Entrepreneur’s Diary

Like it or not, you often will be negotiating something in life, and always will be negotiating something in an entrepreneurial pursuit. The negotiation could be direct or indirect, obvious or subtle, but as an entrepreneur, you always will be negotiating.

As just one example, my colleague Michael (first author of this text) shared with me a very important lesson in this regard from one of the angel investors that was his first major outside investor, Peter. Peter was seventy-one years old when he first became involved in my friend’s commercial fish farming company. He was the master at just about everything to do with starting a new business. Peter had left a Big 4 accounting firm (probably was the Big 8 back then) to launch his entrepreneurial career, when he had four children and a wife to support at the time. Among other deal points, Peter negotiated with Michael to purchase a 20% equity stake in his company in exchange for Peter’s cash investment. Michael violated a soon-to-be-learned rule, one that Peter was about to teach him the hard way. Peter had originally agreed to invest in the company for 18%, but later simply said that he’d feel a lot better if my friend could “round up” this figure to 20%. It wasn’t necessary, but it would be “nice.” Wanting to get the deal done, given that the parties were so close, and concerned he might otherwise disappoint or aggravate Peter, Michael said, “OK.” Michael didn’t ask what he would get for bumping up Peter’s equity stake or say something such as, “I’ll do that for you if you do XYZ in return.” Peter later told Michael that this was part of the negotiation, not simply a casual request.

Entrepreneur’s Diary

You’re making great progress. You’ve got a board, you are about to hire two key employees, and you are just about ready to start executing your company business strategy. But, you need a company structure to embody these attributes. In fact, you can’t even open a bank account without an Employer’s Identification Number (EIN). This is no simple decision. In particular, your board (typically made up of “older” types) will probably steer you in the direction of a conventional commercial corporation, aka C-Corp. Why, because they are familiar with it. People just about always think what they are familiar with is best, else why would they have been doing it all these years? I believe that a limited liability corporation (LLC) is probably your best bet at this point of your company history for a variety of reasons we discuss in this chapter. I’m not a lawyer, and this is where you should seek legal advice once you think you know what you want to do. In fact, never go to a lawyer and ask them an open-ended question such as “What should I do?” They will just about always guide you in the most conservative direction legally, and this may not be best for your company.

Types of Ownership Structures

Before you can decide on an ownership structure for your business, you should learn a little bit about how each structure works. As a good reference on deciding which ownership structure is most suitable for your business, read “Choosing the Best Ownership Structure for Your Business” (go to www.nolo.com/lawcenter).

Entrepreneur’s Diary

It seems as if addition, subtraction, multiplication, and division should be fairly simple. It is, until you want to apply it to accounting and do your tax calculations! There are many ramifications resulting from your choice of corporate structure on how you end up paying taxes. For example, who in their right mind would choose to pay taxes twice on profits you make from your company? Well, if you choose a C-Corp for your company structure, that’s just what you’ll be doing! But sometimes a C-Corp is the best choice, and you might ask why. I think my accountant was probably the key professional with whom I interacted with during the early days of my start-up. I recommend seeking an accountant’s advice early, before you create your company structure.

Getting Started

At this point in the text, we’ve covered the basic steps of defining your business, developing a marketing strategy, and differentiating your business from the competition. In this chapter, we cover the creation and use of financial accounting statements in the typical business plan, including depreciation and taxation issues. We stress the importance of creating these financial statements from the top down versus the bottom up by basing the figures on details from the demand side of the equation, that is, sales and the costs of production.

Where Are We Going?

If you ask a group of engineers, most of them would probably tell you that they have thought about starting a business. Most did nothing. Some others did some research and preliminary planning. Some of these then invested some personal funds in creating the shell of a company in some legal format. A rare few took their companies forward to the point that they became operational businesses.

Most of us will see opportunities to start a business. This book is for those among us who are contemplating the start of a business and those that may have already taken that big first step. As teachers and successful entrepreneurs, our goal in writing this book is to help you the reader maximize your chances of entrepreneurial success. You will find guidance, instruction, and practical lessons that will assist you, the prospective entrepreneur, with your first steps toward realizing a dream.

Entrepreneur’s Diary

I teach a course on entrepreneurship, and I always invite numerous successful entrepreneurs to give guest lectures on the subject. One of my favorite speakers is Greg (PhD from Cornell). Greg was raising money for his start-up venture about the same time I was raising money to start my fish business. Greg is now worth millions of dollars (that is another story), but he retains a casual attitude toward his success. When Greg comes to lecture, he typically wears jeans and a knit sport shirt with a fleece jacket. Greg describes the early beginnings of his company and how he hated big-company corporate structure. You know ... having to report to so-and-so ... following this and that procedure ... properly documenting this and that. Greg started his own company so he wouldn’t have to follow all those rules and do a lockstep with corporate ways of doing things. Well, initially, this approach worked okay for Greg. But, then as his company went from 3 employees to 20, to 100, to 300, he found that he had to follow many of those same corporate rules that he hated before. He was having trouble managing under this new structure. It wasn’t as much fun as it used to be. I asked Greg if it had to be this way. He responded with a slouch to his shoulders and a roll of his eyes.

The majority of this chapter was written by my oldest brother James. He was always to me the smartest person I have ever known. It seems appropriate he would author this chapter on management. Enjoy the chapter; I think it has lots of nuggets of wisdom that you will find helpful sometime in your entrepreneurial career. And thanks, Jim, for sharing your management knowledge.