strategic business plans meet specific needs of a company in various stages of its life. Creation of short term and long term Comprehensive Business Plans are used for both management control and for presentations to the appropriate capital sources, including your own. New ventures needing capital must depend on a well-documented and frequently updated plan. The objectives are two fold. First, to give prospective investors a realistic valuation of the feasibility and risks involved with a thorough analysis of capital needs and applications. Secondly, to provide the entrepreneurial team with a detailed operational guideline. Rapidly growing companies require not only adequate funding, but also strong operational and financial controls. A detailed plan decreases the risks associated with rapid growth by keeping the management team focused and financing sources up to speed. Special project plans are used to assess the reality of undertaking new markets, developing new products or services and analyzing feasibility of financial profitability related to capital acquisition. Mergers, acquisitions and leveraged buy-outs require decisive action from a position of strength. Business plans must reflect the financial structure of the surviving company, as well as detailing the generation of increased cash flow to meet new debt requirements. Turnaround companies must develop solid profitability. These plans describe management's strategic focus and how the plan will be implemented and properly executed to accomplish the turnaround. It requires detailed support of increasing revenues, expense cuts, and corporate asset management to secure the proper capital sources. Planning the Entrepreneurial Venture Business plans boil down to operating the company on paper. The aim is to validate an idea and challenge every aspect of the business. A business plan is a written presentation that carefully explains the business, its management team, its products or services, and its goals, together with strategies for reaching the goals. The entrepreneur or team members who write the plan will find it a painstaking process. But keep in mind, this is the selling tool, and it requires careful consideration of all the multiple facets of a start-up or business expansion. It cannot be written as an afterthought, and it should not be taken lightly. Check with any professional investor anywhere in the country, and you'll hear horror stories about ill conceived, poorly written, or sloppily put together business plans. As great as the company's potential may be, it is essentially doomed to rejection, before it can even get a foot in the door, if it has a poorly conceived business plan. The Primary Purpose of Your Business Plan There are two primary purposes to a business plan. The first has an outside objective--to obtain funding. There's no business without capital. The second serves an inside purpose--to provide a plan for early corporate development: to guide an organization toward meeting its objectives, to keep the entrepreneurial business itself and all its decision makers headed in a predetermined direction, to explain in an engaging way with interesting information how the company will be run for the next 3 to 5 years. The entrepreneur must put the entire "hows" and "needs" together in one neat package. The human and physical resources must effectively interrelate with the marketing, operational, and financial strategies of the company. Unless an entrepreneur has magical powers of persuasion, this is not the time to try to fake it. The business plan is considered a vital sales tool for approaching and capturing financial sources, be they investors or lenders. They want to know that the entrepreneurial team has carefully thought out the plan. They want to be convinced that the team has the skills and expertise needed to actively manage the company and that it is prepared to seize opportunities and solve the problems that arise. That's why the business plan must be well prepared, professional in tone, and persuasive in conveying the company's potential. It cannot be stressed too strongly that a good business plan is the cornerstone of successful financing. If you want investors' money, you've got to give them good reasons to buy in. The business plan is where you lay out the reasons. It does not have to be unduly lengthy or complicated, but it must be informative and relevant. It needs to maintain logic and order, and show the company as effectively positioned as a good investment. More importantly, the business plan should be specifically directed to the funding source and satisfy its particular concerns. For example, you would orient and write the plan differently for presentation to a banker than you would for a venture capitalist, an underwriter, or a private investor. The venture capitalist would want to know what risks are involved, whereas the banker wants more information about how good the security is. These concerns must be individually addressed. There are no hard and fast rules for preparing a business plan--no established, formal format. The key word is ingenuity. Strive for inventiveness; strive to be interesting and captivating. Incorporate the Nine Guiding Principles into Your Plan Here are some general guidelines covering the basic elements of a business plan. These should be helpful in writing any business plan, no matter to whom it is directed.
