How to divide equity in a business between a founder and investor fairly

Often, an entrepreneur will have an idea that can transform an industry, but they lack the financial capital to make it happen. On the other side of the coin, there are no shortage of people searching for profitable opportunities in which to invest their extra cash.

Without the qualities that each party brings to the table, a business cannot happen. The real issue is this: how can one divide ownership of a business fairly between a founder and an investor? In this article, we will address the issues surrounding this thorny problem…

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Founders should retain the lion’s share of equity

Despite the assistance that venture capitalists provide a startup, the vast majority of the hard work will be done by the founder. In light of this, it would be a mistake to give away too much power and ownership of the business to a third party.

This isn’t to say that external investors aren’t important, but the founders should be careful to insert language in any agreement that protects their interests in the years that lie ahead.

No matter what happens, the founder should always have a majority equity stake, plenty of stock options, and a parachute clause to protect them financially from termination by an executive board.

Try to solicit convertible loans or debt financing from investors instead

When a founder is seeking out financial assistance from investors, the first approach should be to attempt to solicit convertible loans or debt financing rather than offering equity.

This tends to work more often than not, as both of these financing vehicles are more attractive to investors rather than having ownership in a company.

This is mostly due to tax issues surrounding equity stakes, which can result in a more substantial tax bill compared to the previously mentioned alternatives.

Hash out equity stakes before any money is accepted

If equity stakes are offered to a potential investor,  it is important that a concise agreement is agreed upon before any form of financing is accepted from an investor.

Most founders and investors have a great deal of separation when it comes to the financial worth of a business, as the entrepreneur behind it tends to have an inflated idea of the value that it brings to the marketplace.

These days, startups can have a practical value that is close to zero before any real money is made, so if  any cash offer is made by an investor,  it should be seriously considered:  just be sure to hash out a contract that makes ownership stakes and other benefits clear before receiving financial assistance from a VC.

Avoid investors that draft agreements that are legalese-heavy

While there are investors out there that want to help entrepreneurs grow their businesses, there are plenty more that are only in it for themselves.

The latter crowd drafts agreements that are heavy on legal terms which benefit them disproportionately, all in the hope that their potential victim won’t read the fine print.

Watch out for language that seeks to take veto and anti-dilution rights away from the entrepreneur, among other tricks.

Five reasons why gut feelings matter

Many business leaders have made decisions that they have regretted at a later date. On the surface, logical analysis suggested that it would be a smart play, but their inner voice felt that something was amiss.
Some may dismiss them out of hand, but there is a lot of evidence to suggest that so-called gut feelings aren’t just real, but they should also occupy a prominent position in every entrepreneur’s toolkit.

In this article, we will discuss five reasons why gut feelings matter, and how they can make a difference in any business…

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1) They fill the gap of incomplete information

It is almost impossible to have all the facts available when an important decision has to be made. In virtually all high-risk, high reward situations, there is an element of the unknown that must be embraced.

In the absence of certain facts, gut feelings can help protect a company from making a potentially disastrous misstep, or it can nudge it in the direction of a deal that will likely have a long term payoff for everyone involved.

2) They can sniff out unsavory and dishonest characters

As rewarding as the business world can be, there are a lot of pitfalls along the road to success.  While many are in business for the right reasons, there are plenty of bad actors looking to take advantage of every “sucker” they happen to come across.

It’s impossible to know the past history of every person looking to strike a deal, so it often comes down to what an entrepreneur thinks of a person, which is often based on the feeling that they are getting from them.

If they are acting shifty and seem to be hiding an ulterior motive, this bad gut feeling can be legitimate grounds for deciding to not enter into a business arrangement with a particular individual.

3) They are a highly productive engine of creative ideas

The logical and analytical side of the mind is great at what it does, but one thing that it struggles with is coming up with creative ideas.

When it comes to conceiving ideas that the world has not seen before, the gut feelings that lie within every capable business person is where they are generated.

The creative part of the mind is amazing at coming up with patterns that are likely to find resonance with certain sets of the population, so don’t be afraid to trust what it comes up with (so long as responsible analysis is done before implementation)

4) They shine when swift decision making is required

If only all decisions in life came with the requisite amount of time to make them properly. Many crucial choices have to be made at a moment’s notice; it is at these times when an entrepreneur’s intuition comes into play. A successful entrepreneur usually gets to where they are by listening to their gut. It’s important not to lose this 6th sense.

