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Chapter 3. Corporation Start-Up-How to Establish Your Company

Chapter 3. Corporation Start-Up-How to Establish Your Company

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50







Entrepreneurship for Engineers



3.1 The Founder and Team

Many people think that entrepreneurs are their own bosses and completely independent. This is

wrong! Entrepreneurs are far from independent, and have to wo rk with many people, including

partners, investors, employees, and families.



3.1.1 Persuasion of the Family

The most popular scenario, in my experience, is that one should have a job with a steady income.

By starting your own company, you may expect more compensation and mental satisfaction in the

future. However, you may experience challenges initially. You may need to work long hours with

less compensation during the start-up and initial growth periods. Your lifestyle may change dramatically compared with regular employment, reducing family time and income. An entrepreneur

needs to obtain complete understanding and strong support from his or her spouse and family.

Though a corporation is owned by shareholders who have the legal privilege of limited liability ,

the actual situation is usually different for the founder. For example, an emergency short-term loan

may be obtained from a bank, with your personal property as collateral, such as a home or other

assets. The liability is not completely limited, which may affect your family’s security.



3.1.2 The Timmons Model of the Entrepreneurial Process

Figure 3.1 shows the entrepreneurial process model proposed by J. Timmons [1]. Founders need to

balance the three driving forces: opportunity, resources, and team. Since the entrepreneurial process

starts with opportunity, the start-up stage exhibits a huge imbalance as illustrated in Figure 3.1a.

By putting particularly strong effort into strengthening t he te am’s technological c apability a nd

harmony, i n a ddition to fi nancial stability, t he entrepreneur c an obtain a n ew ba lance point a s

shown in Figure 3.1b.

In addition to support from family, founders need financial sp onsors a nd pa rtners or te am

members to o perate the new company. In the scenario of Micro Motor Inc. (MMI), Barb Shay

persuaded t he p resident o f C heng K ung C orporation, M r. L enny C hu i n Taiwan, to su pport

MMI’s initial capital expenditures. Barb had been a c onsultant to C heng Kung for a c ouple of



Opportunity

Opportunity



Resources



Resources



Team

Team



Founder



Founder



(a)



(b)



Figure 3.1 The Timmons model of the entrepreneurial process. A huge imbalanced state in the

start-up stage (a) should be shifted to a well-balanced state in the initial growing stage (b).



Corporation Start-Up—How to Establish Your Company ◾ 51



years, and Lenny was interested in operating a U.S. branch of Cheng Kung. Lenny is president and

CEO of MMI. He is also a venture tutor for Barb.

Barb Shay recruited Dr. Tom Meyer as director of research and development. He received his

Ph.D. at the State University of Pennsylvania (SUP) under Barb’s supervision, and worked in a hightech start-up located in Maryland for 4 years, accumulating small business operational experience.

Chapter 5, “Corporate Capital and Funds,” and Chapter 10, “Human Resources” will discuss

this in more detail.



3.2 Legal Procedure

3.2.1 Forms of Organization

There are three types of companies: sole proprietorship ,partnership, and corporation .The sole proprietorship represents ownership by one person. Its advantages are simplicity of decision making

and low c ost. On t he other h and, t he d isadvantage i s t he u nlimited l iability of t he owner. O f

all U.S. business fi rms, 70% are sole proprietorships. However, they represent only 5% of total

corporate revenue. Partnerships are similar to so le proprietorships except that there are multiple

owners with unlimited liability. Unlimited liability means t hat t he owners a re personally liable

for debts incurred by the company. If the company must fold, the owners cannot only lose their

investment, but are also responsible for repaying creditors.

High-tech entrepreneurs should use a corporation structure. It will enable future expansion more

easily and make it easier to issue and own stock. Only 20% of U.S. businesses use this structure.

They produce 85% of all sales and more than 60% of the profits. A corporation is owned by shareholders, who have limited liability; legally, they can only lose their investment in the company.

The key for high-tech entrepreneurs is to keep eligibility as a small business in order to seek Small

Business Innovation Research (SBIR) and Small Business Technology Transfer Research (STTR)

programs run by U.S. government agencies, which provide research funding to small companies.

According to the U.S Small Business Administration [2], a small business is a firm

◾ With 500 or fewer employees

◾ With an annual revenue under $5 million

The above regulations can be easily satisfied for the start-up. Moreover, an SBIR awardee must

◾ Be a company that is at least 51% owned and controlled by one or more individuals who are

citizens of the United States, or permanent resident aliens in the United States; or

◾ Be a c ompany that is at least 51% owned and controlled by another business concern that

is itself at least 51% owned and controlled by individuals who are citizens of or permanent

resident aliens in the United States.