The Next Step: Obtain Critical Reviews You're not finished yet. One of the big differences between ordinary plans and good entrepreneurial plans is that they have been critiqued to work. After you have drafted your business plan, solicit feedback on it. Ask a cross section of people whose judgment you respect to review it. Don't fall in love with your wordsmithing. Make any revisions that are necessary, and then prepare a good oral presentation. In fact, you should have both a 2-minute and a 5-minute oral attention grabber. Follow up with a detailed 15- to 30-minute presentation. All should be modeled on your written business plan. A word of caution: When preparing your financial projections, avoid the shortcut of relying on packaged computerized information--those preset formats in which you plug in figures and percentages. Individualize your financial projections. Think them out carefully. No two businesses are alike. Show when you bring on additional personnel, and remember that each new hire adds other costs beyond salary--items like benefits, desks, supplies, maybe even another computer or additional travel expenses. These items need to be tracked for each expense period. Don't just show advertising costs as a percentage of sales. Most advertising expenditures are made some months before sales result. A lot of them have to be prepaid before they are run. It's just not justifiable to show "plugged" computer figures for most expense items. Individualize them. And keep in mind that a start-up company will not fit the standard industry norms. Your projections should include the financial obligations of bringing your product or service to the marketplace: enlisting new management people as well as workers; taking on more physical space or manufacturing capacity; purchasing support materials and services; and monitoring buildups in inventory and accounts receivable. Outline for a Business Plan There are many specifics that should be included in a successful business plan. The following general outline contains many suggestions, which may seem obvious, but it is often easy to overlook the basics. Again, this outline should be used as a preliminary planning guide. It's up to the reader to add lots of detail, meticulously gathered and presented in succinct entrepreneurial form. (For a complete guide to writing a business plan, see The McGraw-Hill Guide to Writing a High-Impact Business P lan. This book includes an offer to receive a free disk with a complete business plan and financial spreadsheets.) Cover Sheet
Table of Contents Categorize the contents. Use section names and page numbers. You have a choice of only main category headings (History, Management, Product, etc.) or detailed categories (History--date founded, founding members, place founded, etc.). Make note of any charts, tables, or graphs. Executive Summary A very important part, the executive summary briefly sets forth the contents, taking key sentences from each section of the plan to overview the project for the reader. Limit the summary to two or three pages: more is too many. Consider using your mission statement or a brief visionary type of paragraph. It should be concise and to the point. This section is the first thing that investors read, and they may not read further if you haven't captured their interest. History The first several paragraphs should briefly describe the product or service, to whom it is sold, the current status of your industry, and where your new company fits in. This is your second chance to give the reader an overview to establish a basis for detailed understanding. After this brief introduction, include a description of how, when, and by whom the company was started, its achievements and acceptance setbacks. Then bring these experiences to current-day status. Product or Service To succeed with an entrepreneuring company, you must know your product or service; to succeed in obtaining capital, you have to be able to clearly describe your product or service. After giving a simple, straightforward description, outline the need for the product or service in today's marketplace, how it will make a difference, the benefits derived from using it (or what will make the customer buy it), and its advantages. Explain any special training needed to sell or use it. Include all relevant regulations that may affect its sale or use. Expound on any exclusivity or technological uniqueness. Unless your plan is going only to specialists in your industry area, assume you are writing for the layperson. Forget industry jargon and replace it with words that the non-specialist can understand. If you tend to write overly technical descriptions, engage a professional writer. Market Description and Analysis This section profiles three key areas: customers, industry, and competition. Prepare a Customer Profile
Prepare an Industry Profile.
Prepare a Competitive Profile.
