One of the most significant challenges early stage businesses face is finding the right people with the right skills for the roles which need to be filled in the business. This challenge is often heightened by limited financial resources. An early stage company usually needs a combination of business and technical resources now. It may not always have the flexibility of unlimited cash for compensation or complete flexibility in offering equity, options or warrants as incentives.
Roles Should Fit with Expertise
In the earliest stages of founding a company, the c-level (CEO, CFO, CIO, COO, etc.) roles tend to be “granted” to the founders – regardless of qualifications. Some companies may be blessed with both technical and business people as founders. Others start with an incredible depth of technical experience and little to no business experience. Both categories of companies face the challenge of making sound structural, financial, operational, and administrative decisions which can significantly impact the options for the business going forward.
Limited internal business experience can often be supplemented through board members (directors or advisors), investors, and through professional consultants and experts. The ability to obtain these resources, however, is also constrained by the capital resources available to the organization.
Implications of Disparate Parts
In analyzing where, how, and what knowledge and assistance to obtain with the limited financial resources available, it is imperative that companies understand the far reaching implications of poor decisions in the core business processes. The administrative and operational business processes, especially finance, accounting, and human resources, are activities which require both strategic and operational impact assessments. These assessments should encompass the impact of various alternatives, the cost (direct, indirect, and opportunity) of executing or not executing certain activities and perhaps – more critical – what resources are at risk if the organization gets it “wrong.”
Areas of Risk
A couple of areas quickly come to mind when illustrating the potential impact on the organization of not comprehending and complying with key human resource and/or financial regulatory requirements. In early stage companies finance and human resource roles are often viewed as the “simple” part of business – when in actuality these areas can quickly become the cause of “losing the business.” Actions undertaken and decisions made in these areas can leave the organization open to significant exposure financially and can lead to impairment of the value of intellectual property areas or even forfeiting rights to the intellectual property.
Improperly written and executed work-for-hire (employment or independent contractor) agreements can lead to the inability to patent or otherwise protect intellectual property – or at least to have sole ownership by the company. Further, the misclassification of workers can lead to the company and its officers being required to pay back wages, taxes, fines, and interest to employees and the IRS; facing forfeiture of tax exempt status of compensation plans, charges of tax evasion, and significant criminal and civil charges; and can impact the employees creating tax and other personal consequences for them.
Yet another area that companies often plunge into is financing the business – raising funds. Raising funds, whether those funds are debt or equity from friends, family, or “investors”, is a securities transaction. The importance of understanding what the process, parameters, and restrictions are on the who, what, when, where, and how of financing your business cannot be over emphasized. This is a highly regulated area, and while there may be an exemption provision that applies to your securities, it won’t apply if you don’t follow the rules.
What Are You Saying?
Do you hear yourself saying things such as these?
- Accounting is “only” numbers.
- Human resources is just dealing with payroll and people.
- I’m talking to a customer (friend, colleague, etc.) about putting money into the business.
- I picked up a template (financial model, budget format, contract, etc.) from so-and-so and just did a “find and replace” or “filled in the blanks”.
- I downloaded a business plan from the internet.
You may have all the “parts”, but it is unlikely you are bringing them together to form a workable, thriving, and successful business model. Even if the business is “working,” the potential for legal and financial issues is substantial if you’ve been writing agreements and handling other tasks which have specific regulations that are applicable. Furthermore, while the business is driving down the road to success at a steady pace, you don’t know what roadblocks, detours, and hazardous conditions may be ahead to navigate.
It is important to deal with financial (tax, financing, payroll, etc.); human resources (employee agreements, benefits, compensation); intellectual property (patents, trademarks…); and other business transactions from a position of knowledge. Knowledge is power. Having the ability to bring all the parts together the right way creates a business which will thrive.
Copyright ©2006 Lea A. Strickland, F.O.C.U.S. Resource, Inc.