When yo u c onsider fo reign i nvestment i nto yo ur c ompany, yo u m ust c arefully c alculate h ow

much you will ask from outside countries.

You need to determine the following information before contacting attorneys for company setup:

◾ Start-up members —corporate officers

◾ Company location— tentative lease agreement with office space

◾ Capital money —real cash for tentative company operation



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Entrepreneurship for Engineers



3.2.2 Start-Up Members

MMI recruited Lenny Chu as president and CEO; he is a foreigner and the president of Cheng

Kung Corporation, a nother company. If Cheng Kung does not meet t he pa rameters of a sm all

business (i.e., if it has more than 500 employees), this arrangement automatically cancels MMI’s

eligibility to t he SBIR p rogram ap plication. N ote a lso t hat L enny o r C heng K ung sh ould n ot

exceed 49% of the stockholders of MMI.



3.2.3 Company Location

High-tech nonsoftware start-ups require laboratory and manufacturing facilities. H owever, startups hav e diffi culty arranging these. B arb decided to choose a company location near SUP (her

former employer). Many universities are running company incubators. These usually have conveniently located space along with amenities for starting a company and are a good choice. However,

incubator space leases ar e not actually cheap and ar e sometimes mor e expensiv e than leases for

nearby offi ces. I ncubators usually include privileges to the univ ersity’s facilities with r easonable

costs through a research contract.



3.2.4 Capital Money

A company can be started with minimal capital, but the amount differs depending on location

and needs. M MI i nitially set c orporate c apital at $ 300,000, i n addition to t he e xpected i nitial

SBIR funds of around $300,000. Chapter 5 covers collecting capital and funds in detail.



3.2.5 Legal Process

Ask for quotes from multiple attorneys, and choose a reasonable one. There are ranges in attorney

fees, depending on the attorney’s level of experience. The key for Barb’s MMI case is not to u se

attorneys w ho work d irectly w ith SU P. B ecause M MI i s a so rt of spin-off f rom t he u niversity,

MMI may need to license some SUP patents in the future. MMI needs an attorney who is totally

independent of SUP and can focus solely on MMI’s benefit.

Figure 3 .2 sh ows t he a ctual c orporation re gistration sh eets fo r yo ur re ference. You w ill b e

required to give public notice of your company’s establishment, as shown in Figure 3.3.

In parallel, the corporation needs to e stablish its corporate bylaws and minutes of the organizational meeting (the first board of directors meeting), which will define the roles of the board

members. The following items need to be considered:

◾ Board of directors: chairman and secretary

◾ Corporate officers: president, vice president, and secretary/treasurer

◾ Issuance of shares: usually the corporation issues 1000 shares of common stock initially with

a nominal value (par value) of $1.00 per share

Bylaws mandate how a c orporation is to b e run and operated, and the rights and powers of the

shareholders, directors, and officers. Contents typically include the following provisions:

1. The time and place for meetings of officers, directors, and shareholders

2. Number of directors, their tenure, and their qualifications

3. Title and compensation of the corporate officers



Corporation Start-Up—How to Establish Your Company ◾



Figure 3.2



Corporation registration sheet.



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Entrepreneurship for Engineers



Figure 3.2



(Continued)



Corporation Start-Up—How to Establish Your Company ◾



Figure 3.3



Corporation proof of publication.



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Entrepreneurship for Engineers



Example

Micro Motor Inc.

Barb Shay



Figure 3.4 Stock shareholder certificate.



4.

5.

6.

7.



The fiscal year of the corporation

Who is responsible and how the bylaws are to be amended

Any rules on the approval of contracts, loans, checks, and stock certificates

Inspection of the corporate records book



In the fictitious MMI situation, Lenny Chu is chair, president and CEO, Barb is secretary of the

board of directors, and senior vice president and CTO. A total of 100 shares were issued initially

to three stockholders (Cheng Kung, Barb, and another American colleague in order to ke ep the

U.S. corporation eligibility with 51% or higher shares by U.S. citizens) for $300,000 capital. Thus ,

each share had a value of $3000 initially ($300,000 ÷ 100 shares). Figure 3.4 is an example of the

stock shareholder certificate.



Chapter Summary

3.1 The company start-up procedure includes the following:

1. Information collection on the start-up

2. Persuasion of the family and home financial make-up plan

3. Partner and key employee search

4. Business plan preparation—it is important to find investors and loan lenders

5. Investor and loan search

6. Legal procedure of company start-up

3.2 Even with a corporation str ucture, the founder ’s liability is not completely limited. U nderstanding and support from the one's family are definitely necessary.



