An interesting article on marketing

It was just by chance if you believe in things just happening by chance, that I saw this post in Guy Kawasaki's Blog, it was after I had talked with John and Sarah at length about bootstrap marketing and I think Guy says it better than I could ever, he is the expert, so have a read and see what you think. The title may seem strange but duct tape is an American name for our gaffer tape, the multi purpose tape of choice from builders to airframe mechanics. I will not be around after today for a while, I will be down under on vacation, see you all when I get back.

The Essence of Duct Tape Marketing

Guy Kawasaki


Duct tape (the tape) is simple, effective, and affordable—it’s not always the prettiest solution, but it does always work. The central theme of Duct Tape Marketing: The World's Most Practical Small Business Marketing Guide by John Jantsch is that effective small business marketing is a system—not an event—composed of simple, effective, and affordable techniques.
When you combine that with the cult-like obsession many people have for all things duct tape you also get a pretty good example of how something simple like the right name can do a great deal for a company, product, service, or book. I have distilled his marketing ideas to a top-ten list, and here is what he provided:

Narrow the market focus. Create a picture of the ideal client: what they look like, how they think, what they value, and where you can find them. Start saying no to non-ideal clients.

Differentiate. Strip everything you know about your product or service down to the simplest core idea. Make sure that the core idea allows you stand out.

Think about strategy first. Take everything you’ve done in steps one and two and create a strategy to own a word or two in the mind of your ideal client and prospect.
Create information that educates. You are in the information business, so think of your marketing materials, web sites, white papers, marketing kits as information products, not "sales" propaganda.

Package the experience. Put visual elements around every aspect of the marketing strategy that you adopt. Use design to evoke the appropriate emotional response from your ideal prospect.

Generate leads from many points. People learn in different ways. Your lead generation efforts must allow your prospects to experience your firm from many different angles and views.
Nurture leads along the logical buying path. There’s a natural way for your prospects to come to the conclusion that you have what they need. Build the lead conversion system for before, during, and after the sale.

Measure everything that matters. Certain things always matter. The secret sauce is in finding and measuring the intangibles – those things down on the shop floor that eventually add up to profit.

Automate for leverage. Embrace the Internet or else. Create access, stimulate community, capture innovation, and build knowledge to automate the basic delivery elements of your information business.

Commit. Resist the temptation of the marketing idea of the week. Create daily, weekly, monthly, and annual marketing calendars, make marketing your new habit, and find the money to stick with the plan.

Slainte

Gordon

Answering the "how does your Idea address a need"

How does your idea address a need?

This is one of the most important answers you can give to your prospective investors, you need to be able to enthuse them with answer, and if you Idea doesn't stir them then pack up and move on to the next targets. How does your idea address a need? This is where you get to explore the true potential of your new idea. There are two basic types of demand in the marketplace—a “want” and a “need.” A business that addresses a need is always more promising than one that addresses a want. In the case of a market need, there’s pre-existing “pent-up” demand, and creating awareness is all that’s required to catalyze the sales of your offering. A market need creates “pull” in the marketplace, and the end user literally pulls your product or service through the system to satisfy his or her need. In the case of a market want, you’ll be required to “push” your product onto consumers, and this usually requires expensive advertising and marketing campaigns in order to encourage and influence the sale. There are varying degrees of “want” in the marketplace so try to get a sense of the degree to which the market wants your product or service. Obviously the more the “want” approaches “need,” the better. Basic food and shelter are examples of market needs while goods like jewelry, video games, and even gourmet food products are examples of market wants.
What want or need does your product or service address, and how? Why is it the best solution for addressing that need? Figure out if your idea is revolutionary, evolutionary, or simply a copycat. A revolutionary idea, something that really is different, often means you have far greater chance for upside—more potential revenue and profits. But revolutions typically come with a lot of risk. Don’t underestimate how challenging it is to educate consumers and change their behavior before they see the need for your product. It’s often said among seasoned entrepreneurs that you can easily spot pioneers. They’re the ones with all the arrows in their backs. Be clear in your business plan about how much pioneering you’ll have to do before people understand how and why your product is a winner. An evolutionary idea typically has less upside than a revolutionary one, but your odds are better of getting the business up and running and into a stable mode relatively fast. With an evolutionary idea, the bigger burden is making clear to your customers that which distinguishes you from the rest of the competition.

Slainte

Gordon

Some Ideas on extending your cash flow

Extending the runway

There is real stress when you first start up, when you start to think about cash and cashflow, these things are never for from a founders daily tasks, how is my cash postion, what can I do save cash, how am I going to pay the bills, what does that leave me to eat this week, I was talking to Bill Payne, who is a seasoned entreprenure and this was the output of that chat.Bootstrapping enables entrepreneurs to operate their startup companies with minimal infusions of cash from others, postpone raising capital from outsides sources, and maintain 100 percent ownership of their companies.
After capital has been raised from friends, family, angels, or VCs, bootstrapping is the technique entrepreneurs use to "extend the runway." That is, to postpone raising additional capital until key milestones can be met. Meeting milestones demonstrates the viability of the company, increases the valuation of the company when raising money, and allows the entrepreneur to maximize personal ownership in the company.
Bootstrapping can take many forms, but can be divided into personal or business sources of cash and/or reduction in expenses, as is shown in the chart below:

Sometimes it becomes necessary to provide incentives to assist the entrepreneur in bootstrapping the company. Options (or warrants) to purchase stock in the company can be offered to employees, vendors (including landlords), customers, and partners. Permanent or temporary exclusive relationships can be used to motivate vendors, customers, and partners.
Why bootstrap your company? Why not simply raise money from angels or VCs? Equity investment is the most expensive source of capital for starting companies. Why? Debt (if available) may cost 5 to 20 percent annually.
For highly successful companies, equity costs over 100 percent per year. Don't raise the funds needed to start your company from equity sources unless you absolutely must do so. And there are additional reasons to bootstrap rather than raise money now:
Fundraising takes much more time than most entrepreneurs anticipate. The time dedicated to raising money could be more effectively used to develop and commercialize your first product. Generate revenues (and profits) early-by bootstrapping the company.
Raising money too early, before meeting substantial milestones for success, decreases the valuation at which money can be raised thereby increasing the percentage of ownership new investors will require to complete the transaction. Bootstrap the company-keep 100 percent ownership.
Entrepreneurs always have been bootstrapping startup ventures. It is a time-proven method for extending the funds available to start a company until the cash generated from earnings is available to fund the growth of the business.

How to rev up the Innovation and Ideas bank

Other People's Shoes

By Jeffrey Baumgartner

We have a saying in English: put yourself in the other person's shoes. It means to try and understand the situation from another person's perspective.
ABILITY to put yourself in someone else's shoes is one of the greatest creative thinking skills you can have. TRYING to put yourself in another person's shoes is a terrific creativity exercise and an effective ideation method for brainstorming.

