Dividing Equity among Co-founders

Image by mohamed Hassan from Pixabay

There is no one best way to divide equity among co-founders and set founder salaries.

I am generally an advocate of one for all and all for one.  Keep the equity equal among founders and keep your base-salaries the same.  I have found it tends to reduce these issues as distractions while creating a stronger sense of team.  Is it perfect?  Nope.  But, it has worked pretty well for me.

Here is a good summary of the pros and cons of a fixed approach versus a more dynamic, situational approach.

The key is to have a serious discussion among co-founders before the business is up and running, when everyone is still friendly and everything is still more or less hypothetical.  Talk through the various models and don’t come to a resolution until you reach full consensus among the founders.

Small Town Entrepreneurship Grows

Downtown Ripon, Wisconsin
#jeffcornwallphotography

I grew up in a small town in Wisconsin:  Ripon, to be exact.  It was a typical rural, mid-western town.

In the years after we left Ripon, more and more residents, like us, left to move to larger cities.  This exodus took its toll on our hometown.  More and more of the storefronts became vacant, in what was once a vital downtown, as Ripon’s population slowly declined.  This trend continued throughout the end of the last century.

Rural Renaissance

And then, as we began the new century, things began to improve.  In our hometown of Ripon, we saw once vacant storefronts begin to fill with coffee shops, a brewery, craft stores, and so forth.  Ripon’s population began to grow for the first time in many years.

In fact, small towns across the country showed some glimmers of rebirth in the early 2000’s.  People began moving back to small towns.  Developers began to see the opportunity in small towns and their surrounding rural areas.  The census bureau even took note, introducing a new term called “micropolitan areas” for small towns and their surrounding rural area.  Many of these micropolitan areas were showing signs of sustained growth.

Where we live today in Tennessee, communities that were once thought to be too rural and too far away from Nashville began to emerge as growing hotspots.  Sleepy little Tennessee towns, such as Pulaski, Tullahoma, and Columbia invested heavily in telecommunications infrastructure, hoping to encourage business relocation.  Developers began to invest heavily in small towns throughout the region.

And Then Came the Pandemic

With the pandemic came an unexpected boost to these trends.

Becky McCray, at Small Biz Survival, just issued an interesting report on small town trends in 2022.

“After saying for years that remote work would bring more people to choose a rural residence, here we are: Zoom Towns!

“The real trend isn’t an explosive exodus from major tech and population centers, but the more subtle diffusion of opportunities to a broader swath of places.”

One of the things she sees as a game-changer for many small towns is the dramatic shift to remote working that is now part of our post-pandemic world of work.

Although the investment that small towns made in Internet infrastructure did not pay off with the corporate relocation that they had envisioned, it is beginning to attract newly remote workers to these communities who can now choose to work from anywhere in the country that has good broadband.

As more and more workers move to these small communities they are creating opportunities for entrepreneurs.  These workers want coffee shops and restaurants.  They need lawn care and house cleaning services.   The economies prosper with increasingly affluent populations in these small towns.

The rural renaissance should accelerate over the coming years.

What VCs Really Look For

Image by mohamed Hassan from Pixabay

Mike Rogers made a great post on LinkedIn about the six things that matter most to venture capitalists when deciding on an investment.

You will need to nail all six of these to have a chance at landing venture capital.  Experts estimate that venture capitalists fund as few as 1 percent of deals that they look at, so make sure yours has the best chance of making the cut!

 

Social Media Can Challenge a Small Business

If you are a B2C business model, social media is probably near the top of your list for reaching your customers.  If current statistics about social media are to be believed, about half the world’s population now uses social media.

However, for small business owners, knowing how to effectively use social media to promote your business can be daunting.

But which one?

The number one rule for choosing where to promote your business with social media is to know where your customers spend their time online.  Although Facebook is still the most popular social media site, it may not be the favorite site for your customers.  The preferred social media site varies by age, lifestyle, geography, and gender.  For example, if your target market is younger, you may have better success finding them on Instagram or TikTok, as they view Facebook as the platform where mom and grandma hang out.

Even if you think you know where your customers go to engage in social media, make sure to experiment with a few different sites.  People often go to more than one site for different reasons.  For example, they may go to Twitter for news, but Instagram for finding trendy products.

Keep in mind that social media is a moving target.  Where your customer go today, may not be where they go in six months.  It is critical to keep up with these trends.

DIY or outsource?

As social media has gotten more and more complex, even small businesses are relying on experts to manage their digital marketing efforts.

More and more entrepreneurs choose to outsource digital marketing and the management of social media.  As Steven Clayton explains in his post at SmartBrief, outsourcing offers the advantages such as cost savings, specialized expertise, and better results.

