Building Your Organization

Unless your enterprise will be a ‘one person show’, you will need to build an organization. Your direct organization can include co-owners, staff (full or part time), and an Advisory Board. In addition, your indirect organization/network can include mentors, paid advisors/consultants, business alliances, and even suppliers. Finding and funding these resources can be the biggest challenge that you face in your startup enterprise.

The key decisions related to your organization are: what are the issues that you need managed and addressed on a priority basis by the organization; what people and positions will you need to address these issues; when will you need these resources; and how do you finance them? Prior to answering these questions relating your organization development you should have completed a comprehensive business plan.

A good exercise is to build an organization chart at least 3 years hence and include all the positions that you feel you will need to operate the successful enterprise 3 years from now. Identify those positions you have already filled and those ‘To Be Determined’ (TBD). It is understood that, in the short term, owner(s) and startup staff will be fulfilling multiple roles until the owner(s) is able to build his/her organization. An example of a sample Organization Chart is as follows:

MyBus Organization 2027

Once you have identified the key positions that you will need for your enterprise over the next three years, the next step is to determine the timing and cost of bringing these staff on board. The planning exercise here is to simply build a table listing the position, timing and monthly cost.

MyBus Example

A startup enterprise is unlikely to require or be able to afford this number of staff or this amount of capital. However, the analysis clearly demonstrates the potential costs of funding an organization and the need to financially plan for it. There are several ways to compensate your organization, and each has a different impact on ownership and funding:

Unless an individual is independently wealthy, he or she will likely require a steady income. This usually is in the form of a salary. It has the highest fixed cost and lowest variable cost, but it also has no impact on the owner’s share of the business.

In the case of a salesman, a common compensation structure is salary + commission. This structure has a moderate impact on both fixed and variable costs and no impact on the owner’s share of the business. Depending on the salary portion of the compensation, in the early stages of a business a salesman may require a draw on commissions (that needs to be paid back through future commissions) or a guaranteed income for a period time until the business is generating sales. If commissions are based on sales, there will likely be pressure on the owner to reduce pricing to make a sale. Commissions based on Gross Margin tend to result in better financial results but require the sharing of financial information without disclosing the full profitability of the business.

Another compensation structure is salary + bonus. This structure has a moderate to high impact on fixed and variable costs and no impact on the owner’s share of the business. For salesmen this bonus is likely based on achieving a sales (or gross Margin) target. It is usually based on growth over the prior year rather than on all sales. For other staff the bonus can be based on company results. A rule of thumb is that the closer a bonus can be tied to individual results the higher incentive it provides.

A commission only structure is used to compensate salesmen. It has no impact on fixed cost and a medium to high impact on variable cost. It also does not have any impact on the owner’s share of the business. It can be based on both new and existing accounts. It is important to not set the commission rate too high since it will be difficult to reduce in the future. As the base business grows it can generate a large commission disproportionate to the effort. You could reduce the commission rate as sales growth since the organization may be shouldering much of the customer relationship. As you bring in new salesmen and it can be difficult to restructure a territory.

Salary + shares can be used as a retention tool. It has a moderate to high impact on fixed cost and no impact on variable cost. It will impact the owner’s share of the business and could limit shares available to outside investors such as VCs or Angels if too many shares are distributed. Shares should only be given to people who will stay and help a business grow to its full potential.

Sweat equity is used for staff who believe in a business enough to work only for shares when funding for other compensation structures is not available. Essentially, they are compensated only when the company earns a profit that can be distributed. This structure often applies to an owner when they first start a business. However, not paying yourself should be a relatively short-term strategy.

Hiring subcontractors for specific work is a common practice among start-up companies. Although the hourly or daily cost is usually much higher than the staff you only pay them when you need them. Therefore, there is a medium impact on variable cost but no impact on fixed cost or shares.

Compensation for investors can take several forms. Obviously, it has a high impact on share structure. Investors usually take a stake in a business to benefit from the appreciation of the value of their shares or dividends. In rare situations it may take the form of or salaries, especially if they are involved in running the business. How many shares should be allocated is a complicated subject. You obviously do not wish to lose controlling interest in your own company but if you cannot grow the business without a large infusion of capital you may be better off getting a smaller piece of a large operation with a good potential to be sold in the not-too-distant future.

Written by Bob Aslip – BAG Consultant