If you run a business, the people whose shoes you should be trying to put on are your customers. Sure, market research and customer surveys can provide you with lots of information, such as the average age, income, education and more, about your customers. You can even run surveys of your customers to find out how they will react to new products. But, market surveys cannot really tell you what your customers think and feel.
In order to do that, you need to be able to put yourself in your customers' shoes. You need to be able to look at your product, service, company and marketing from the perspective of your customers.

This requires two steps. Firstly, you must dump all your assumptions about your product (see article on "destroy your assumptions in 23 July 2004 issue of Report 103: http://www.jpb.com/report103/archive.php?issue_no=20040713). Your customers do not have most of those assumptions. They buy your products; they do not make and market them.
The second step is to try and see your products as your customers do. Your sales people (or dealers), your support people and your call centre people are best placed to know how your customers see your product. They have to sell the products and respond to customer questions and complaints.

If you solicit suggestions and feedback from your customers, the information you have received can be invaluable for interpreting how your customers see your products and services.
Running an ideas campaign can be a good means of better understanding how your customers see your product. Effective ideas campaigns can be based on questions such as: "What alternative uses have you found for [our product]" or "What new product features would you like to see on [our product]"

(An ideas campaign involves soliciting customer, supplier and general public ideas on a specific issue. Ideas campaigns generally last around two weeks. See Report 103, 15 June issue on ideas campaigns: http://www.jpb.com/report103/archive.php?issue_no=20040615, for more information on ideas campaigns. If you are interested in running an ideas campaign, do check out Sylvia Ideas Campaign at http://www.jpb.com/sylvia/ideascampaign.php.)
If you are selling big ticket items to other businesses, there is nothing like treating customers to a nice dinner with quality wine as a means for getting to know them better. Be sure you focus on listing and asking rather than on talking.

Once you are in a position to put yourself in your customers' shoes, you need to make a habit of trying them on regularly. Look, from your customers' perspective, at your products and your competitors' products. Review your unique selling point. Is it really unique? Is it noteworthy in the eyes of your customers?

Brainstorm new products, new product features and new services while wearing your customers' shoes. When coming up with ideas, do not think, "I think we should add this feature." Rather, think "I would like to see this feature on your products." You will be pleasantly surprised by the kinds of ideas you get with this perspective.
Role playing (see next article) can also be an excellent means of coming up with ideas from your customers' perspective.

The better you become at putting yourself in your customers' shoes, the better you will become at serving your customers in innovative, effective new ways

Slainte

Gordon

The way you mean to start out ? Faith, Morals and company culture

Morals,Faith and Company culture

I was talking to a CEO of an emerging start up company in the Telecom sector, it was a few weeks ago, and we were talking about faith, religion and how they fit into the modern business culture. He told me a story, it was about one of his relations who was running a large company, he told my friend that he would never ask anyone to do anything he would not do himself, and he went on to talk about his secretary, he would never ask her to tell a "white" lie, because if she did, he would never know when she would tell him one or a customer. This got me to thinking about the weeks before you start your first new employee, what culture are they going to meet with when they first join, another way to ask the question how do you want them to represent you in there dealings with customers, suppliers and workmates. I am not going say here what is the correct way to set the culture, because we are all individuals and have our own thoughts and believes, but what I would ask is for you to think about what culture is it you want to run through your company ? then ask your self how are you going to make sure that it develops that way.

You need to be comfortable in your own skin, but you also need to feel comfortable with your company and it's skin. The two need to be the same, for you to work effectively and effortlessly there.

Slainte

Gordon

Getting things done :

Here is a great article about Randy Mott, CIO of Hewlett Packard. The thing to pick up on from this article is the importance of having management skills and not just technical prowess in order to get things done.
Mott's greatest strength may be that while a technologist, he has the management skills to actually make it take root in a company's culture. Linda Dillman, a onetime Wal-Mart CIO and now its executive vice-president for risk management and benefits administration, recalls how Mott championed the deployment of IT by showing how it achieved Wal-Mart's business goals.


Hope you have a great weekend..



Slainte


Gordon

Birthday Quote

It's my Birthday, and I thought for a change I would just give you some words to think on today, have a great day.

On Fulfilling One's Task

"A man who becomes conscious of the responsibility he bears toward a human being who affectionately waits for him, or to an unfinished work, will never be able to throw away his life. He knows the "why" for his existence, and will be able to bear almost any "how."

"It did not really matter what we expected from life, but rather what life expected from us. We needed to stop asking about the meaning of life, and instead to think of ourselves as those who were being questioned by life - daily and hourly. Our answer must consist, not in talk and meditation, but in right action and in right conduct. Life ultimately means taking the responsibility to find the right answer to its problems and to fulfill the tasks which it constantly sets for each individual."

Viktor Frankl

1905 to 1997

Slainte

Keep the Faith

Gordon

Practical thoughts on Pitching

When you are raising funding for your start-up, you will have to make a pitch about your business proposal to a group of angel or VCs investors. This post is not meant to give you tips on the complete content and style of the presentation, there are plenty of published advice already and I have posted on a few times in the past as well, which will describe what key information is required,In summary though, your presentation should answer the following questions:
• What are you going to sell?

• Who will buy your product or service?

• What is the potential market size?

• What is the average selling price?

• How are you going to sell it?

• Who is your competition?

• Who are the team members that will make all this happen?

• What are the financial projections and exit possibilities for the lenders?

