Engineering Your Start-Up : A Guide for the High-Tech Entrepreneur

List of Figures xv List of Tables xvii List of Sidebars xix Acknowledgments xxix Part 1 The Genesis 1(36) 1 Start-Up Opportunities for High-Tech Entrepreneurs 3(12) The Lure of Freedom 6(1) The Professional Engineer 6(1) The Recent College Graduate 6(2) From Technology to Product to Marketing 8(1) Is It Time to Create Your Own Job? 8(1) Issues to Consider 9(1) Small Business: Not Synonymous with Start-Up 10(2) The Definition of a Start-Up 12(1) Taking Risks 13(2) 2 The Technology-Oriented Professional as Company Founder 15(10) Founders Roles and Responsibilities 15(1) Officers 16(2) Title Inflation 18(1) Frivolous Titles 19(1) Founder Career Paths 19(1) Entrepreneur's Profile 20(1) The Nonengineer Founder 21(4) 3 Life in Your Start-Up 25(12) Success and Failure: Statistics 25(3) Vacation and Time Off 28(2) Working Hours 30(1) Divorce 31(1) Holding Your Business Together 31(1) Personal Planning Process 32(1) Leadership and Business Basics 32(1) Allocation of Effort 33(4) Part 2 Getting Down to Business 37(40) 4 Market-vs. Technology-Focused Approach to Growing a Business 39(12) Delivering Benefits to Customers 39(1) Technology and Markets 39(6) Rapid Time to Market 45(6) 5 When High-Growth Business Is Desirable and Necessary 51(8) Why Grow? 51(1) The Self-Employed 52(1) Investors Expect Rapid Growth 52(1) Grow a Commanding Position in a Defensible Market Segment 52(1) "Rule of X" Competitors 53(2) Attract Customers in Expanding Markets 55(1) Develop a Product Family 55(1) Achieve Critical Mass and Economy of Scale 56(1) Speed Is Not a Substitute for Strategy 57(1) Diversify to Diminish Business Risks 57(1) Create Career Opportunities 58(1) Create Future Start-Up Opportunities 58(1) Create Market Value, Attract Investments, and Cash Out 58(1) 6 Start-Up Financing Terminology and Stages 59(18) Part 3 Elements of a Successful Start-Up 77(190) 7 Create your Management Team and Board of Directors 79(24) Management 79(8) The Entrepreneurial Team 87(1) Board of Directors 88(5) Advisory Board 93(1) Mentors 94(1) Personnel Policies 94(1) Signed Agreements 95(8) 8 Evaluate Markets and Target Customers 103(12) Traditional Business Model 103(1) Customers and Markets 104(11) 9 Define Your Product or Service 115(22) Choosing the Right Product 116(1) Finding Good Product Ideas 116(2) Marketing and Competitive Analysis Considerations 118(7) Exceptional Product Attributes 125(1) Producing Your Product 126(11) 10 Write Your Business Plan 137(50) Form vs. Content 137(1) Types of Business Plans 137(1) Getting Started 138(1) Find a Team and Write a Plan, or Write a Plan and Find a Team? 139(1) When to Write the Plan 139(1) How Long Should It Take to Write Your Plan? 140(1) How Long Should a Plan Be? 141(1) Essential Tools 142(1) Good Business Planning 142(1) Business Plan Basics 143(1) The Executive Summary 143(1) Plan Emphasis 144(1) Business Plan Outline 145(1) Venture Capitalists' Typical Business Plan Contents 146(2) A Business Plan Checklist 148(3) Adding or Highlighting Sections 151(1) Classic Problems 152(1) Use Standard Ratios 152(3) Looking Like an Amateur 155(1) Understanding Financial Statements and Projections 155(1) Working Backward 155(1) Get Good Data 156(1) Do Not Ignore Your Own Data 156(1) The Three Most Important Financial Statements 156(1) Balance Sheet 157(1) Income Statement 158(3) Cash Flow Statement 161(1) Break-Even Analysis 162(2) Investors' Hurdle Rate of Return on Investment 164(5) Exit Strategy 169(1) Private Placement Memorandum 170(1) Due Diligence File 170(1) Conclusion 170(17) 11 Funding Issues 187(30) Investment Criteria 187(1) Cheap Start-Ups Are Finished 188(1) Looking for Seed Cash 188(1) How Much Money? 