Things Successful People Never Say

Small business owners often have a level of ambition that is higher than the average person on the street. Their drive to succeed sets them apart from their contemporaries, leading some to believe that it has to do with traits that they are born with and not learned.

In fact, it is the opposite that is true, as successful people in business have adopted a vocabulary and accompanying mindset that has helped to propel them to the top. With that in mind, we will review a few phrases below that a winning entrepreneur will never say…

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“I can’t…”

Henry Ford once made the point that having faith or no faith in one’s abilities played a huge role in the end results that a person would achieve.

When an entrepreneur has no confidence in their skill set, it doesn’t matter how much they have learned, as their lack of drive will sabotage them before they have even crossed the starting line.

Things in life are less complicated than people make them out to be, so those that choose to believe in their ability to learn on the fly shouldn’t act too surprised when they find themselves achieving results that they had previously considered to be “impossible”.

“I can do it all on my own”

Entrepreneurs tend to have a super hero complex about them when it comes to getting things done. While many aspects of an enterprise can be completed by one person in the initial stages of a startup, there comes a point when these onerous tasks can bleed away valuable time that should be spent on higher level business activities.

When bookkeeping, processing payroll and marketing become too much to bear, the savvy businessperson should make their first investment in acquiring (an) employee(s).

Whether they take up a cubicle in a physical office or complete their work from a remote location, the workload taken off a beleaguered executive’s desk can free their mind, enabling them to use it to take their business to the next level.

“This issue is not my problem”

When a business owner begins to delegate tasks to employees and subcontractors, it is tempting for them to disassociate themselves from various problems that may occur between departments.

This is a mistake, as many people are non-confrontational; it is foolhardy to assume that they will resolve certain issues on their own.

Whether it is interpersonal problems, or inefficiencies in communication up and down the chain of command, senior management has an important role to play in helping to resolve these issues.

By reviewing incidents and making changes that will ensure that future occurrences of these problems are minimized or eliminated, a productive work environment can be maintained.

Furthermore, when the business owner makes a mistake, it is important that they own up to it in order to set a good example for the people that work under them.

When employees see that there isn’t a two-tier system in place when it comes to playing by the rules, they will be more motivated to work towards the common goals of the organization.

“I’ve always done things this way”

This is a dangerous statement for a successful business person to make in the 21st century. At no point in history has technological and social change occurred so quickly in such a short period of time.

By doing things the way that they have always been done, the flat-footed entrepreneur leave themselves open to getting outflanked and left behind by their competitors in a matter of a few short years.

The business owner that is always learning and innovating stands the best chance of remaining successful in the years and decades to come.

How to choose a business broker in Pennsylvania

Savvy entrepreneurs know that choosing a competent business broker in Pennsylvania makes the difference between a smooth sales process or one that is fraught with problems from start to finish.

However, business owners who are selling their enterprise for the first time may not know what to look for in an honest and effective practice.

In this article, we will outline three things that a first-time business seller should keep in mind when picking a business broker in Pennsylvania.

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Research their background and credentials

In business, there are plenty of bad actors, so it’s vital to ensure that any business broker in PA that is under consideration has licenses from professional organizations such as the International Business Brokers Association (IBBA).

At the state level, entrepreneurs looking to buy or sell a business through a business broker in Northampton County, PA, for example, should ensure that they at least have membership through the Pennsylvania Business Brokers Association (PBBA).

Membership in either of the previous mentioned organizations requires that these brokers follow a set of codified rules that ensure ethical business practices.

As a result, those looking to use their services can be assured that they will be treated in a fair and honest manner.

In addition, be certain that business brokers in Pennsylvania that are being considered have experience selling businesses in the industry in which the entrepreneur is involved, or at minimum, a knowledge of the market.

By performing this essential task, the probability of a successful sale or purchase will increase dramatically.

Are they really interested in helping people sell businesses?

While most people involved in the business brokerage industry genuinely enjoy what they do, others may be in it simply for the commission.

True professionals that work for a business broker in Lebanon County, PA, for example will take the time to learn about the inner workings of any business that comes across their desk, and they will ask questions that will enable them to understand the motivations behind the sale of a business.

Armed with this information, they will be able to move forward with the intentions of their clients in mind, and they will be able to tailor their tactics appropriately when dealing with potential buyers.

What strategies do they utilize to sell companies?

When a seller approaches a business broker in Cumberland County, PA, for example, for the first time, the most important questions they should ask should revolve around the strategies they intend to use to promote their business in the marketplace.