You should not require more than 10 to 15 slides for this, three of which should purely focus on the financials projections for three years. First of all, you should mentally prepare yourself by knowing your business proposal inside out – this will not only build confidence in yourself and the presentation, but also invite the appropriate response. Although, it is a good idea to rehearse the presentation, do it with someone you are not close to, as they are more likely to be honest and straight with you. People too close to you may not give you the appropriate, direct feedback you require, just because they may be trying to protect your feelings and so keep your confidence level up. Try not to read from a pre-prepared script, be natural and be yourself.
You will be asked a lot of questions, so have the information handy in an appendix, but do not present all of it.
There is no harm in requesting that you are allowed to quickly run through your presentation without questions first, followed by the Q & A session. This will only work if you quickly roll out your presentation in as short a time as possible – 10 to 15 minutes maximum – so there is enough time for questions and discussion. In theory, the vast majority of the questions should have been answered within your presentation.
When an investor continually badgers you with questions on every point, more often than most, they are testing the individual presenters ability to withstand pressure rather than the accuracy of the answers. When asked a question, first of all learn to listen to the question and understand the question. Try and not begin your answer with a lot of euphemism like, “I am glad you asked the question, this is exactly the reason why we are pursuing blah blah technology.” Instead, try and answer the question as directly as possible. You will have very limited time, so make the best use of it and get straight to the point. Some Europeans consider this style too brash, but it is becoming quite common now. If you do not know the answer, either say you will get back to them with the answer later on or just plainly admit that you don’t know; that way you will be measured for your honesty and sincerity rather than some woolly non-answer.
Sometimes, when entrepreneurs want to present themselves as a team, the team decides to split the company presentation between two or three team members as a set of synchronised speeches. This kind of presentation is out, as it would be very easy to lose synchronisation of key information. It is better to for two separate presentations with a natural split, like the finance part and the product technology section.
Two people presenting at the same time can be confusing, as the investor has to carry out an additional mental calculation as to who is going to be in charge when the chips are down.
You are also being measured in terms of your ability to articulate your “idea” or “proposition”, as they would expect you to do this to your prospective customers, partners and employees. Try and minimise the underlying technology and its finer workings, and instead focus on what customer problem you are going to solve and how this will translate into dollars.
Spend time understanding the basics. Understand the basic financial terms and the differences between them, e.g. sales, revenue, cash flow, burn rate, breakeven. If you don’t know them, find someone who could give you some tuition. If an investor is going to entrust you with their cash, they need to feel comfortable that the person has a fundamental grasp of the basics; they don’t expect you be an expert accountant, but they do expect some minimum knowledge.
The subject of initial valuation is very tricky and sensitive. It is not appropriate to openly lay out your cards at the initial presentation, unless, the investor is serious about the offer. In that case you could make valuation discussions into a second part of the meeting. Be realistic about your company’s initial valuations and also offer a realistic equity position at seed stage and R1. At later funding stage (R2, R3), professional advisors and early investors will ensure that the valuations are more realistic.
Remember your company is worth almost zero when it has no customers or no product or IP. So sometimes, being humble may work in your favour. The investor is trying to minimise the:

Technology risk:

Market risk:

Operational risk:

so try and provide any information that helps them mitigate those risks.
Although you should use each presentation session as useful feedback, try and not paste all the feedback back into the presentation, as this will look very dull and unstructured. Use the feedback information to emphasise key issues verbally.
And lastly be firm in your proposal and belief. Do not get de-motivated after a few rejections, as for every NO you get, you are getting closer to a ‘yes’. It is just that sometimes it takes a little bit longer to get to ‘Yes’.

Slainte

Gordon

The structure of your start up team

Your team should have a hard core of start up warriors, the guys and gals who will not give up,who love to design, build and sell services / products , this is an article that I have summarised from an original series by Richard Hathway he is a Chartered Engineer with many years experience in software development and several years with startups. Most recently he spent four years at Sendo the mobile phone manufacturer, having joined shortly after it was founded.

There is a common perception of a high-tech startup, the common view is that a startup consists of a highly driven ceo with The Vision who builds a two or three person management team, prepares a business plan, raises a bare minimum of venture capital and than hires a handful of employees. This small but dedicated group then boldly struggles to build The Great New Thing, whilst being paid mainly in stock options rather than real money. About two years later there is an ipo and everyone involved makes a fortune and retires to a desert island.

An alternative reality for some startups

The above may be in fact the planned life-cycle for many smaller high-tech startups – but some larger startups can be different. They have plenty of vc available from Day One. The staff are also very well paid – and also receive stock options or even real stock. At these larger startups the ceo and the management team own the bulk of the stock. Their role is strategic rather than hands-on. This team provide the vision for the company. Much of their work will be outward facing, involving funding, marketing, pr and so on. However the management team is no longer in a position to manage the product development in detail. The company now needs a three tier structure, namely: a management team, the employees ... and a core team sandwiched between these two extremes.

The core team

Most accounts of startups fail to highlight the nature of this core team. The core team members are not simply traditional line managers – they are the people who actively convert the founder's vision into a marketable product. The members of this team will be highly skilled and experienced specialists who provide the technical strategy, designs, plans, schedules, etc at the implementation level. The core team will also hire and manage a number of employees to support the product development.

Core team members will be extremely well paid and will received a decent amount of stock options and/or stock – but at nowhere near the level allocated to the management team. The employees in turn will be paid a little above industry average rates and may be offered relatively small stock option allocations.
Any ceo of a newly founded well funded startup should not expect to simply hire employees en masse to implement the planned product. He/she would be well advised to plan a core team as part of the initial business plan.

The most crucial core team members should be identified before the vc is obtained – this will allow them to be brought on board almost as soon as the company starts trading. This means that the founders must use their contacts and probably also a headhunter very early on in the creation of the company to locate the first core team members. All candidates at this level should be interviewed and hired by the ceo. The primary tasks of the initial members of this team” will be to set up the basic structure of the implementation side of the company and to sketch out a development plan with the other core team members. Once the basic framework is in place each core team member will hire suitable employees for their specific areas. The ceo should draw up a basic org chart as part of the business plan – but in real-life the core team will self-organise to optimise the skills and experience of its members. The team must be around 20% understaffed to prevent office politics, to save money, to minimise overlap and to maintain focus. The behaviour and attributes of core teams and their members can be remarkable – and yet there seems to be relatively little written about them.

Key attributes of “core team” members

They following seems to apply to “core team” members:

- They have in-depth experience in their key area.

- They have obtained their experience from several different companies an projects.

- They are passionate about their work.

- They can focus very intensely of what needs to be done.

- They want to make things happen – the word “can't” isn't in their vocabulary.

- They are happy to pursue the vision of the founder without attempting to improve it.

- They are intensely loyal to the founder, and not necessarily to the company or to the other members of the management team.

They are all full-timers – not part-time staff.

- None will be trainees – keenness cannot replace expertise.

- They are happy to work very long hours, 6 or 7 days a week.

- They have a huge amount of energy, drive and stamina.

- They are multi-skilled, and can provide useful support in areas outside their main focus.

- Many have been hired globally and multi-culturally – there won't be sufficient candidates locally.

- They are extroverts with a huge amount of self-confidence – perhaps tending towards arrogance.

- Even if primadonnas, they can control their egos in order to work as successful team players.

- They don't necessarily have degrees - many geniuses have no letters after their name.

- They have a varied dress sense – there might be a high iq powerhouse. beneath that kaftan or baked-bean splattered T-shirt. In fact a traditional business suit might be a warning sign.

- They have an innate ability to estimate project time-scales and resources.

- They can multitask between problems and projects.

- They are completer-finishers - they will leave no loose-ends in any task.

- They are not perfectionists – they know when to move on to the next task.

- They don't care about job titles.

- They can work equally happily with ceo level staff or junior staff, both inside and outside the company.

- They understand that the goal is to ship a product, not to play with technology.

- They are usually happy to travel extensively and to represent the company.

- They are not academics - although some certainly have the ability to be so.

- They complete their own tasks and they admit their own mistakes - and fix them. In turn, they accept other peoples mistakes - as long as they get fixed. A startup can't afford to waste time with cover-ups etc.

- They do not use the startup opportunity to pad their CV, to devise or acquire "silver bullets" or to introduce magic tools or methodologies.