Don't guess in this section. Check all your facts and note all your sources. You can be sure that these will be checked with a fine-tooth comb during an investor's due diligence process. If you're citing voluminous reports or statistical information, note that you have them available for further review. Marketing Strategy This is a critical section that should clearly specify the company's marketing goals, how they are to be achieved, and who will have the responsibility for achieving them. Qualify all distribution methods (representatives, dealers, and so forth) and describe any planned advertising or public relations activities. Include references to sales aids, foreign licensing, and training plans as appropriate. Simply, detail how you are going to sell the product or service. Operations Plan This section is primarily oriented toward facilities, manufacturing capability, and equipment. Disclose all present capabilities as to equipment and facilities, as well as further projections for offices, branches, manufacturing, and distribution. It often helps if you include current floor plans as well as expected future space plans for production or manufacturing companies. For all fast-growth companies, task/time charts can be especially useful in this section. They help impress on the reader that the Entrepreneur has a real handle on the operational challenge. Research and Development The length of this section depends on whether you're a service or product company and--if a you're a product company--on how technical your product is. The object is to explain all past research and development efforts and accomplishments as well as future expectations. Here is your opportunity to justify past time and dollar expenditures. Substantiate the patentability of inventions, proprietary processes, or other advantages that your company will have over the competition and the resultant, anticipated market impact. Schedule Describe the timing and sequential steps that will be taken to bring the company up to full speed. Graphs or charts help indicate the timing and interrelationships of the major events in the company. Take it month by month for the first year. Thereafter, indicate the progress expected quarterly. Areas that may be important include completion of prototypes, starts of beta tests, early significant sales, when key people are to be hired, physical expansions or moves, opening of branches, trade show or convention dates, major equipment purchases, and the like. Management In the eyes of the investors, the quality of the management team often determines the potential success of the company. Consequently, this section should cover career highlights, accomplishments, and positions held, with an emphasis on good performance records. Describe how the team has worked together in the past. List all directors, consultants, advisers, and other key professionals who will be involved in company operations and point out how they add value. Detailed resumes of key management should be appended with bios of others as appropriate. Risks and Problems Risks could be a red flag. There are diverse opinions about the inclusion of this category. Some investors object to the obvious and prefer to discover their own negatives. Others prefer that the company openly acknowledge risks and potential problems. It's a toss-up; however, high profile, success-threatening risks should be brought out. Use of Proceeds Judiciously present a timetable indicating how much money will be needed, when it will be needed, and how it will be used. Most companies require multiple stages of financing, including both debt and equity. Show the proposed capital structure, including who is going to own what part or percentage of the company at what stage. Start-up plans need to detail start-up use of proceeds and then generalize on the additional stages. Finances Present the company's current equity capital structure as well as future plans. Itemize the equity payments made with dates paid. List all outstanding stock options. Include both historical and current profit and loss statements and balance sheets. Present current and proposed salary structure for those who are already on board and those who will come on board at a later date. Show projections, including balance sheets, profit and loss statement, and cash flow studies. These should be month-by-month for the first year, quarterly for the second and third years, and yearly thereafter. It is mandatory that detailed assumptions accompany all projections. It is also very helpful if the very first part of this section summarizes the details. In fact, in many cases, details can be appended or supplied separately. Appendix Include a glossary (if pertinent) and all essential pieces of evidence, such as resumes, product brochures, customer listings, testimonials, and news articles. Your Plan Is a Lot of Work It's suggested that you seek out available books on writing a business plan. They can be found in many bookstores and all libraries. Read two or three to give you the essence of a good background for specifically outlining your plan. Each company is different and your plan must be tailor made to your particular situation. The ideal business plan just does not exist, and generic plans just don't cut the mustard for Entrepreneurial companies. Expect to spend a minimum of 2 or 3 months and 200 to 300 hours writing your plan. It's not unheard of that entrepreneurs spend up to a year putting together a detailed plan. Additionally, you'll have to spend some time preparing and rehearsing your oral pitch. Remember, your words and story not only have to paint a pretty picture; they must be persuasive as well. It's of little use to approach the writing of a business plan as a necessary evil. Rather, look at it as a