If you do choose to manage your digital marketing in-house, make sure you understand all of the ins and outs of social media.  Christina Newberry offers a comprehensive guide to effectively using social media in her post at HootSuite’s blog.  How does she suggest getting started?  It all starts with a social media plan:

But before you leap in feet first, remember: every good business strategy starts with a good plan. Yes, you can use social tools for free. But the time and effort involved still represent an investment in your business.

Without a plan, you have no clear goal for what you’re trying to achieve. That means there’s no way to know if you’re getting a return on that investment.

Effective management of social media requires the right tools.  Here, here, and here are articles that offer reviews of social media tools.

7 Common Elements When Transitioning from Founder to CEO

Image by Gerd Altmann from Pixabay

When entrepreneurs start their first business, not only is it their first time as a business owner, but also their first time as a CEO.

Being the “CEO” means very little in the early days, but as the company grows, the title of CEO takes on more meaning. Defining your role and your style as the CEO of your company takes planning and specific effort on your part. It may even feel a bit awkward at times, but you have to establish what your role will be as the CEO.

Growth Changes Your Job

Many entrepreneurs start their businesses because they like the hands-on part of their business. Engineers like to engineer. Furniture makers like to build stuff. At some point in the growth of the business, the entrepreneur begins to move away from the hands-on part of what their company does. This can be a painful and frustrating period.

As they move away from the hands-on, entrepreneurs must learn the other strengths and weaknesses they bring to the business.

If you have a knack for numbers, keep the financial management of the business part of your core responsibilities.  If you are good with customers, don’t be in a hurry to give up selling and customer relations.

Your “job description” as CEO should be a reflection of your skills, abilities, and knowledge.  However, no matter what your specific role as the CEO is in your business, growth demands you start to build your team.

Delegation Hesitation

There are three common mistakes that entrepreneurs make when delegating.

The first mistake is being hesitant to delegate.

When first beginning to delegate to employees, some entrepreneurs might feel that no one can do what they do as well as they can do it. Employees might not care quite as much as the entrepreneur does. After all, this is your business, and your reputation is tied to its success. To employees it is simply a job.

To overcome this hesitancy to delegate, entrepreneurs should remind themselves that sometimes “good enough is good enough.” While employees may not carry out the tasks delegated to the level of perfection you would, they can learn to perform these tasks well enough for the business to run smoothly and for customers to stay satisfied.

Moving Too Quickly

The second mistake entrepreneurs make is rushed delegation.

Rather than being hesitant to delegate, entrepreneurs who make this mistake seem as if they can’t wait to get tasks off their plates. We see this quite often with serial entrepreneurs who are so eager to get to their next new business idea that they don’t take the time to get their current one running properly before moving on.

These entrepreneurs delegate without providing proper training and without giving clear expectations for performance.

In the rush to delegate, tasks and responsibilities can also end up being assigned to the wrong person or mistakenly to multiple people simultaneously. This can lead to chaos and frustration.

To overcome rushed delegation, develop a clear and detailed plan that includes what needs to be delegated, who should be assigned the task and what needs to be done to prepare employees for their new responsibilities.

Trust

The third mistake is undermining the delegation process.

Even after the delegation of tasks and responsibilities, employees will still tend to want to go directly to the entrepreneur to get an answer to a question or to make a decision, instead of going to the person now assigned to that area. If the entrepreneur answers that question or makes that decision, it will completely undermine the authority of the person it has been delegated to.

I developed a “seven-second delay” to avoid this mistake. When I was asked for an answer or a decision I would always pause for a few moments to ask myself, “Is this still my responsibility or have I delegated this to someone else.”

If I had delegated it, I’d answer by sending them to the employee to whom I had given that responsibility.

Delegation is a lot like raising teenagers. At some point you have to begin to let go so they can learn — and grow up. With your business, if you don’t learn to let go and delegate, your business will never successfully “grow up” to the next stage of development.

7  Common Elements of CEO Job Description

As founders build their team and delegate responsibilities to their leadership group, they must pay attention to seven elements that are part of every entrepreneur’s job description as CEO:

  • Growth can be stressful for everyone in the company.  The entrepreneur must remind everyone of the vision as to where the business is headed and provide inspiration for the company’s potential.
  • The entrepreneur must be the keeper of the culture and lead the efforts to create an intentional culture that represents the founders’ values.
  • Growth requires resources.  As the CEO, the entrepreneur is responsible for securing the necessary resources to ensure successful growth.
  • The entrepreneur must work with the leadership team to create systems that will support ongoing growth and ensure customers’ needs are being met.
  • The structure of the business should never “just happen” as people get hired into the business.  The entrepreneur must ensure that structure is tied to the strategy, culture, and business model of the company.
  • As CEO, every entrepreneur must be prepared to be the chief strategist and adjust the direction the business takes based on changing market demands and opportunities.
  • Finally, as CEO, the entrepreneur serves as “emotional shock absorber” to keep a positive climate in the business, even when the business faces the inevitable challenges that are part of growth.