189(1) Seed, Start-Up, and Subsequent Funding Rounds 190(1) Milestone Funding 191(1) The Nightmare: Running Out of Money 191(1) Where to Get Money 191(9) Shopping vs. Selling Your Business Plan 200(17) 12 The Term Sheet-A Practical Overview 217(50) Definition of Term Sheet 218(1) Dilution and Antidilution 219(2) Key Provisions of Term Sheet 221(26) Dilution Is the Number One Business Issue 247(1) A Sample Term Sheet 247(20) Part 4 Making It Pay 267(98) 13 Remuneration Practices for Your Start-Up 269(12) Salaries 269(4) Headhunters 273(2) Equity Ownership: Stock and Stock Options 275(1) Form of Equity Incentive Vehicles-an Umbrella Plan 275(1) Other Compensation 276(1) Employment Contracts 276(5) 14 Stock Ownership 281(22) Risk-Reward Scale 282(2) Ownership Interest over Time 284(1) How Many Shares Should You Grant? 284(2) Common and Preferred Stock 286(2) Authorized and Outstanding Shares 288(1) Acquiring Stock 289(1) Founders' Stock 289(2) Restricted Stock Grants 291(1) Future Tax Liability on Restricted Shares 292(1) Section 83(b) Election 293(1) Transferable Shares and Vesting 294(2) When and How Often to Grant Stock 296(1) The Alantec Litigation 297(6) 15 Stock Options 303(16) Stock Option Grants vs. Stock Grants 303(1) When to Grant Stock Options 304(1) How Often to Grant Stock Options 305(1) On How Many Shares Do You Grant Options? 305(3) Stock Options as Part of a Total Package 308(1) Two Kinds of Stock Options 308(2) Option Vesting and Exercise Schedules 310(1) Exercising Options-an Interesting Twist 311(1) The Future of Stock Options 312(1) Administrative Details 312(1) A Comparison of Tax and Accounting Effects on ISOs and NQSOs 313(2) Alternative Minimum Tax-the ISO Trap 315(1) The "Wash-Sale" Trap 316(1) Helping Your Employees Understand Stock Options 316(3) 16 Other Equity and Wealth-Building Vehicles 319(10) Unrelated Stock Purchase 320(2) Tax-Free Exchange of Intellectual Property for Stock 322(1) Investment Through the Provision of Real Property 322(1) Warrants 323(1) SARs and Phantom Stock Plans 324(1) Employee Stock Purchase Plans (ESPPs) 325(1) Employee Stock Ownership Plans (ESOPs) 326(1) Section 401(k) Plans 326(3) 17 Valuing Your Equity Position 329(22) Valuations at Different Points in Time 330(2) Valuation Benchmarks from VentureOne Study 332(1) Factors that Venture Investors Consider 332(1) A Secret: Venture Capitalists Don't Really Use Valuation Models-at Least Not for the First Round 333(3) Peer Group Comparisons 336(1) More Commonly Used Valuation Methodology 336(3) Capitalization Formation Road Map from AVI Capital Management 339(3) Valuation as a Black Art 342(1) The Effect of Founders' Cash on Company Valuation 342(1) The Importance of Negotiation in the Valuation Process 343(8) 18 Other Compensation and Start-Up Employment Considerations 351(1) Entrepreneurs Need Insurance 351(1) Do Some Planning Regarding Fringe Benefits 352(1) Use the Internet 353(1) Outsourcing Your Benefits Work 353(1) Life Insurance 354(1) Key-Person Life Insurance 355(1) Health Insurance 355(2) Disability Insurance 357(1) Asset Protection Maneuvers 357(1) Retirement Plans 358(3) Section 125 Cafeteria Plan 361(1) Employment Contract 361(1) Emotional Distress Compensation 362(1) Golden Handcuffs-When and How to Stay 363(1) Golden Parachutes-When and How to Leave 363(1) Summary 363(2) Part 5 Doing It 365(60) 19 Protecting Your Intellectual Property 367(14) Copyrights 368(2) Patents 370(4) Trade Secrets 374(2) Trademarks 376(5) 20 The Legal Form of Your Start-Up 381(8) Corporation 382(2) Partnership 384(1) Limited Liability Company (LLC) 385(1) Sole Proprietorship 386(1) Miscellaneous Legal and Business Matters 387(1) Work with a First-Class Lawyer 387(2) 21 Making the Start-Up Decision 389(16) How Committed Are You? 389(1) Leaving a Current Employer 390(7) Stay Fit 397(1) What if Your Start-Up Fails? 397(8) 22 Some Final Comments 405(4) Appendix A.1: Some Colorful Definitions 409(6) Definitions 409(4) A Foreign Language Test 413(2) Appendix A.2: Resources Available to Start-Up Entrepreneurs 415(10) Entrepreneur and Mentoring Organizations 415(1) Organizations for Women 416(1) Professional Services Organizations 417(2) The Small Business Administration 419(1) Venture Financing 420(1) Human Resources and Equity Compensation 421(2) Other Good Resources 423(2) References and Recommended Reading 425(4) Index 429