- They accept that much of the product development work will be integration of existing technologies and not “blue sky” research or development.

- They fully understand the importance of time-to-market.

- They are capable of interviewing, hiring, assessing and possibly firing staff.

- They have some awareness of commercial issues.

- None will be sharply dressed individuals with smart haircuts who use “paradigm shift”, “quantum leap” and other management jargon.

- They recognise when – and when not – to follow international technology standards.

- They recognise when to use scalable solutions compatible with long-term corporate growth, and when to use fast “point” solutions in order to meet the time-scales.

- They accept that they may be at the company for anytime between 1 week and 4 years, but most probably for about 2 years. However they don't expect to still be there after 5 years.- They have a very “crisp” interpersonal style and will often scream at colleagues - but will then buy them a beer that evening. Conversely, if they are the one screamed at, they do not sulk overnight.

- They don't play office politics.

- They are perfectly happy with constant change.

- Many have lived or worked abroad for some time in their lives.

- Many are into exotic and extreme sports such as go-karting, rock climbing and caving.

- Many have run their own businesses at some point in their lives.

- They don't have the time and inclination to put up Dilbert cartoons.

- Their "significant other" understands that they will be away from family life. for most of the time for typically one to two years.

- They believe their health is up to the high workload.

- They are remarkably insensitive to stress.

- They "live to work" rather than "work to live".

- They are prepared for "burnout" - the workload and pace may simply be too much for them after a year or so, requiring them to move on, before the startup reaches ipo etc.

The expectations of “core team” members

- They expect the planned product or service to really have a significant chance of commercial success.

- They expect the company to have finance to cover the first 18-24 months.

- They expect to be paid well for their skill - typically around two to five times a "normal" salary plus stock and/or stock options.

- They don't expect, need or want a detailed job description - they will be happy doing whatever is needed: writing adverts, giving guided tours, clearing blocked toilets etc in addition to their main role.

- They expect that all secretarial and administrative staff have above average skills.

- They expect to be able claim certain tasks or features as “their own" and maintain ownership of these areas – without requiring management instruction or permission to do so.

- They expect under-performing employees to be removed very promptly.

- They expect to be fired very promptly if they do not perform.

- They expect an informal HR process – “control” by formal HR group will not be appreciated.

- They expect regular feedback from the ceo concerning the progress of the company - ideally through “Town Meeting” style events which allow questions to be posed to the ceo by the staff.

- They expect Machiavellian empire-builders and political animals to be chastised - and weeded out if required.

- They expect that any “group hires” from a single company are not permitted to set up a self-serving “clique” within the startup.

- They don't expect the stock options etc to allow then to retire. They understand that they will probably never benefit from them or that the financial rewards will be a lot less than you might have expected. Any real financial rewards will go to the founders and investors - and the probability that the startup will make any money for anyone is low.

- They will be unhappy about the hiring of “centralised” qa or documentation staff – initially this should be handled by team members.

- They expect to be given the best possible equipment for the task in hand.

- They do not expect the ceo or other founders to employ friends and family at any level in the company.

- They do not expect the ceo to “parachute in” expensive directors or senior managers during the project, especially if these isolate the ceo from the “core team”.

- They expect a “low friction” working environment eg a 100% reliable computer network, simple & rapid expenses processing etc.

The nature of the core team itself

From the above, core team members seem to have typical startup personality profiles. Such people can come across as being self-opinionated and arrogant. However what is less well known is how effective – and daunting - an integrated team made up of such personalities can be. A group of 10 or 20 high iq, highly driven, highly experienced people all working very long hours towards a common goal can sweep almost all obstacles aside. As a team member you can feel like a member of a military unit – or a “cult”. This can be exhilarating when you a member of such a team – but outsiders can find the attitude offensive and overbearing. This however is not regarded as an issue by team members because the intensity of this approach really does work: suppliers learn to deliver on time and with high quality whilst customers admire your focus and tenacity – or at least get worn down by the incessant pressure. Many people would say that they could not work for such a team which behaves in such a manner – however don't forget that the vc will only last a certain amount of time, so the startup staff simply cannot afford to be patient and polite at all times. Some might say that the core team consists of a gang of stormtroopers. That description may sometimes be close to the truth.

Slainte

Gordon

Please also give your prayers to the families of the murdered at Virgina Tech, yesterday (16th April 2007)

What are you going to do with the cash once you have it ?

What do want to do with the cash once you get it ?

I had a chat with an IT company last week, looking to grow and expand with a strong market to develop, they just need cash, I have the same discsuion with a entreprenures all over the world, the one thing I have found helpful when you look for cash is to set yourself funding goals.When you are seeking external cash to support growth, remember that just like you, funders have specific goals they intend to accomplish with the relationship. Some sources seek an ongoing relationship while others work towards promoting small businesses and still others attempt to earn as high a return as possible on their investment. Hundreds of funding options exist out there, but don't get confused by the number of options. Take time to identify your own goals for funding so that you can match them with sources that will be more likely to have a desire to help you. Four major goals to consider are the amount of money needed, the use of the funds, the costs, and the consequences associated with the funding.

Amount: The amount of money you need to finance the company has a bearing on available sources. When you need a small amount, it might be fairly easy for you to obtain funds by pledging personal assets, such as a mortgage loan. Banks will typically only provide commercial loans within a minimum and maximum range. Many angel and venture capital investors are only interested in amounts beyond the bank's maximum range. In each case, the amount you can acquire through financing depends on your business's ability to repay the money through loan payments or distributions.

Use of Funds: Will the money be used to buy fixed assets and inventory, to fund accounts receivable, or for research and development? Each of these options requires different kinds of money. For example, a coffee shop owner seeking funds to purchase an espresso machine that will be useful for four to six years in producing revenue would likely seek a loan with a payback schedule of a similar time frame. In this way, the debt repayment is due in the same years that income will be generated with the machine.

Cost: Money is expensive, so consider the costs. Private investors such as angels, investment bankers, and venture capitalists typically want a 25 percent to 100 percent return per year for the use of their funds. One of the reasons for the continued popularity of bank financing is that it is an affordable source of money that can reach upwards of 1 to 5 percentage points over the prime interest rate.

