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.

Entrepreneur’s Diary

Raising money is hard work. You have to be prepared. Anytime a potential investor senses that you have not properly prepared for a meeting, you instantly will have lost any chance of landing this person as an investor. When I was raising some stage 2 financing for Fingerlakes Aquaculture, I had a meeting with a group of potential investors in Boston, friends and acquaintances of my angel investor, Peter (I think I’ve mentioned him before). We met in the high-rent financial district. Big buildings … marble hallways … all that type of stuff. I had spent many hours refining my presentation down to about twenty minutes to cover selected details so they would ask for more information that I could tell them was covered in the full business plan and that I had copies with me for them if interested. Part of my presentation was to actually prepare some tilapia fillets from my farm so the guests could really “get a taste of what it was all about.” (This was back in 1999, when most people had no idea what a tilapia fillet tasted like or even what a tilapia was!) The meeting was to start at 11:00 a.m. I was getting ready to start my presentation, including the cooking arrangements for the fillets. The invitees (there were five in total) got there about ten to fifteen minutes early and started chatting with my angel investor Peter. It didn’t take long before they became so curious about the product and what it tasted like that I had no choice (in my opinion) but to go ahead with that segment of the presentation, even though it was supposed to be at the end of my planned presentation right about lunch time (I thought this would be perfect timing). They all loved the product. Two of the people in attendance became investors in my company. I never did get to show them my PowerPoint presentation. But if I had, it was a good one. I was prepared.

Entrepreneur’s Diary

I recently was involved in raising capital for starting an indoor shrimp farm. Just about everyone likes to eat shrimp. Interestingly, just about all of our shrimp (90%) is imported, creating a fairly obvious market opportunity. So, several years back, we put some seed money together and started working on the constraints that prevented someone from successfully raising shrimp indoors and making a profit. Well, after three years of research and demonstrating a prototype production system, we were ready for our next round of financing (we needed about $500,000). We prepared a presentation and invited a group of high-net-worth individuals. We presented in one of the high-rent office buildings in the financial district of Atlanta. You know, people do like shrimp, but they also like to have a sense of confidence about the people they are dealing with. My cousin John, a businessman in the Atlanta area, brought that credibility to the table. Our challenge was to present the opportunity to the individuals in the room in a form they could understand. We had all the necessary legal documents with us. We knew the rules and followed them. We were successful that night and raised most of the equity capital we needed. The investors all seemed to like and respect my cousin. And they all ate a lot of shrimp that night, too!

Entrepreneur’s Diary

Most games are not won because one of the players knows the rules better than the others. Most of us will soon know the rules of the entrepreneurship game (especially after you finish reading this text), but only a few of us who want to be successful entrepreneurs will become one. Why is it that some coaches seem to be consistent winners, even though the talent pool available is fairly similar? I think it is mostly doing your homework. That’s what this chapter is about – doing the necessary preparation before launching your business. This is not fun, this is work.

Understanding your market, and therein recognizing whether you have a winning product, is probably the key aspect to creating a successful company. Your market analysis will be a key part of your business plan. But how do you analyze a market that does not exist? Markets always exist; they may be untapped, but they do exist or are ready to be created. Henry Ford could not analyze the market for automobiles when he was ready to start cranking out those Model Ts, but Ford knew quite well that there were markets for horses, carriages, trains, and other forms of transportation that he was going to try to capture. You will often have to use your imagination in trying to define and analyze your market.

Entrepreneur’s Diary

Launching your business beyond the friends and family stage will require you to rewrite your business plan, probably for the umpteenth time! I will guarantee you one thing: the circle of professional acquaintances that you had thought might invest in your company … well, most won’t … and the ones who do invest, will have a lot of advice for you, and probably more than you want! Advice can be a good thing, but when one investor says, “Go right,” and the next investor says, “Go left,” you’ll likely find yourself wondering which direction is correct. But, you must do something!

I have been pretty successful in raising capital for my start-ups. My business plans were a critical component of my successful fundraising. Were they perfect? No, but these plans raised money! In fact, one of the VC investors said several times that she thought my business plan for my aquaculture tilapia start-up was one of the best business plans she had ever read. Her VC firm required a supporting partner (a proponent was required before this venture firm would make an investment) to make a personal investment in any company that is submitted to the VC group for consideration. After the initial acceptance, the tilapia business several years later ended up under new management and despite the earlier VC’s praise for the original plan, one of the first objectives of the new management team was to write a “really good” business plan. My “best she’d read” plan got tossed out the window. What does this tell you?

Entrepreneur’s Diary

I was getting pretty close to starting my fish business; I was concluding some final negotiations to secure the capital I needed to implement the business plan strategy (I needed $500,000). As you get involved in this entrepreneurship arena, you’ll quickly discover that there is a lot of parallel processing going on. You will need to juggle several activities concurrently in order to pull this business launch off successfully. My situation was that I knew I was going to need a general manager (GM) about the same day I broke ground on the fish production building. So, about three months before I thought I needed my GM, I initiated a concerted effort to find a competent GM, who would be my first paid employee. I spread the word through my contact list and a national online site for aquaculture. I also received a call from Dr. Tom Fields, a colleague at a private fish farm near Saratoga Springs, New York, with whom we (Cornell University) had done business with over the years.