Some brokers take the approach of simply posting up an ad on an online B2B classified site and calling it a day.

Any business sales professional worth their salt should make use of both online and offline sales tactics; the latter should include exposure in traditional media such as newspapers and trade magazines so that they are able to reach buyers in older demographics.

Additionally, they should also have connections to other small business professionals, as it may enable them to use word of mouth in order to obtain solid leads.

How to prepare to sell a business in New Jersey

If the time has come to sell a business in NJ, there are a number of tasks that should be conducted before just opting to  drop it in the classifieds, or with a business broker in Somerset County, NJ.
The following steps will ensure that the sales process proceeds in a smooth and expeditious fashion…

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Tidy up the property and the books

When getting a business valuation in Mercer County, NJ, it is important not only to ensure that the physical premises looks clean and neat, but that the paperwork for the business is in order.

Apart from passing the broom and putting a fresh coat of paint on the interior and exterior walls, the business owner also needs to go through the books line by line to make sure that the financials can be easily understood by those looking to buy a business in NJ.

Job responsibilities need to be outlined as well so that any potential suitor can walk in and run the business with almost the same ease as turning a key.

By taking care of these responsibilities in a proactive manner, the business seller can increase the appraisal of their company.

Draft a sales strategy

Once the business is in sale-ready shape, contact a business broker in Mercer County, NJ  and begin to plan out a sales strategy together.

These professionals will counsel sellers on how to market their business towards buyers that would be interested in purchasing the type of company they have to offer.

Generally speaking, look for buyers that are looking for a business that has an established system, as these players are often willing to pay top dollar for companies that possess this attribute.

Get an idea of what valuations are available in a given niche

Once a game plan has been written up, the last thing left to do before courting business buyers is to figure out how much money can be secured for a business.

A lot of this will have to do with the field in which the company in question is situated, but location plays a role as well.

For example, a business valuation in Somerset County, NJ will yield a different number than if one were to attempt to sell their company in Camden County.

Beyond this variable, physical attributes such as inventory levels will play a significant role in how much a business can fetch, but the biggest numbers to focus on have to do with profit, revenue, and cash flow.

Once it is clear to a business broker in Somerset County, NJ what these numbers are, the business owner will be able to get a clear cut answer of what dollar figure they can expect to get in exchange for their enterprise.

How to choose the right bank for a business

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When a business finally gets off the ground, the time will come when a separate account should be opened for it, creating an essential division between personal and corporate income.

What different banks offer businesses can vary greatly from institution to institution. Doing homework beforehand can save a great deal of money, time, and countless headaches.

Below, we will cover several areas that the entrepreneur needs to think about when the time comes to open a business bank account.

Determine business banking needs

Don’t go with the first financial institution that comes to mind. Every bank has its advantages and disadvantages given the structure of a business, its cash flow, and the needs of a given business and its employees.

Some banks charge more than others for the privilege of having a checking account, while others don’t charge anything for a given balance.

Some offer in-house financial investment services, while others specialize in helping small businesses grow from the ground up. Take time to examine all options on the table so that the best possible decision can be made.

What features make the most sense

While some businesses go with community based banks due to lower setup costs, these institutions often lack essential offerings such as online banking.

This feature is essential to companies looking to bootstrap, as being able to access services without setting foot in a physical bank branch saves valuable time, allowing the entrepreneur to spend more of it on higher value tasks.

Additionally, be sure to negotiate additional features that the bank offers, but may not be necessarily offered up front. There are many competitors in this space; given the choice between turning away a potential client and extending extras to a persistent entrepreneur, bankers will often opt for the latter.

Ensure a prospective bank’s size is sufficient

Sometimes, going with a bigger bank is the best move for a business. Larger financial institutions have enhanced abilities to extend loans of a size that a growing company might need, and they also are part of ATM networks that will prevent traveling executives from running into problems overseas.

On the latter count though, there are smaller banks that are part of international ATM networks, so be sure to do research before signing on the dotted line.

Periodically reevaluate the company’s banking requirements

While a certain bank might fit a business at this present moment, as the years go by, growth and changing needs might change that equation.

When doing an annual review for the business, evaluate whether your current financial institution is supplying satisfactory services, and whether other banks might be able to accommodate it better.

LLC or S-Corp: which is the best structure for a business?

While many business owners get started without paying heed to corporate structuring, they will eventually get to a point where protecting their assets from tax authorities and litigators will become important.
Of all the ways to structure a company, the LLC and S-Corp are two methods that entrepreneurs have been using to organize their business assets.