By integrating these elements into your job description, you will be on the path to becoming a more effective CEO of the business you founded.

Symptoms of Growing Pains

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“The biggest cause of failure in business is success.”
(A favorite saying of my late father, RM Cornwall)

“Every time the business owned by an entrepreneur who banks with us starts to grow, I get nervous.  And if it grows quickly, I go on high alert!”
(A banker who wishes to remain anonymous)

When I look back at a failed entrepreneurial venture, its demise can most often be traced to one of two causes.  Either their business model was flawed from the start or they were not prepared for their business model to succeed and had trouble handling the growth that followed.

Business Transitions

During growth, entrepreneurs must lead their businesses through various stages of development.  One of the best models to help entrepreneurs understand these changes was developed by Eric Flamholtz.  In their book (now in its 5th edition) Growing Pains, Flamholtz and Randle present a practical model that helps entrepreneurs understand the stages of business growth.  A fellow entrepreneur gave me a copy of this book in its first edition while we were managing the rapid growth of our healthcare business back in the 1990s.  I have been recommending it ever since, and have had the authors as our guest speakers at Belmont several times over the years.

In the early stages of growth, the entrepreneur engages in what Steve Blank refers to as the Search Process for the basic business model.  The entrepreneur is finding a gap in the market, and developing a product or service to address that market need.  This is where the testing and pivoting of the business model occurs.

Building a Business

Once the business model begins to show signs of market traction, the next stage is to secure the resources the business needs to grow.  The entrepreneur must secure the cash, talent, materials, facilities, and so forth needed by the business to support its growth. If the entrepreneur fails to secure necessary resources, even the most promising business model can fail.

In the ensuing stages, Flamholtz and Randle chart the path to successfully navigate growth.  First comes the development of critical operating systems, including financial systems, marketing systems, production systems, and human resource systems.  Next comes the development of key management systems, including planning, organizing, leadership development, and performance development.  Finally, the entrepreneur must build an intentional culture to ensure the sustainability of the values and beliefs the founders brought to their business at its inception.

New Challenges Around Each Bend in the Road

Each stage in the development of the business leads to specific new challenges in the next stage of growth.

The entrepreneur must watch for a wide array of critical symptoms that warn of impending crises involving customers, employees, and the organization itself.  If these symptoms are detected early enough, the entrepreneur can act to prevent significant challenges or even the possibility of business failure that can come from poorly managed growth.

Symptoms of Customer Challenges

Customers are the proverbial “canary in the coal mine” during growth.  Customers provide the earliest warning signs that growth is not being managed properly.

A fundamental growth challenge for early stage business is selling more than the company can possibly deliver.  In their zest to build a successful business, many entrepreneurs get out ahead of their capacity to produce their product or provide effective service.  When this happens, the company’s reputation in the market suffers.

Another symptom that a company is having challenges is when it starts to lose good customers. This may be the result of poor quality, poor customer service, or both.  Customer retention should be a key ratio for every entrepreneur to watch on their dashboard. When customer turnover reads exceed expectations, an entrepreneur should quickly diagnose the problem and take appropriate actions. Customers have little patience with a business that no longer delivers its promised value proposition.

Symptoms of Employee Challenges

Employees are also an important early warning system for growth problems.

Certainly, the entrepreneur should pay careful attention to staff turnover and employee morale during growth.  It can be hard enough to recruit enough new employees to support growth. Needing to also recruit employees to replace disgruntled workers can make it an almost impossible task to keep up with the company’s hiring needs.

Rapid growth often negatively impacts employee efficiency and productivity in their jobs. Employees never seeming to have enough time to get their basic work done or spending most of their time putting out fires may be sure signs that the entrepreneur should slow down growth and take corrective actions.

Other employee related symptoms of growing pains includes poor communication, a lack of understanding of the vision, and a general insecurity among workers.

Symptoms of Organizational Challenges

Finally, there are symptoms at the organizational level that also need to be monitored.

A constant shortage of critical resources, overwhelmed operating systems, and ineffective planning can all be signs that an entrepreneur is not prepared for the growth of the business.  I will address all of these more in future posts.

The most disconcerting symptom is when sales are growing, but profits are plateauing or even declining.

No Single Cure

Overcoming the causes of these and other symptoms is no easy task.  There is not one magical thing an entrepreneur can do to achieve pain free growth.  Over the coming weeks I will be looking in depth at what entrepreneurs can do to help ensure successful growth in their business ventures.