Consequences: When obtaining funding from debt sources, you need to consider the consequences of not being able to repay the debt. If lenders go after the collateral, the worst consequence might be that you will have to close your business. Failure to provide your investors adequate returns could also mean you lose control of your business. The consequences depend upon the funding agreement and what you have offered as collateral. Consider the impact that outside funding can have on your control of the business before you choose a funding source.
Slainte
Gordon

Preparing your entrance to the VC den

A short how to article on starting out....have a great weekend

Entering the Dragon's Den
by Nick Hood

Thanks to BBC television’s latest reality show, Dragons’ Den, the general public has seen behind the scenes of one of the commercial world’s most difficult tasks – finding new capital. Sadly, most new business ideas are never turned into reality because they fail to find financial backing. Often, this is not because the proposition is weak; it is because the entrepreneur has failed to communicate the investment argument in an effective way.
Raising capital can be difficult even for those with a decent track record. For new entrepreneurs, the task can be nearly impossible. In the fictional Dragons’ Den, the vast majority of contestants are turned down by the panel of successful business people. This is no great surprise because many entrepreneurs are badly prepared when they go before potential backers. They simply haven’t worked out their story. An outside investor will want to see and understand the facts and figures on costs, the market place and competition before he or she considers getting involved, so the entrepreneur needs to have those ready. Poor preparation isn’t confined to the one-man-band businesses. It happens even with substantial companies looking for investment support from major financial institutions in London or elsewhere in Europe.
The one essential tool for fund raising is a comprehensive business plan. It needs to include a focussed summary of the business itself, supported by financial projections, an outline of the marketing strategy and a thorough evaluation of the market. The figures must be more than just a profit forecast. They need to include a cash flow projection and a prediction of how the company’s balance sheet will look at the end of the forecast period. The business plan must also be brief, or it will be discarded long before the investor reaches the end. It must have an executive summary at the beginning, setting out all the key facts.
One element often missing from badly prepared business plans is a clear summary of the major assumptions on which they have been based. Explaining the underlying thinking makes the plan seem much more professional. Investors may not agree, but at least they will understand the background to the venture.
Another common fault is not including any sort of sensitivity analysis. The only certainty about business forecasts is that they are wrong, the only questions are by how much, in which direction and, crucially, why. Business plans need to recognise this and identify what the impact will be if, for example, the business misses its sales target by five per cent in the first year.

Once drafted, the plan must be shown to an outsider, preferably an accountant or other experienced business consultant, who can ask all those difficult “but what if” questions. The entrepreneur must be prepared to set aside his ego and listen to what they say, no matter how painful this is. If changes to the plan are necessary, then pride must take second place after good advice. Accepting outside input is essential for success in business. Few lenders or investors will simply hand over money to entrepreneurs and wait patiently for the return on their investment. The most active investors, like business angels or venture capital companies, will be actively looking to provide their own skills and experience for the mutual benefit of all concerned. It might seem obvious, but the larger the sums on the table, the more the investor will demand to keep an active eye on it, including sometimes taking a seat on the management board.
When everyone is happy with the business plan, it needs to be turned into a professional presentation, which should communicate memorably what the business does. If the core purpose cannot be explained in 30 seconds, the pitch is too complicated and investors will lose interest before the client has a chance to get into the supporting facts and figures. The old cliché about identifying a “unique selling proposition” still applies even if it may have been overtaken by newer management jargon.
It is essential to practice the presentation several times before seeing investors. I have seen the credibility of some seriously good projects destroyed by a hesitant delivery and worst of all when the technology gets the better of the entrepreneur. Most presentations these days are done in PowerPoint, but there should always be hard copy sets of the slides available in case the projector bulb blows or the PC crashes.
The questions the investors might ask should be anticipated and strong well-researched responses prepared. Once in front of the potential investor, the approach needs to be open and not defensive. There will be detailed questioning and the entrepreneur and his team must be able to demonstrate why their skills and experience will justify the risk the investor is being asked to take.
One regular mistake is not raising enough money. If an idea is sound, a professional investor will be happy to put in a little more, if it gives the business a contingency fund to deal with the unexpected costs and problems that are inevitable with all new ventures. Going back later to ask for more is usually difficult unless there is a very good reason why the extra requirement wasn’t anticipated at the outset.
Entrepreneurs must also be realistic and get guidance about the potential value of the business. They need to be willing to give up a significant share of the action. Investors will want a meaningful stake in the company. They will also want a good return on their investment and a planned exit route so that they can see how they are going to get it back.
Raising money for new ventures is difficult at the best of times, but good consultancy advice and a professional approach can prevent it becoming mission impossible.

www.begbies-traynor.com

Slainte

Gordon

Dealing with the Board

This was an article I thought would help those of you who are starting out, and are getting to grips with your new board.

"PureVC" -
Board Reporting Packages
Brad Feld and his partner Chris Wand have initiated some discussion on Board Reporting Packages. There is some good content there and I won't repeat everything here, but here are some key points about communicating with your board. Please note that every VC or investor has different expectations for what should be in a Board Reporting Package. I believe our firm sets very high standards in this area. In addition to the categories mentioned by Chris in his post, we feel that the Board Reporting Package should be in some sense a truncated Due Diligence Binder with the addition of key financials, goals, and projections. If you are keeping up to date on your Board Packages, then you will be up to date on your Due Diligence Binder, and vice versa.
The Board Reporting Package should come well in advance of the Board Meeting. It should contain everything you want to communicate to the Board and everything the Board has asked you to include and what you would expect that they might want to know. A good CEO will anticipate questions from the Board and have preparations to address them. It is a good idea when you are new to a Board that you ask each member what they want and expect from you in the meeting and in the package. Similarly, you should outline what you expect from them.
You will find that if you treat the Board as the valuable source of advising and representation that they are, they will put more effort into investing their time and energy on your behalf. Most of them will have vested financial interests in the enterprise already, but if they are on your Board then they probably have competing interests with their time. You want to do what you can to get them to go above and beyond their call of duty to help your company.

Regards

Gordon

Leading a start up company today

"What man actually needs is not a tensionless state but rather the striving and struggling for some goal worthy of him. What he needs is not the discharge of tension at any cost, but the call of a potential meaning waiting to be fulfilled by him"

Viktor Frankl.


A short post today, I have already mentioned before that I lecture on "the great leaders of our Past and Present", both political and the services, they all had there own style and technique, but there is one thing that they do which is common to the great leaders, they make sure that they task there followers with objectives worthy of there effort and time, and even there life's on occasion. This is something that modern leaders in all areas of service, whether it is Business or Government should emulate, if you have hired the best, make them work to the best of there abilities, stretch and push them, coach them into new areas of experience, and reward them. This is a leaders responsibility to your followers, do not abuse them or waste the resource, like many leaders have and still do. Business these days is complex and competitive with new challenges emerging every day, to compete and succeed in these times, you need to be on the top of your game, and your people.

There has been a tendency to waste away in "safe jobs", but you are deceiving yourself and wasting your potential if you want to be the best you need to push yourself and the business you are involved in, you can be a technician on the shop floor or the CEO of a corporation you still need to fulfill your potential. I have always been my happiest and most productive when I am pushing up hill, developing teams and products in the hard to win businesses, I spoke to a senior guy a couple of weeks ago from a contract manufacturing business about extreme challenges and winning through, and that there are times in a new venture that there is a difficult challenge that looks impossible, you will always find a way through, it is during these times that you see the human being at there peak performance, these are the times that you will remember if the future.

So back to the quote from Viktor Frankl, to develop the potential in you and your teams, make sure you give them tasks and goals that will stretch and develop them, that way you all win.