Which of these corporate structures are right for owners? It depends on their priorities; below, we will break down scenarios in which either an LLC or an S-Corp makes sense.

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An LLC is the best structure for a business if…

1) Simplicity is a priority

Successful business owners are busy: they don’t have a lot of time to burn, so minimizing its usage on administrative tasks is a top priority.

The process by which an LLC is organized is simplistic, as its application form takes up a single page, guidelines are straightforward, and the owner doesn’t need to file a separate return for it, as they only need to report income on their personal income tax return.

2) Cash reserves are limited

Another distinct advantage of an LLC is that the application fee for setting one up is very inexpensive.  In most jurisdictions, you will only need to part with a couple hundred dollars for the privilege of applying for this business structure.

In the early stages of a start up, every dollar counts, so minimizing the amount of capital allocated to unproductive but necessary expenses is vital.

3) Some shareholders are not American citizens

An inescapable fact of business in the 21st century is that more companies have not just employees, but stakeholders that reside outside of the United States of America.

While other corporate structures place restrictions on ownership on non-American citizens, an LLC allows those without US citizenship to own a stake in a company which it is organized around.

An S-Corp is the best structure for a business if…

1) Shareholders wish to receive dividends from excess profits

A key benefit of an S-Corp is that it allows the business owner to pay out dividends from profits after necessary expenses have been addressed.

By paying stakeholders a “reasonable” salary (as defined by the regulation of an S-Corp), any profits that are left over can be distributed in the form of dividends, which offer a lower overall tax burden than what is assessed on straight salary.

If there is a reasonable expectation of a consistent annual profit, this can be a great way to minimize the tax bill of an owner and their partners.

2) Cultivating an image of integrity is paramount

As advantageous as organizing a company under an LLC can be,  its reputation often suffers due to bad actors in the business community.

If a business owner operates in an industry where reputation is a very important quality to maintain, an S-Corp can be a better organizing structure, as it has many rules and regulations to follow, and requires its owners to adopt official titles and responsibilities.

Directors need to be appointed to attach accountability for major decisions that are made with regards to company business, while officers are similarly appointed to handle day-to-day business operations.

3) The owner wants to pay less in self-employment tax

While LLC’s are simple and inexpensive to set up,  they are subject to the quarterly self-employment tax that the IRS charges them, which can equate to a heftier tax bill for some companies.

Because an S-Corp structure allows owners to treat themselves as employees, the overall tax burden at the end of the day can be less due to the ability of S-Corp stakeholders be privy to unearned income (dividends).

Disclaimer – This post was not prepared by a certified accountant and just serves to present basic, publicly available information. Consult your tax professional before making any decisions. 

How to choose the right health care plan for employees

Of all the benefits that businesses offer, none are as highly valued as a comprehensive health plan.  With health care costs in this country being burdensome to many, having a policy that fits the needs of its employees is an attractive recruiting tool for the best talent out there.

When choosing a health plan, take note of the following in order to choose the package that is right for the team, as well as the company’s financial health.

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What are the business’ needs?

Before searching for a health insurance plan, executives should draw up a list of priorities that they are seeking from the best possible policy. Overall cost to the company and employees is an obvious consideration, as a top of the line health insurance plan will do a company and its people no good if it is out of range of the company’s budget, or if the burden that would have to be shouldered by the employee represents an unreasonable amount of their take-home pay.

Coverage is another aspect that should be paid attention to, as some policies mask their low overall cost with ridiculously inadequate coverage when it comes to things such as pre-existing conditions or catastrophic health events.

Once these issues have been addressed, evaluate the specific types of coverage that are desired by employees of the company. This can include things like dental, maternity leave, and mental health services, all of which are typically supplementary when it comes to most health plans.

Insurance brokers:  to use or not to use?

While securing health insurance for the company is an important task, the process of seeking out bids from providers can be a time-consuming process.

An insurance broker can help solve these problems, as these professionals take the legwork out of the equation by offering a suite of insurance plans, with prices and offerings laid out in an easy-to-understand manner.

However, businesses should take care to research their broker’s reputation, as some will charge significantly more for premiums than if the company were to seek out insurance providers on their own.

Properly vet a potential insurer before signing any deal

While there are many names in the insurance industry that are well known, some are more obscure, and hundreds of these companies have gone under in the past decade for their less than stellar business practices. As such, any insurance firm that the company is thinking of partnering with should be thoroughly investigated.

