How to Select and Retain Management in a Startup or Early Stage Company

Startup entrepreneurs needs to recruit and retain an “A” team. Short of cash, you need to allocate and offer real tax-favored equity to reward performance of those who share the risks.

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 Presentation for IEEE Entrepreneurs’ Network, Waltham, MA – February 5, 2008

By Robert A. Adelson

 

Team Building on a Shoestring: Thinking out-of-the-box to Recruit/Retain

 

• In the early stage, the successful entrepreneur must be willing to jump boldly: To use the tools and resources available to recruit the team needed.  Without that team, failure is likely, so try …take the jump to  have a chance to succeed.

 

               1.  Conventional Methods to Recruit and Retain the Team you really                                    need

                              ·  Competitive Salary / Benefits

                              ·  Established place in the market

                              ·  Recognized company and team

 

                2.  The Challenge to Recruit in Early Stage

                              ·  ”Credibility Challenge” with no track record

                              ·  Enticing a leap from security to great risk

                              ·  Hard to give up day job – live on savings

                              ·  Great probability of failure, economic loss

 

               3.  Using Early-Stage Mode – as Advantage

                              ·  Selling “the story” – capturing imagination

                              ·  Flexibility to build the company “your way”

                              ·  Chance to get in on ground floor, strike gold

 

                4. Using Equity- Team Building “Toolbox”

                              ·  Restricted shares

                              ·  Stock options- tax qualified (ISOs)

                              ·  Stock options -Non-qualified (NQSOs)

                              ·  Phantom stock

                              ·  Member units in LLCs

 

               5.  Using Tax laws as Your Friend

                              ·  Capital Gains

                              ·  Tax Deferral of Accumulated Income

                              ·  Stock Appreciation Rights

                              ·  Protection of Phantom Gains

 

              

 

               6.  Leveraging the Future- “to strike gold”

                              ·  Fair market valuation for tax purposes

                              ·  R0I valuation- for market

                              ·  Strategic entity growth

                              ·  Payback in non-cash equivalence

 

               7.  Comp terms used for maximum mileage

                              ·  Signing bonus- equity, returnable arrangements

                              ·  Base salary- deferral options

                              ·  Performance bonus- payment vs. payback

 

               8.  Employment terms – “Good Vibrations”

                              ·  Position, platform, and launching pad

                              ·  Authority, support, reciprocal commitment

                              ·  Outside affiliations- showing trust and growth

                              ·  Expense reimbursement, employee advances

                              ·  Benefits- outside group plans

                              ·  Reciprocal termination provisions

                              ·  Targeted restricted covenants

 

 

Building Value on firm FoundationAppear Generous but Demand Value SM

 

• In the early stage, the successful entrepreneur wants to be fair.  To offer real equity and real opportunity to those willing to share the risks in early stage. Yet, nothing is “given”.  All must be earned. Seeking value imperative – to build for long term. 

 

               1.  Vesting Arrangements- firm hand on tap

                              ·  Vesting based on service and loyalty

                              ·  Vesting on individual performance, achieving targets

                              ·  Vesting based on company performance

 

               2.  Getting Equity Back – even after vesting

                              ·  Protection for the company when needed                            ·                                                          

·  Employment termination – need for replacement

                              ·  Bad boy provisions – penalty for breaching

                              ·  Death, disability vs. divorce or bankruptcy

                              ·  Allowing employee to retain equity when earned

 

               3.  Calibrating Vesting with Stock Rights

                              ·  Rights in stock

                              ·  Rights in options

                              ·  Liquidity rights and cash exit

                              ·  Durability of stock and options

                              ·  Built in value in stock and options

 

               4.  “Success Events” – Giving a stake in the future

                              ·  Acceleration of vesting

                              ·  Incentivizing employees with company success

                              ·  Making employee feel a part of company success

 

               5.  Asset Transfers – Real Company ownership 

                              ·  Assignment of Inventions

                              ·  Employee licenses of technology

                              ·  Equipment transfers

                              ·  Company ownership rights

 

               6.  Restricted Covenants- Real Company Rights

                              ·  Non Competition Agreements

                              ·  Non-solicitation of clients, suppliers, employees

                              ·  Non-disclosure-confidentiality agreements

                              ·  Trade secret protections, internal protections

 

               7.  Allocating Equity- Discipline of Dividing the Pie

                              · Setting aside equity for future players

                              · Limiting yourself to 100% company

                              · Using and scheduling all resources at hand

 

               8.  Good Dilution and Bad- “Stand and Deliver”

                              ·  Value added, good dilution: to feed growing company

                              ·  Downward Spiral- watch out

                              ·  Vigilance over investment terms

                              ·  Participating preferred, full ratchet, VC nightmares

                              ·  Minority control by venture backers

 

Thank You!

 

Robert A. Adelson, Esq.

Engel & Schultz, LLP

265 Franklin Street, Suite 1801

Boston, MA 02110

 

Phone: (617) 951-9980 x205

E-Mail: radelson@engelschultz.com

Website:  www.ExecutiveEmploymentAttorney.com

Author: radelson

Robert Adelson has been a corporate and tax attorney since 1977. He began as an associate at nationally prominent New York City “mega” law firms, first at the Wall Street firm Dewey Ballantine Bushby Palmer & Wood and later at the Park Avenue firm Weil Gotshal & Manges. In 1985, Adelson returned home, where he has since established himself as a respected Boston business attorney. He has attained partner at several small and midsize Boston law firms, most recently at Lawson & Weitzen LLP and then Zimble Brettler LLP, where he was a partner from 1994 to 2004 before becoming a partner at Engel & Schultz LLP.

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