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30 - 32 : The Complete 35-Step Guide For Entrepreneurs Starting A Business


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30. Thoroughly Research Your Competition

Make sure you are thoroughly researching competitive products or services, and keep on top of new developments and announcements from your competitors. One way to do this is to set up a Google alert to notify you when any new information about those companies shows up online.

Expect that prospective investors in your company will ask questions about your competitors. Any entrepreneurs who say that “we don’t have competitors” will have credibility problems. So anticipate these questions from investors:

  • Who are the company’s principal competitors?
  • What traction have those competitors obtained?
  • What gives your company the competitive advantage?
  • Compared to these other companies, how do you compete with respect to price, features, and performance?
  • What are the barriers to entry in your market?

31. If You Are Seeking Angel Investing Financing, Know These Important Points

In reviewing a prospective investment, angel investors especially care about:

  • The quality, passion, commitment, and experience of the founders
  • The market opportunity being addressed and the potential for the company to grow to become very big
  • A clearly thought out business plan and early evidence of early business traction
  • Interesting intellectual property or technology
  • A reasonable valuation for the company
  • The likelihood of the company being able to raise additional financing in the future if progress is made

Angel investors will want to initially see the following from a startup:

  • A clearly articulated elevator pitch for the business
  • An executive summary or investor pitch deck
  • A prototype or working model of the company’s product or service
  • Early adopters, customers, or partners

There are a variety of ways to find angel investors, including:

The best way to find an angel investor is through a warm introduction from a colleague or friend of an angel. Using LinkedIn to ascertain mutual connections can be helpful.

See Angel Investing: 20 Things Entrepreneurs Should Know.

32. Consider Adopting a Stock Option Plan to Attract and Motivate Employees

Stock Option Plans are an extremely popular method of attracting, motivating, and retaining the best employees, especially when the company is unable to pay high salaries. A Stock Option Plan gives the company the flexibility to award stock options to employees, officers, directors, advisors, and consultants, allowing these people to buy stock in the company when they exercise the option.

Stock Option Plans permit employees to share in the company’s success without requiring a startup business to spend precious cash. In fact, Stock Option Plans can actually contribute capital to a company as employees pay the exercise price for their options.

The primary disadvantage of Stock Option Plans for the company is the possible dilution of other shareholders’ equity when employees exercise their stock options. For employees, the main disadvantage of stock options in a private company—compared to cash bonuses or greater compensation—is the lack of liquidity. Until the company creates a public market for its stock or is acquired, the options will not be the equivalent of cash benefits. And, if the company does not grow bigger and its stock does not become more valuable, the options may ultimately prove worthless.

Thousands of people have become millionaires through their stock options (Facebook being one famous example), making this form of benefit very appealing to prospective employees. The spectacular success of some Silicon Valley companies and the resulting economic riches of those employees who held stock options have made Stock Option Plans a powerful motivational tool for employees to work toward the company’s long-term success.

Here’s a general explanation of how stock options are granted and exercised:

  • XYZ, Inc., hires employee John Smith.
  • As part of his employment package, XYZ grants John the option to acquire 80,000 shares of XYZ’s common stock at 25 cents per share (the fair market value of a share of XYZ common stock at the time of grant).
  • The options are subject to a four-year vesting period with one-year cliff vesting, which means that John has to stay employed with XYZ for one year before he gets the right to exercise 20,000 of the options. The remaining 60,000 options then vest at the rate of 1/36 a month over the next 36 months of his employment.
  • If John leaves the company or is fired before the end of his first year, he doesn’t get any of the options.
  • After his options are “vested” (become exercisable), he has the option to buy the stock at 25 cents per share, even if the share value has gone up dramatically.
  • After four years of continued employment, all 80,000 of his option shares are vested.
  • XYZ becomes successful and goes public, and its stock trades at $20 per share.
  • John exercises his options and buys 80,000 shares for $20,000 (80,000 x 25 cents).
  • John turns around and sells all 80,000 of his shares for $1.6 million (80,000 x the $20 per share publicly traded price), making a huge profit of $1,580,000.

For a comprehensive article on this topic, see How Employee Stock Options Work in Startup Companies.

forbes.com

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