Start by looking up their evaluation in the top ratings books, which are maintained by agencies such as Standard & Poor’s;  if they check out, still pay rapt attention to every line of legalese that you find in an insurance agreement before signing on behalf of the business.

Read the fine print carefully, as provisions that restricts coverage for something as little as crossing state lines exist in many agreements. If you uncover inconsistencies, work with the insurer to have them struck down; if they resist, seek out a different provider for the company’s insurance needs.

How Successful People Manage Their Time

It’s easy to look at a successful person’s accomplishments, and attribute it to unchangeable factors such as luck. However, successful people have reached their station in life primarily through the proper use of the most important resource in their life: their time.

The tips below will help make better use of the hours that are available in a day.

They set goals and break them into manageable chunks

Most projects seem intimidating at the outset,  which results in procrastination and analysis paralysis by many employees. By setting simple, concrete goals that are well-defined, and then breaking them down into manageable chunks, real progress can be realized from day to day.

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They delegate time-consuming tasks of low overall importance

Just because an employee can do a specific job doesn’t mean they should be doing it. If there is another employee in a department or an external contractor that can take on a task that is of low overall importance, it should be delegated to them. This frees up the higher-skilled employees to spend their time on executing tasks of greater value, increasing their effectiveness and moving the project along at a greater rate of speed.

They embrace the concept of minimum effective load

When it comes to any task, a small amount of overall effort is responsible for the lion share of the desired effect. This relationship is described perfectly in the Pareto principle,  which states that 80% or more of a wanted or unwanted effect stems from 20% or less of the causes.

A good example of this relates to the times of the day when an employee is most effective; whether it is in the morning, afternoon, or in the evening, they should conduct their highest value tasks during the time when they have the most energy, and not when habits developed in the past dictate it.

They focus 100% of their energies on the task in front of them

An unfortunate tendency that many workers have developed over the past generation is that they attempt to multi-task, as it creates the illusion that they are getting a lot of work done. Despite this perception, studies have shown that multitasking slows down the overall pace of work flow,  rather than quickening its pace.

When working on a project, focusing on a single task at a time with all of one’s attention will result in higher productivity per person, rather than splitting one’s attention over multiple files and folders.

Important questions to ask in interviews

Asking effective questions in job interviews is an important task, as it avoids the expensive mistake of paying an ineffective employee a salary over a period of many months or years.

While there are many creative questions that hiring managers can ask,  some are better than others at getting an interviewee to reveal their inner character.  Below, we have assembled some questions that achieve this goal.

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Deliver a sales pitch on behalf of this company to me, a potential customer

This question will test the candidate on their knowledge of the company,  as their ability to sell its products or services will depend on how thoroughly they have researched the business. They won’t be expecting this question, so it will evaluate their ability to craft sales pitches on the fly.

Being able to market and sell products or services is central to the survival of any business, so evaluating their ability in this department is paramount when recruiting for almost any position in a company.

Ask them about their interpersonal relationships with their co-workers

Many candidates in the job market these days have the technical qualifications and the education necessary to fit into any role, or so it seems. Human beings are complex beings though, so it is vital to evaluate them for interpersonal fit.

With this in mind,  ask them about the worst relationships they have had with co-workers in the past. Ask them to go into detail, as their answers will tell everything that is needed to make a decision on whether this individual would be a great employee for the company.

If they go out of their way to bad-mouth former co-workers, it is highly likely they will eventually experience friction with employees in the business in which they are trying to get hired.

Explain a complex concept so that someone in grade school could understand it

Any business has its fair share of jargon; being able to explain concepts to those that don’t know the lingo is vital in fostering cross-department communications.

While a high grade point average is a good starting point when it comes to recruiting intelligent talent, the true mark of a smart employee is one that can take a complicated problem and break it down into terms that even someone in grade school could act upon.

By getting them to offer up a complicated process and successfully explain it to the interviewer in a manner that anyone could comprehend,  it will show that this individual will be an effective member of the team.

Ask about a time they messed something up … what happened and why?

No human being is perfect, but hiring someone that isn’t afraid to own up to their mistakes is a rare quality. Stilted responses pointing to someone’s propensity to work too hard should be disregarded in most cases, as it shows they aren’t willing to expose their ego by acknowledging that they too are capable of making real mistakes.

However, those willing to make themselves vulnerable by showing that they are willing to accept responsibility for their errors, and explain how they recovered from them should be given a long hard look when making a final decision on who to hire.