helpful tool that can be used to exploit the advantages of your product or service. Some companies may question the necessity of a business plan, citing successful firms that never had one. Times are changing. When the goal is to raise money, it's not only the entrepreneur's money that is at stake. Advisers, team members, directors, investors, and bankers need to be thoroughly convinced. They want to know that they won't be wasting their time and money. They want to know that the entrepreneurial management team has a clear sense of direction and is prepared to move toward its established goals. A good business plan is the answer. What's more, much of the same information would have to be gathered anyway to be made available to potential shareholders before they place their money in the company. Creating a Special Executive Summary Another unique aspect of the good entrepreneurial business plan is the putting together of a special executive summary. This summary is not the same as that in the business plan; it does, however, take advantage of the high points in the plan. It serves as an entering wedge to semi-interested parties as well as potential investors. The business plan executive summary, discussed under the Business Plan Outline section, usually summarizes the business plan in two or three pages. The special executive summary expounds on the most enticing parts of the business plan for about six to eight pages. In essence, it's a condensed business plan that shows the company to best advantage. It's an entree, when initially seeking help, to locate and identify potential financial sources. It can also be used as an overview for those who do not need to know all that much about the company (like staff personnel or suppliers), or for those from whom management wants to keep proprietary information. It can be changed and adapted to any particular audience. It's kind of the bait before the hook, a plan used to capture one's initial interest and motivate one to request more information. A special executive summary should not be taken lightly. It is indispensable, and should be kept updated. This is easier to do than revising a whole business plan if the entrepreneurial team simply wants to test some new plan ideas or gain some quick feedback. It may very well be the key to reaching the right source. Making the Transition from Business Plan to Operating Plan Once the company is up and running, top management should convert the business plan to an operating plan. This process is simply retitling the plan as an operating plan and then religiously keeping it updated, using it as an operational guide on a continuing basis. The operating plan helps keep both management and staff focused on the tasks at hand. The parts that are pertinent to various departments can be pulled from the master plan and passed on to the appropriate staff individuals responsible. Continuous updates should be given top priority in all entrepreneurial companies. The basic plan should be reviewed quarterly--at minimum, semiannually. Remember, for investors, the business plan is what they buy into. It becomes the benchmark for accountability. They intend to hold management responsible for achieving the goals and objectives that are set out in the plan. It is inevitable that things will change as the company achieves full operation. In some cases, these changes will have only a small effect on operations. In others, they could result in a drastic shift in total company focus. Given the ultimate entrepreneurial goals, it's apparent that a continuing update of business plan strategy in the form of an operating plan helps keep everyone singing from the same songbook. Entrepreneurial Plans Take Your Best Effort All companies should have a business plan. Preparing it may take months, and you won't get to first base without it. The outlines presented in this chapter may not fit every company's particular requirements, but they should contain enough general information and suggestions to provide a solid base for preparing your plan. More detailed materials and information on writing business plans can be found in many bookstores and libraries. For Entrepreneurs, there are some very important points that need to be given extra attention to set their plan apart from ordinary business plans. These include continually updating their plans, paying special attention to the corporate structure and valuation portions of the plan, creating a special executive summary, and finally, converting the entrepreneurial business plan to an entrepreneurial Operating Plan. A company should give its plan its very best efforts. You will discover that a well-prepared entrepreneurial plan will serve as a solid sales tool for approaching any financing source--investor or lender--as well as provide management with a written game plan for guiding operations and maintaining a check on expectations. Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page Venture Capital Funds In 1995, the venture capital industry raised $7.4 Billion for 1100 deals, an average of $6.7 Million per deal according to VentureOne, a San Francisco-based research firm. VentureOne is the preeminent investment research firm serving the venture capital industries. The company specializes in tracking the business progress and financing plans of thousands of privately held, venture-backed companies. Their research provides valuable insights into the otherwise murky world of venture capital. If you're trying to find money, attracting a venture fund is certainly one way to do it but you, your product or service, and your company is going to have to be very special. Most venture firms focus on emerging technologies, and are primarily interested in companies that have proprietary products or services, although there are exceptions. Retail or consumer deals are of interest only if they offer strong national or international expansion potential. VentureOne's summary of venture capital investments shows that the majority of funding goes to emerging technologies in the computer, biotechnology, telecommunications and health care fields. Annual Venture Capital Investments ($,000)