Slainte


Gordon

How does a VC company pick your start up to invest in ?

This is a question that always comes up when you start your company, how do the VC's pick the companies they invest in and so how can I get them to invest in my company. I hope this answer below, given by Brad Feld from "Ask the VC", will help a little....




Question: When a VC evaluates startups to invest in what are the key qualities and what emphasis do you place on it? Is management as high as 50% or more?


Every young venture capitalist learns several cliches about how important either (a) the team is or (b) the idea is. Unfortunately for the young venture capitalist, these cliches are directly contractor as some wise old VCs are believers that it’s all about the team and others are believers that it’s all about the idea. Such are the paradoxes of life.

Looking back on the investments that I’ve done, it’s clear that a combination of team and idea is key. If the team is weak, that’s a non-starter. If the idea is weak, that’s a non-starter. So – it ends up being a classic 2 x 2 matrix: strong team + strong idea is good; weak team + weak idea is bad; and strong team + weak idea or weak team + strong idea is – well – questionable at best.
The big challenge is determining whether a team or an idea is a strong one. Just because someone has had success doesn’t mean they are good (since I’m feeling cliche-ish tonight “better lucky than good” comes to mind.) The converse is also true – I’ve met plenty of great entrepreneurs with a failure or two under their belt.

The same goes for the idea. Those online pet food stores seemed like a great idea at the time in 1999. And – in the same time frame – “yet another search engine” didn’t seem like such a great idea to lots of other folks (YASE = Google.) Of course, there’s always a lot more to the story – but on the surface it’s not an easy evaluation, which of course is the point.

So – the answer to your question will vary by investor. There are several distinct philosophies as well as numerous investors who probably don’t have a clear set of rules (e.g. I can’t tell you the number of times I’ve heard something like “I always invest in people, but the idea here is so great that we can fix the team later.”) Whenever in doubt, remember the answer is 42.


Also for those who need the meat and two veg on the matter, try Venture Capital and the Finance of Innovation by Andrew Metrick,

Part 1 is titled VC Basics and covers the VC Industry, VC Players, VC Returns, The Cost of Venture Capital, The Best VCs, and VC around the world. It’s a solid introduction to how the VC industry works.

Part 2 is titled Total Valuation. This part has a bunch of juicy meat in it that is relevant to all entrepreneurs raising venture capital (as well as any new venture capitalist.) It delves deep into the financial structuring of deals in sections titled The Analysis of VC Investments, Term Sheets, Preferred Stock, The VC Method, Discounted-Cash-Flow Analysis of Growth Companies, and Comparables Analysis. The examples are extensive, build on themselves, and create a solid foundation for anyone that wants to understand the economics of venture capital.


Part 3 – titled Partial Valuation – is the section where it becomes apparent that Metrick is a professor at a business school. While intellectually (and mathematically) interesting, most of this section is a departure from the practical reality of how most VCs think about deals.

Part 4 – titled The Finance of Innovation – is all business school stuff. R&D Finance, Monte Carlo Simulation, Real Options, Binomal Trees, Game Theory, and R&D Valuation.



Slainte

Gordon

Disco's, DJ's, dancing, and the Start Up Company

I was at a wedding on Saturday, the ceremony was held at Linlithgow palace, (http://www.caledonia-weddings.co.uk/linlithgow.htm), It is an amazing place for a wedding, full of history and splendor, I had forgotten how beautiful the palace and surrounding grounds were. The the wedding reception was held in a near by hotel, the usual meal, speeches and then the disco, it was during the disco , that I made some mental notes, on how a disco, could be equated to the culture /rhythm of a company. I have noticed that a company had it's own rhythm or it's own work rate, even divisions of a large corporation show this difference, there are companies that are frenetic with activity, the heavy metal head banging company, there is the slow- fast-fast-slow company, the disco dance club mix company, and there is the slow waltz company, always moving forward, steadily, and you can round it out with the robotic company, moves with automated precision of an 80's style robotic mix dance.

The DJ, was not the best I had heard, but he was observant and kept the evening flowing a long, he found out early on the music that folk like and the rhythm of music that this group of revellers liked, if the music was too fast, they would sit down..to slow for long and they would sit down. Yes there were the oddities, that would hit the floor, and have a head bang to some ACDC, but they would soon fade out to sit down and rest....so where am I going with this...


The CEO of a company needs to learn what the rhythm of the company is, this will even be different for different groups of people in the company, he is the DJ and needs to manage the organisation to fit the rhythm and know when to push and when to run slow, many CEO's have burnt out there best teams, with just playing the wrong music for too long. The DJ can speed things up if he likes but he always needs to make sure that the speed comes back to the natural rhythm of the company, and if the DJ wants to keep the rhythm going faster , he may need to find a few different dancers to help speed the group up......


Well hope you all have a good Easter Monday.....





Slainte

Gordon

How to attract the Attention of a Venture Capitalist

- How to Get the Attention of a Venture Capitalist

These are some notes that were taken during a presentation by Guy kawasaki, he was asked how do you get on the radar of the VC ?, it was captured and committed to the WWW by Wendy Piersall (she has an interesting blog at http://www.emomsathome.com/) ,now you can get noticed by the VC with not to much difficulty but it is always the next step that is harder,getting the first meeting, you can lessen the pain if you make the first contact with the VC correctly, play to there drivers, fear and greed, get them thirsty to hear more....have a read through what Wendy has captured.


Get an introduction by a partner-level lawyer. He should work at a firm that does a lot of venture capital financings. Best case email/voicemail: “This is the most interesting company I’ve seen in my twenty years of legal work for startups.” Venture capitalists dream about calls like this—it’s the equivalent of a scoring shot that knocks the goalie’s water bottle off the top shelf.
Incidentally, this part of the reason of why you should pay top dollar and use a well-known corporate finance attorney instead of Uncle Joe the divorce lawyer (even if he handles venture capitalists’ divorces). You’re paying for connections not only expertise.

Get an introduction by a professor of engineering. Best case email/voicemail: “These students are the smartest ones I’ve ever had in twenty years of teaching computer science. Larry and Sergei would have carried their backpacks for them.” Arguably this is even better than the lawyer’s call if the school has a history of receiving multi-million dollar donations from its alumni—if you know what I mean.

Get an introduction by the founder of a company in the venture capitalist’s portfolio. Best case email/voicemail: “My buddies are starting a new company, and I think it’s really cool.” For this to work, it would help if the person making the call is a successful company in the venture capitalist’s portfolio. Also, this would be a good time to tap your network in LinkedIn to find acquaintances in the portfolio.
Here’s a power tip regarding getting to venture capitalists using LinkedIn. Maybe it’s only me, but I hate when a connection of a connection of a connection wants me to take a look at deal. LinkedIn enables you to just go direct, and that’s my advice if you can show success (see below). If you can’t show success, the connection of a connection of a connection is useless anyway.
Show success. Suppose you can’t get any of the introductions mentioned above. Then the most compelling email/voicemail that you provide is this: “My buddy and I have been working in our garage, taking no pay, and with MySQL we built a site that is doubling in traffic every month. Right now, we’re at 250,000 page views a day after thirty days.” With this one sentence you’ve proven you can (a) make a little bit of money (“none”) go far, your architecture looks scalable so far (once in my career I’d like scalability to be a problem), and most importantly, the dogs are already eating the food.

