This series takes concepts learned in an MBA program and adapts them for easy comprehension by scientists without a management background. This is currently the 20th part of the series and the third in drafting a business plan.
In the last few months, we've discussed why a scientist might want a business plan, and what format and style to use when writing the plan. This month, we discuss the first real "meat and potatoes" section of the plan: the description of the management team and the corporate structure of the business. When asked what the three most important parts of a business plan are, many venture capitalists will use a modified version of the old real estate maxim, and tell you "management, management, and management." That is why this section will often come first in a plan, even before a discussion of the business, the intellectual property, or the revenue model. People like to know who they are investing in, and how the business is going to be run.
The problem with many start-up businesses (and the reason many people have problems writing this section of their plans) is that, at the time of drafting the plan, they have no management team. Most scientists I know have trouble putting themselves down as president of a company; then they have even more trouble finding other people to add to the team. Others feel they should have a full management team in place, but have no real idea of what types of positions a business requires. Our discussion this week will include both what you'll need as a management team and how to package it for the business plan.
Setting Up Your Management Team
A management team in a start-up business is usually pretty small. But it should be more than just the original entrepreneur-scientist. A typical team should include at least one person with some kind of business experience as well as the scientist. You really don't need more than that in the early stages of the business, unless you're going to start selling stuff right away. Instead, the other "experts" are traditionally either on the board of directors, or on an advisory board of some kind.
So here's how a typical business structure works. There are three tiers of corporate governance: The officers of the business, who are the people that run the business from day to day; the board of directors, who tell the officers what to do; and the owners or shareholders of the business, who appoint the board of directors. On top of this, most businesses will also have an advisory board of some kind (usually a scientific advisory board). In a start-up, a lot of the time there will be overlap between these different levels of management. For example, you, the scientist who has decided to start this business, may be a shareholder of the business, a member of the board of directors, and the president of the company (and thus an officer). However, each of these sections of the corporate governance take very different roles in the running of the company, so keep this in mind when designing your team.
The officers of the company include the president, who is in charge of all day-to-day operations of the company, and the vice presidents. Usually, a mature company will have a vice president for finance, sales and marketing, and research and development. In a typical science-based start-up, there will be a vice president for finance, and maybe for business development, and little else. Remember that the president of the company is often a scientist, and can thus fill the role of research and development vice president. Remember also that each of these positions has to be paid, so the younger the business, the fewer people will likely be on the management team.
The board of directors is appointed by the shareholders of the company, and they act as a steering committee of sorts for the business. While not involved in the day-to-day activities of the business, they'll likely need to approve any major transactions, the hiring and firing of officers, and the like. The board of directors does all the "big picture" business thinking and will likely include someone appointed by a venture capitalist who has invested in the company. Directors of a small company are usually not paid more than an honorarium and some stock options.
The owners of the business are likely to be the founders and any other people that may have invested time or money into the business in exchange for shares. The owners aren't all that important for the business plan, but some aspects of ownership are important. Typically, venture capitalists or other investors will like to see that the people they are investing in have a big stake in the success of the company. If the founders of the company don't own shares, they really don't have much at stake and can just quit and get jobs elsewhere.
Many start-up businesses also have advisory boards of some kind. Usually, these are scientific advisory boards, made up of important scientists who understand the intellectual property driving the business. However, more and more companies also have advisory boards for other facets of the business. Clinical trial advisory boards, marketing advisory boards, and business development advisory boards are becoming more common. Advisory boards are a great way of saying, "there are a lot of people behind this project," without having to pay those people a whole lot. They also allow the young entrepreneur a way of tapping in to expertise that would be hard to get otherwise.
Writing the Management Section of the Business Plan
Now that you've figured out who's doing what in your business, you've got to write it up for your business plan. Typically, the management section of the business plan will have subheadings for officers, board of directors, and advisory board. Most start-up businesses will also have a subheading (often before any of the others) describing the founders of the business and a heading at the end of the management section describing the businesses' ownership structure. In each case, the information that should be conveyed in the business plan should include answers to the following questions: Who is the management comprised of? What is each person's role? What is their previous experience? And how much stock do they have in the company?
Typical plans will have each person's name and position under the different subheadings described above. After the person's name, there should be a brief bio of that person: what they've accomplished in the past and how much time they will be devoting to this business. The final section, that of ownership stake, should simply be in tabular form, explaining who owns what share of the business and who might have any outstanding options. (Options, for those unfamiliar with the term, are a way of paying someone in stock--that person has the option to purchase a certain amount of shares, at a certain price, for a given amount of time. This way, if the business does well, the optionee can profit because they can purchase the stock at a lower "insider" price. If the business doesn't succeed, the optionee hasn't lost any investment, but the company has saved money in the interim by offering a stake in the company's success rather than a higher salary or other compensation.)
The management section is the most important section of your business plan. Investors invest in people, not products, and this section describes who the brains behind the company are and what their stake is. Though the section should be short (a couple of pages at most), it should well represent the people behind the business. It should also convince the investor that these are people that can be counted on.