Industry
Number of Deals
Dollars Raised
Average Investment
Software and computer services
52
$496.1
$3.26
Biotechnology and pharmaceuticals
140
$806.5
$5.76
Communications and networking
139
$698.1
$5.02
Medical devices and equipment
90
$392.8
$4.36
Electronics and computer hardware
83
$293.9
$3.54
Retailing and consumer products
65
$473.3
$7.28
Health care services
44
$280.8
$6.38
Semiconductors and components
39
$189.2
$4.85
Environmental
11
$152.6
$13.87
Other
96
$646.7
$6.74
Total
859
$4,208.3
$4.90
Details about raising money from venture capital sources is provided in Finding Money but, in general, venture funds invest in companies that offer: Proprietary Products or Services Companies with proprietary products or services often enjoy a desirable "unfair" competitive advantage by virtue of the exclusivity of their products. Patents, trademarks, copyrights, exclusive distributorships, or other special rights may protect a company's unique position in the market. Sometimes, a non-protected product or service with an exceptional head start on potential competition can fit this criterion, as well. The point is that the company must have some significant advantage over existing or potential competitors so it can achieve and maintain a dominant position in its industry. Huge Market Potential Venture funded companies are expected to be able to grow to $30, $50 or even $100 Million in five to seven years. This means that the industry has to be big enough to support such growth. But many venture proposals fail to adequately convince investors of the market potential while others naively project that they'll capture 10%, 20% and even 50% market share in a very short period. When you're projecting potential market share, consider the fact that IBM achieved less than 8% market share in 1994 personal computer sales. Proven Management Talent Management is the most important element in a venture capitalist's decision to invest in your company. Are you, and the others in your company, capable of building a $50 Million business? Have you managed similar growth in the past? Do you have, or are you able to hire, the top people in your field? Venture capitalists will want to see real depth. Extraordinary Returns Venture capitalists are looking for returns of 35-50% per year. A 50% return means that if they invest $1 Million they want to wind up $5 Million in four years. Obviously most businesses, even the high-flyers, won't achieve that kind of return through profits. In fact, most will lose money in the early years. Therefore, you have to be willing and able to sell the company or go public in three to seven years. While the venture community is known for its incubation of startup businesses, the majority of their funds (almost 75% in 1995) go to more established companies. According to VentureOne's research, the typical venture-backed company, when financed, was three years old with 42 employees. They also reported that a total of only 65 startup companies in the whole country, for the whole year of 1993, won seed financing. That's less than 2% of all venture investments that year. In 1995 all startups combined received $276 million for an average of $1.2 million per deal, up from $0.9 million in 1994. Startups, even though they require relatively small amounts of capital, are among the most time-intensive venture investments. Because fund managers are responsible for deploying larger amounts of capital they probably won't increase their investment in startup companies in the future. So if all you have is a bright idea, and even a business plan, your chances of finding several million dollars to start up your business are very small indeed. The average venture capital investment has grown since 1991, reflecting the industry's emphasis on higher quality, later stage deals. Clearly, later stage deals are more in vogue right now. This, however, is a pendulum that swings with changes in the economy, the initial public offering (IPO) market, and the portfolio mix within the venture industry. In any case, the competition for venture capital is fierce. Venture firms fund fewer than one in a hundred of the business plans they receive, and they expect only one in ten of those businesses to provide a home run. Less than half of their investments, they figure, will even make it to first base. Investments are, for the most part, proportional to the fund's size, but few will look at deals of less than $250,000-it's just as much work to do a small deal, as it is a large one. While some venture firms seek majority interests in the firms they finance, most take a minority position. Regardless of their ownership, some venture sources will want to take an active role in your business, and some will be passive investors. More experienced companies give up less ownership and control than early-stage ventures in first round financing. First Round Investment as a Percentage of Company Valuation:
Finding the right venture capitalist for your situation, and negotiating a good deal, is quite an art. Informed professionals can make the process go much smoother, but in the end the venture capitalist is investing in you, not your advisors. Finding Money is a must-read if you're planning to go this route. It offers plenty of insider secrets about how investors evaluate proposals and structure their investments. In addition, The Directory of Venture Capital offers detailed information about the investment preferences of over 600 of the nation's most active Venture firms. Available in both diskette and book form, this publication is an invaluable resource for finding and negotiating venture capital funding. Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page The law requires a corporation to have a board of directors to protect the interests of the corporation and shareholders. However, there are other reasons to have an active board of directors. Effective boards can provide independent advice and act as a check to the CEO. Benefits of an Independent Board Many corporations fill positions on the board with family and friends for various reasons. Small companies, especially family-run businesses, tend to distrust outsiders and don’t want to give up control of the company. However, the benefits of having a truly independent board will usually outweigh the drawbacks. Board members can provide perspective and experience to a company that the insiders might lack. If board members themselves are entrepreneurs, they can help the insiders avoid common mistakes. A board can also help insiders realize the need for long-range planning and develop long-term strategies. The board can also provide a mechanism for controlling and disciplining the CEO as well as advising the CEO. Having experienced businesspersons on the board also gives the company credibility. This credibility can be crucial when trying to raise funds. Experienced businesspersons on the board can provide the company with valuable business connections. For family-run corporations, outside directors can often ease generational transitions. Board Size The board should be small enough to be held accountable but large enough to carry out its responsibilities. Boards usually vary from 5-10 directors. Venture-backed companies usually have five directors. There should be more outsiders than insiders on the board to maximize the benefit of independent directors. Board Meetings The role the board plays will determine how frequently it should hold meetings. A hands-on board can meet once a month. Less frequent meetings are sufficient for a less involved board that meets only to discuss major strategic issues. The CEO should stay in touch with each board member between meetings. Where and how long a meeting lasts are also important considerations. Ideally, a board meeting will last between 3-5 hours which gives the board enough time to get necessary work done but not so long that the directors can’t focus their full attention. Off-site board meetings can be valuable but if the directors are normally busy individuals, they may be hard to schedule. Type of Directors A company should consider the functional skills it needs to run smoothly and grow as well as the mix of personalities when deciding who to put on the board. Forming a board is more art than science. The CEO needs to determine the present and future needs of a company when forming the board. This includes determining the companies competitive advantages, the likely changes and future demands on the company, what things are needed for the company to succeed, the importance of marketing, research and service, and the company’s access to money. Taking these factors into account will help the CEO select an effective board that will help the company realize its potential. Skills Needed A company should assemble a complete combination of abilities when assembling a board. This requires the founders to assess their own strengths and weaknesses and then find the people with the talent to complement them. These talents include industry experience, financial know-how, marketing, start-up experience, and technical abilities. While knowing the product and market are benefits, the CEO should aim to provide as much breadth on the board. The CEO might also want to consider the age, gender and cultural background of each director. For a family business, a director who is relatively the same age as the designated successor to the CEO may be prudent so the new CEO will have a peer on the board after the succession. Matching a board member’s gender and cultural background to that of most of the company’s employees or customers may also be something to consider. If a company markets products to women, for example, having a woman who understands the market on the board might be prudent. The CEO should be wary of appointing board members whose interests may not be aligned with the company or to whom they already have access. A commercial lender’s interests may not be consistent with the company’s long-term interests. Having corporate counsel on the board or the CEO’s personal attorney may waive any attorney-client privilege. A CEO should carefully scrutinize consultants and those who work for the CEO are not as likely to challenge a CEO’s action when appropriate. Venture-backed companies will usually have one or two seats reserved for the venture capitalists. Venture capitalists tend to stay actively involved with the company and can provide leads on other potential board members. The Personality Mix Functioning as a cohesive group is important for a board. This means the board members must be compatible with each other. Board members need to respect each other and no one member should dominate the others at meetings. The board chairman should prevent that from happening and make sure that he or she also does not dominate the others. While breadth on the board is good, the board should not act as a legislative body with each member advocating its own special interests. Board members should also have practical experience and business savvy in addition to theoretical or technical knowledge. The board as a whole needs to understand the difference between meddling and being constructively active in long-range