Another way to show success is to hit it out of the park at Demo or the poor man’s Demo we call Launch: Silicon Valley, but this is a game that only a few dozen companies can play in every year. Finally, you can provide links to articles singing your praises, but this only means that you fooled the press, not that the dogs like what you’re serving.

Make sure your company is in the right space. No matter how you get to the venture capitalist, make sure that she is the right one for you. For example, if you have the cure for cancer, contacting a firm’s enterprise software guru isn’t the brightest idea, so get on the web and do your homework.

Use a short email. The ideal length of your email is three or fourth paragraphs:
What does your company do?
What problem are you solving?
What’s special about your technology/marketing/expertise/connections?
Who are you?

Here are some things not to do:

Attach a PowerPoint presentation. Save it for the face-to-face meeting.

Use the word “patented” more than once. All it takes to file a patent is $1,000. No good venture capitalist believes patents makes your company defensible. They just want to learn (once) that there might be something worth patenting.

Claim that you’re in a multi-billion dollar market. Isn’t every company in a multi-billion market according to some study? At least every company that’s ever pitched a venture capitalist.

Provide a lofty financial projection. Most projections that I see show how you’ll grow faster than Google. Frankly, I wouldn’t provide any projection at all. It will be either too low and make your deal uninteresting or too high and make you look delusional.

Brag about an MBA degree. Most venture capitalists want to invest in hardcore engineers at the start. The MBAs can come later, so focus on engineering or avoid the subject at all.
Try to create the illusion of scarcity. Many entrepreneurs claim that “Sequoia is interested.” If Sequoia is interested, you should take its money. If it isn’t, then the venture capitalist won’t be either. Either way, don’t even think of blowing this smoke.





Well see you guys and gals tonight...Tony and Martha are pitching...should be good..bring the cheque book for the drinks afterwards...and have a great Easter break, spend sometime having a think about you, Easter is a time of celebration in the christian church, attend an Easter Sunday service..do your soul some good...



Slainte


Gordon

An alternative to Plaxo

This is an alternative to Plaxo, www.lyro.com and it looks like it is not as intrusive as Plaxo can be....it may be worth a try..it is in BETA...it will help you improve yor online presence, that is an all important requirment in these days of Web 2.0 and your online connectivity....


Press Release to Blog Publishers
Lyro.com Launches Business Card 2.0New digital business card directory helps users brand themselvesRelease date: March 29, 2007Minneapolis, MN - We're introducing Lyro – the business card 2.0. You are part of a select group of blog owner/publishers that we are inviting to take an early “sneak peek” at lyro. We see your blog as a major delivery vehicle for news and information and hope you'll have a willingness to cover our launch (good or bad).Today, most of us use email and the internet to connect with others and maintain effective business relationships. While a large amount of searchable data on people already exists on the internet, this information is not always well organized, easily locatable, user friendly, or under individual control in terms of what’s displayed and how. It remains difficult to get your hands on the necessary business contact information you need to grow your business, or to help you get more leads and close more deals. Lyro makes it faster and easier for potential customers, business partners, colleagues and acquaintances to search, find, and safely & securely contact each other. Unlike other existing contact management and networking sites, Lyro allows basic business contact information – name, company, job title, address, phone number, and business URL (but not email addresses) – to be freely searched and exchanged over the Web. It also empowers people to control how that data is displayed. LyroMail (our anonymous messaging system) allows users direct contact with each other without disclosing email addresses. "We believe it is the right of individuals to have a say in protecting their privacy while also being able to enjoy the fruits of freely promoting themselves and their business," said Audie Dunham, leader of the lyro team.Lyro is quickly gaining momentum in business circles. “With Lyro, I can get basic information about me out on the Web faster and easier than ever before. People can find me and make direct contact with me without the hassle of going through layers of their network or relying on information from second and third hand sources. Yet, my email address can remain as secure as I choose to make it.” said lyro user Chris Toal, Senior Vice President of Marketing at Amplifon USA / Miracle-Ear®."We aspire to become the world's largest repository of digital business cards – where everybody who’s anybody can be found if they so choose," said Dunham. Lyro is intended to help business people to more effectively brand themselves on the web.###



Slainte

Gordon

Value not difference, creates real interest in your products

I picked up these thoughts from Edward de Bono, on why value, and not difference, creates real interest. It is always a problem for "Techie start ups" that they focus on how different or technically advanced there product is, and forget that the buyer may not be interested in all the added functionality that you think is a great idea and costs half your R&D budget to implement. You make money buy selling something someone finds useful, fulfills a need that they can't get anywhere else, not that !!! you can have this really expensive and sexy looking pencil sharpener for £20, when a 20p pencil sharpener will do just the same. There is a saying in the VC world, you can make the worlds greatest dog food, but if the dogs don't eat it, then you do not have a business, even though you have the worlds best dog food, that little story can be taken across a lot of business areas, you can have a ton of patents and IP (Hear me Universities) but if they are not being used to make a saleable product, by you or someone else then they have no value. Please have a read at what Edward had to say about creativity, and let me know what you think


Interesting Creativity
A key element of creativity is interest. You often hear the comment, “Now, that’s interesting”; “What’s interesting about that is...” and “Very interesting”. However, while “difference” can be interesting, it is not usually enough. Too many people believe that “being different” is enough where creativity is concerned.
Visual difference might get an idea noticed, but that is all. The difference must deliver real value, otherwise being different is not creativity. But it is true that making something different could represent a “provocation”, from which you can find something of value.
We look for concepts that are interesting and search for what is interesting. We take notice of interesting things and our attention is attracted by them, once we develop that habit of mind. So once we have focused on what is interesting, what do we do next?
What we do is explore the point of interest – the implications, the ramifications, the effects and the results, and how other things are affected.
Exploring in this way goes further than the initial judgement. Exploration might involve the mental process of “movement”, a key part of lateral thinking.

You can focus on any point of development and use it as a springboard for other things. The journey goes on. You don’t so much assess the idea as explore the impact of the idea and the values involved.
When exploring interest, always look for “value”, because in the end that is what we are interested in. Value or changes in value are immediately interesting.
There are two types of value. The first is “functional value”. Will the idea work and will it perform the necessary function?
For example, if a new idea for streetlights fails to control traffic flow, then there is no operational value.
Then there is “benefit value” – what benefit does the new idea bring to the different parties involved? For instance, a new idea for supermarkets could benefit the customer, but at the expense of the operator.
Consider these different values when deciding what is interesting.