Corporation Start-Up—How to Establish Your Company ◾ 57



3.3 The Ti mmons m odel o f t he en trepreneurial p rocess: t he fo under n eeds to ba lance t hree

driving forces— opportunity ,resources and team .

3.4 Three forms of firm: sole proprietorship ,partnership ,and corporation. A high-tech entrepreneur

should choose a corporation firm, which is owned by shareholders with limited liability .

3.5 In order to b e eligible for SBIR and STTR programs in the United States, you must start a

small business firm that meets the following requirements:

◾ With 500 or fewer employees

◾ With annual revenue under $5 million

◾ At least 51% owned a nd controlled by one or more individuals who a re U.S. citizens or

permanent resident aliens

3.6 Required information for starting up a c ompany: (1) Start-up corporate members, (2) company location, and (3) capital money.



Practical Exercise Problems

P3.1 Corporation Structure Questions

Determine the following required information for starting up your company:

1. Start-up corporate members

2. Company location

3. Capital money

MMI Example

• Board of Directors: Chairman Lenny Chu and Secretary Barb Shay

• Corporate Officers: President and CEO Lenny Chu, Vice President, CTO, and Secretary/

Treasurer Barb Shay

• Total Capital: $300,000; issuance of shares: MMI issues 1000 shares of common stock, initially 100 issued with an actual value of $3000 each share (par value of $1.00 each)



P3.2 Venture Supporting Organization

Many universities have a venture-supporting organization to advise on and help with how to start

a company. Access your university Web site to find this organization, and familiarize yourself with

their services. There are two examples below:

◾ Pennsylvania State University business supporting Web site—http://www.innovationpark.

psu.edu/new-business

◾ ePnnsylvania State Organization—financial support, technology and management experience: http://www.cnp.benfranklin.org



References

1. Timmons, J. A., and S. Spinelli. New venture creation. New York: McGraw-Hill/Irwin, 2007.



2. U.S. Small Business Administration, Small Business Resource, http://www.sba.gov/services/ (accessed

March 1, 2008).



Chapter 4



Business Plan—How to

Persuade Investors

You do not need a detailed business plan to persuade family and friends, or to register the company

legally. However, one of the most important tasks for the founder is to write the business plan, in

order to persuade outside investors, venture capitalists, and banks of the company's viability. There

are two major purposes for establishing a clear business plan:

1. The business plan is not for the technology experts, but for investors, who may not be familiar with your technology area. Do not describe it like an academic journal paper! Instead use

lay wo rds, e xcluding p rofessional ter minologies. A dd si mple e xplanations on p rofessional

items. Writing style should be similar to a press release. Remember: the business plan is to

persuade outsiders to invest in your idea from a business viewpoint, not from a scientific or

engineering viewpoint.

2. The founder must visualize his or her business from an outsider’s viewpoint. Many high-tech

entrepreneurs are too enthusiastic about their inventions, which gets in the way of thinking

coherently about business issues, mainly making a profit. The founder can exude confidence

in business, but should exclude his or her selfishness in business planning. The business plan

should carefully describe the current and projected future fi nancial condition of the company and the development pace from an outsider’s viewpoint. Unexpected applications and

markets or new business opportunities may be found during brainstorming sessions w ith

outside potential investors.

The e xample fo rmat fo r t he b usiness p lan c an b e fo und i n va rious p laces, suc h a s i n t he te xtbook New Venture Creation [1] and the Web site of the Entrepreneurial Center at Old Dominion

University [2] .The following template was used for Micro Motors Inc.’s (MMI) business plan.



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Entrepreneurship for Engineers



Table of Contents

Executive Summary

Managent and Organization

Management Team

Compensation and Ownership

Board of Directors

Insurance

Organization Charts

Product/Service

Purpose of the Product/Service

Stage of Development

Future Research and Development

Trademarks, Patents, Copyrights, Licenses, Royalties

Product Liability

Production

Facilities

Suppliers

Marketing Plan

Industry Profile

Competition Profile

Customer Profile

Target Market Profile

Pricing Profile

Gross Margin on Products/Services

Break-Even Analysis

Market Penetration

Advertising and Promotion

Future Markets

Operating and Control Systems

Administrative Policies, Procedures and Controls

Documents and Paper Flow

Planning Chart

Risk Analysis

Growth Plan

New Offerings to Market

Capital Requirements

Personnel Requirements

Exit Strategy

Financial Plan

Sales Projections

Income Projections

Cash Requirements

Sources of Financing

Supporting Documents

Financial Worksheets

Resumes of Key Personnel

Legal Agreements



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