planning, budget review and checking the CEO’s excesses. Board Responsibilities The directors of a corporation owe two legal duties to the corporation and its shareholders: a duty of loyalty and duty of care. Breaching either duty can result in multimillion-dollar liability. While private companies have fewer shareholder suits involving breaches of a director’s duties, they do happen especially where a minority shareholder alleges a majority shareholder has violated its rights. Duty of Loyalty A director has a fiduciary duty to act in the best interests of the corporation. The director must set aside personal, financial and professional interests when making decisions for the corporation. Directors should avoid any appearance of self-dealing. The duty of loyalty applies to decision effecting the day-to-day operations of the company such as compensation for executives, along with strategic decisions such as whether to merge with another company. Directors with no personal interest should determine executive compensation. Directors should also refrain from any business opportunity in the corporation’s line of business and disclose the opportunity to the other directors and getting their permission to pursue it. Some jurisdictions will look at the number of outside directors to determine if a board is sufficiently disinterested. Since outside directors only receive director’s fees rather than a salary, courts view them as having less of a personal interest in making decisions for the corporation. At times it will be impossible to have a vote of disinterested directors. In that situation, the board should do its best to inform all the directors and make sure that the transaction is fair to the company and all of the shareholders. For transactions approved by interested directors, the directors have the burden of proving it was fair should it be challenged. Duty of Care Directors must act like a “reasonable person” would under similar circumstances. Thus a director must make a reasonable effort to make informed decisions. In most states, a director can rely on reports prepared by corporate officers or outside experts like investment banks and consultants. However, if the reports suggest making further inquiries, then merely relying on such reports is not sufficient. Many states will allow a corporation to amend the certificate of incorporation to limit or abolish a director’s liability for breaches of the duty of care except in clear cases of willful misconduct or fraud. A corporation can also amend to corporate charter and make other agreements (indemnity agreements) to pay a director’s legal fees if he or she gets sued. Business Judgment Rule Under the “business judgment rule”, a plaintiff challenging the decisions of disinterested and informed directors must show that the directors were grossly negligent or acted in bad faith. This high burden of proof is designed to protect directors who merely make poor business decisions. All business decisions have some inherent risk and reasonable decisions can have bad results. Thus the business judgment rule protects directors who make decisions in good faith. Compensating Board Members Directors get both tangible and intangible benefits from serving on boards. Formal compensation for serving on the board of a privately held company tends to be small. Most directors who serve on boards do so for the intangible benefits. Intangible Benefits Some of the intangible benefits of board service include keeping abreast of industry developments by overseeing the company’s operations, learning strategies or techniques and the prestige of serving on a board of a prominent company. In addition, some directors like helping a company develop from its early stages. Tangible Benefits A company will usually pay most if not all of the expenses a director incurs to attend a board meeting including meals. Companies should also compensate directors for their time and efforts. Such monetary compensation is more a token of appreciation than a payment for the director’s time which a small company probably could not afford. Effective board members will spend at least half a day examining materials provided by the CEO before attending the board meeting. Directors also spend a few hours a quarter discussing corporate business with the CEO. If there are quarterly meetings, that adds up to about eight days a year. Board honoraria should be about 2-3% of the CEO’s annual salary. Surveys estimate that most private companies pay their directors about $1,000 per meeting. If a board has six directors and meets quarterly, that adds up to $24,000 in annual directors’ fees. Other expenses could bring that figure to $35,000 and insurance for directors and officers could increase that figure to $60,000-65,000. Most companies will also compensate directors with equity in the company such as options and restricted stock grants. Providing shares to the directors will help keep their interests in line with those of the shareholders. Directors may already own shares in the company and serve on the board to protect their investment. A company can also have an informal advisory board. While helpful at the beginning it runs the risk of future conflict with the advisors who might expect compensation. Information for Directors The company should give the board members the agenda for the next meeting before each board meeting so they can effectively prepare. General statistics on how the company is doing should also be included to keep the directors updated on the company and alert them to any potential problems. Some experts also believe that the company should also provide directors with information on the company’s long-term trends. This includes information on the company’s competitive position and organizational health.