Slainte


Gordon



Question....is your company an F1 car or one that is dressed up to look like one

VC Pitch Rules

VC Pitch Rules


I found an interesting site by Laura Fitton, (follow the links below) one part that interested me was her rules on pitching I have posted on the challenges of pitching, and these thoughts are very close to my own....

• Your powerpoint isn't "your presentation"
• Once you've cut down your presentation to its desired length, take out a few more slides (you won't miss them and neither will the investors you're pitching)
• Always keep in mind the outcome – your entire presentation should be geared toward serving your audience and the result to which you're trying to drive
• End by encouraging next steps (rather than the throw away summary "this is the greatest deal ever" slide)
• Vary your tone, speed, inflection, etc.
• Don't memorize your speech (Be fluid, live your presentation ,my add lib)

More at the links below, if you think you need your pitch polished and want a proffesional communicator, talk to Laura shes a good lady.....and if you want a test audience.....give me a shout..

http://home.comcast.net/~pistachioconsulting/10ThingsPitch.htm
http://home.comcast.net/~pistachioconsulting/Break10Rules.htm

Slainte

Gordon

Sometimes a good cup off coffee makes you think

Putting up with the Status Quo.

I mentioned in last Mondays Blog that I had been in the Czech Rep for a few days, and I had met with some of the key guys from Foxconn Cz. I was also lucky enough to get a look at there manufacturing operations, hence the comment a good cup off coffee, the walk through got me thinking about my own operations here in Scotland and other sites that I have the opportunity to work for and visit around the world, and it got me thinking about how to improve on what I thought was a good operation.

Coffee is the life blood for an entrepreneur, it helps kick start an early morning, and it prolongs a late evening. I like my coffee, my favorite is blue mountain bean, hand ground, brewed in a percolator, expensive but it tastes great, it is a treat. We changed the coffee here a few weeks ago, it was during the re-org of the company, the other site used to drink "better coffee" where as on this site it was the low cost kind, when I started drinking the new coffee there was something missing, it did not have the same bite as the old coffee and I ended up bringing in my own Alta rica, so where am I going with this you will be asking?.

• We get used to the status quo, don't push the performance, i.e the same coffee each morning,we accept it.
• We do not think there may be a better way i.e change the coffee, it may be better.
• See what's happening elsewhere in other companies get out and see i.e try a wide variety of coffee, there is only one blue mountain coffee bean that is any good, it took me a while to find it.
• It will take to much resource to do this, a half day trip may bring you 5% improvement in margin and you will have increased your network. i.e you never know who you may meet with in your pursuit for a great cup off coffee.

Well this was just a few thoughts I had this morning, and if you don't take anything away from this at least take this, give your guys and gals a good cup off coffee, it does help in the "wee sma hours"

Slainte

Gordon

Stock Options 101- for the Entrepreneur

This a subject that can confuse the first time employee, what does the stock options mean to them ? and what are the pitfalls....this information is not meant to be a definitive statement and I would suggest that you talk to your IFA for the legal cut on Stock options. This article was cut for the the USA market, but has a lot off similarities to the UK /Europe, setting up a stock options plan for your company is something you need to plan on taking 3 to 6 months, as you will have to involve the government tax bodies and they work to there own timetable.



Startup Stock Options: ISOs vs. NSOs
Startup Stock Options — Dave Naffziger on March 31, 2007


An Employee’s Guide to Startup Stock OptionsEven seasoned startup personnel frequently misunderstand the ins and outs of their options. I initially thought I could cram a full overview into one post, but quickly realized that it would take several posts to get into the detail that I wanted. So, this is the first post in the Startup Stock Options series. These posts are intended for employees and other people that own startup stock options. Brad Feld has a great series on Term Sheets which cover stock options (and plenty of other issues) that are more geared for company founders.

The first aspect I’ll discuss is the two option types: Incentive Stock Options (ISOs, sometimes called Statutory or Qualified Options) and Nonqualified Stock Options (NSOs, NQSOs or sometimes called Nonquals). Many aspects of stock options are impacted by which type you hold so developing this familiarity early will help discussions later on. I’m not going to address Employee Stock Purchase Programs (ESPPs), as they are inappropriate for and rarely seen at startups. For a super-detailed look at the two option visit this writeup by Johanson & Berenson LLP.
Most option agreements will state which type of option you hold. All ISOs need to be issued under an ISO Agreement, which pretty much ensures that the agreement is named something like “Incentive Stock Option Agreement”. I’ve never seen an ISO Agreement that wasn’t named that way, but I’m not familiar enough with the legal aspects to guarantee this is always the case. The easiest way to find out if you hold ISOs or NSOs is to ask your employer.
Incentive Stock OptionsIncentive Stock Options are a class of options created by the IRS that provide tax advantages over NSOs. These tax advantages are two-fold:
ISOs are taxed on the stock sale (not the grant or exercise). NSOs are taxed on the exercise of the option. You don’t make money until you sell the stock. There can often be gaps between the time you exercise the option (buy the stock), and sell the stock. There are plenty of scenarios where you may exercise the option, but never have the opportunity to sell it. This benefit prevents the worst-case NSO scenario from happening: your unsold, exercised stock becomes worthless. You’ve lost the money you paid to exercise the option, and you would also have to pay the IRS ordinary income taxes on the difference between the exercise price you paid and the market value of the option. So, if you paid $100 to exercise stock worth $1000, you could have to pay the IRS up to 35% of the $900 ‘gain’.
ISO shares may receive long-term capital gain tax treatment. If they have been held long enough to satisfy a special holding period ISO stocks can be taxed at lower long-term capital gains tax rates. Long-term capital gains are currently 15%. Ordinary income tax rates can go up to 35%.
It is also worth noting that the Alternative Minimum Tax is increasingly reducing the tax benefits of ISOs. But more on this in a later post.
There are multiple eligibility requirements for an ISO option. The notable requirements include (but aren’t limited to):
Employees only
Must be granted at fair market value (409A hell for companies)
Non-transferable (except through inheritance)
Must be granted within 10 years of shareholder/board approval
Must be exercised within 10 years of grant
Nonqualified Stock OptionsAny option that does not ‘qualify’ to meet the requirements of an ISO or ESPP is an NSO (hence their nickname: ‘nonqual’). NSOs are far more flexible than ISOs, but several important differences include:
Can be given to anyone (partners, consultants, board members, gas station attendants, etc.)
Can be priced below (or above) current market value
Typically taxed on exercise at ordinary income tax rates. In some instances, they can be taxed at issuance.
ISOs offer tax advantages, but NSOs offer substantial flexibility. Consequently, many startups issue both ISO and NSO options depending on the situation. As an employee, in most cases you would prefer to receive ISO instead of NSO options.




Slainte

Gordon