Building A Brain Trust Out Of A Board
Bylaws Come First
Changing Roles for Boards of Directors in Entrepreneurial Companies
Choosing a Board of Directors for Your Small Business
Outside Directors—Do You Need Them and Where to Find Them
Pieces of Advice
The Best Practices for Board Operation
The Council of Growing Companies
The Ultimate Board Game
Unlimited Partners
Young Entrepreneurs Organization
Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page Problem Solving and Decision Making Much of what managers and supervisors do is solve problems and make decisions. New managers and supervisors, in particular, often make solve problems and decisions by reacting to them. They are "under the gun", stressed and very short for time. Consequently, when they encounter a new problem or decision they must make, they react with a decision that seemed to work before. It's easy with this approach to get stuck in a circle of solving the same problem over and over again. Therefore, as a new manager or supervisor, get used to an organized approach to problem solving and decision-making. Not all problems can be solved and decisions made by the following, rather rational approach. However, the following basic guidelines will get you started. Don't be intimidated by the length of the list of guidelines. After you've practiced them a few times, they'll become second nature to you -- enough that you can deepen and enrich them to suit your own needs and nature. (Note that it might be more your nature to view a "problem" as an "opportunity". Therefore, you might substitute "problem" for "opportunity" in the following guidelines.) 1. Define the problem This is often where people struggle. They react to what they think the problem is. Instead, seek to understand more about why you think there's a problem. Defining the problem: (with input from yourself and others) Ask yourself and others, the following questions:
Defining complex problems :
Verifying your understanding of the problems :
Prioritize the problems :
Important problems deserve more attention. For example, if you're continually answering "urgent" phone calls, then you've probably got a more "important" problem and that's to design a system that screens and prioritizes your phone calls. Understand your role in the problem:
2. Look at potential causes for the problem
3. Identify alternatives for approaches to resolve the problem
Very simply put, brainstorming is collecting as many ideas as possible, and then screening them to find the best idea. It's critical when collecting the ideas to not pass any judgment on the ideas -- just write them down as you hear them. (A wonderful set of skills used to identify the underlying cause of issues is Systems Thinking.) 4. Select an approach to resolve the problem When selecting the best approach, consider:
(The nature of this step, in particular, in the problem solving process is why problem solving and decision-making are highly integrated.) 5. Plan the implementation of the best alternative (this is your action plan)
(An important aspect of this step in the problem-solving process is continually observation and feedback.) 6. Monitor implementation of the plan Monitor the indicators of success:
7. Verify if the problem has been resolved or not One of the best ways to verify if a problem has been solved or not is to resume normal operations in the organization. Still, you should consider:
Planning Quick Look at Some Basic Terms Planning typically includes use of the following basic terms. NOTE: It's not critical to grasp completely accurate definitions of each of the following terms. It's more important for planners to have a basic sense for the difference between goals/objectives (results) and strategies/tasks (methods to achieve the results). 1. Goals Goals are specific accomplishments that must be accomplished in total, or in some combination, in order to achieve some larger, overall result preferred from the system, for example, and the mission of an organization. (Going back to our reference to systems, goals are outputs from the system.) 2. Strategies or Activities These are the methods or processes required in total, or in some combination, to achieve the goals. (Going back to our reference to systems, strategies are processes in the system.) 3. Objectives Objectives are specific accomplishments that must be accomplished in total, or in some combination, to achieve the goals in the plan. Objectives are usually "milestones" along the way when implementing the strategies. 4. Tasks Particularly in small organizations, people are assigned various tasks required to implement the plan. If the scope of the plan is very small, tasks and activities are often essentially the same. 5. Resources (and Budgets) Resources include the people, materials, technologies, money, etc., required to implement the strategies or processes. The costs of these resources are often depicted in the form of a budget. (Going back to our reference to systems, resources are input to the system.) Basic Overview of Typical Phases in Planning Whether the system is an organization, department, business, project, etc., the basic planning process typically includes similar nature of activities carried out in similar sequence. The phases are carried out carefully or -- in some cases -- intuitively, for example, when planning a very small, straightforward effort. The complexity of the various phases (and their duplication throughout the system) depends on the scope of the system. For example, in a large corporation, the following phases would be carried out in the corporate offices, in each division, in each department, in each group, etc. NOTE: Different groups of planners might have different names for the following activities and groups them differently. However, the nature of the activities |