The years since the Corona outbreak are the best proof of a fact in the life of entrepreneurs: No one and nothing, not even the best business plan, can predict what will happen next. And so, right now, numerous startups are once again on the verge of going out of business. But would there be a tomorrow for them if they had considered certain things from the beginning?
The things that are meant are not market analyses and product features, but the many different individuals with whom entrepreneurs within must collaborate successfully on many (and often extremely emotional) levels in order to succeed. That the team is crucial is a truism of the startup scene. Not so well known: Who is part of the team.
“The team includes not only the founders, but also the family, the investors, the bank, the employees and the funding agencies“, says Birgit Polster, a specialist at Erste Bank’s GründerCenter & Förderservice. “The most important thing is to talk openly and honestly with everyone. It’s wrong to think that the bank or the funding agency can’t know everything. Only with open and honest communication can you identify dangers early on and take countermeasures in time. These are difficult conversations, but you have to have them“.
So who do you now have to get on board, tie very firmly to the side of the startup, and then be able to go through thick and thin? A guide.
1. Bind the co-founders, but in the right way
A good team is more important than the business idea – this is an old rule of thumb of investors who look at many different startups. As a result, it is critical to properly get to know the co-founders with whom you are going on the endeavor.
“Startups are often founded with schoolmates, friends or colleagues from university. But just because you know each other well doesn’t mean you can build a company together” Polster says. “From our experience at the GründerCenter, we know that 80 percent of startups fail not because of the market, but because of internal problems. The biggest problems arise within the team, for example, when key points in the founding contract have not been clarified. That’s where a founder clash can quickly jeopardize an entire company.”
Even if it’s a painful process – a good founder also checks very carefully how his future co-founders are doing (especially financially). One trick here is to request a self-disclosure from each of the others at a creditor protection association or credit agency. In this way, everyone can disclose whether they have already been insolvent, are overindebted or have other problems.
Once this obstacle has been overcome, there are a variety of established processes in the founding agreements designed to guarantee that co-founders do not leave after a short period of time or do not feel bound by their commitments in the company. The most important clauses include:
- Vesting: Here, it is stipulated in the shareholder agreement after which period of time the founders are entitled to their full shares. In other words, vesting means that co-founders who leave the company prematurely during the initial phase do not receive their full shares. This is to guarantee that cofounders do not leave early in the difficult start-up phase. Vesting periods often last between 2 and 4 years for startups and are assumed by many investors as a safeguard.
- Good Leaver/Bad Leaver: Leaver clauses regulate what happens when co-founders really leave the company. There can certainly be reasons for someone to leave the startup that cannot be held against them – such as illness, death, if the separation is amicable or if the others want them out of the company (“good leaver”). However, it is also possible that someone has to leave the company because he or she has intentionally or knowingly harmed it – rules must be defined in advance for such “bad leavers” in order to harm the company as little as possible.
2. Maximum security for your own family
All founders who are serious about it, know: In the first few years, you can pretty much forget about free time – even countless blogposts and podcasts on the “right work-life balance for founders” won’t change that much. The numerous construction sites and fires that need to be worked on and put out at the same time hardly leave any free time.
And this long, stressful period in a founder’s life can become a burden, especially for their own family – emotionally and financially. “Every founder needs the backing from the private sphere” says Polster. “For the first three years, founders have very little free time. The family has to go along with it; without them, the startup is doomed to fail“.
That’s why those who want to start up need to have an open and honest conversation with their life partner. Childcare, planned pregnancy, relocation plans, joint travel plans, major purchases over the next few years – all of this needs to be discussed, and also from the point of view of seriousness – if the startup fails.
“Under no circumstances should you describe only the positive sides of starting up to your family, who only know the word startup from TV” says Polster. In the same way, he says, you have to make it transparent that starting a company involves a high financial risk. He also says that as a bank, you have an obligation to put on the emergency brake.
“It’s the bank’s job to protect people from certain ventures. If the existence of a young family is at risk, then we have to warn” Polster says. “Not only does the business model have to be stable, but also the family’s finances. We don’t want the founder to go into full risk with private capital“. Mortgaging the occupied condominium, for example, should be the last resort resorted to. “This is morally and ethically indefensible. We must protect customers from this” says Polster.
3. Bringing financiers permanently on board
In addition to the bank, a company need the constant support of investors and financing organizations. Only in the interplay of debt capital, equity capital and funding is it often possible for startups to reach the next level and internationalize as a scale-up and move toward profitability.
In addition to the legally and contractually prescribed obligations (e.g. annual shareholder meeting, monthly reporting, reports for the funding agencies), there are other ways to get the financiers more involved in the company and its development. One particularly important one is the advisory board.
Establish startup advisory board: Unlike the supervisory board at stock corporations, there is no mandatory board at limited liability companies. However, an advisory board opens up the possibility of involving the company’s most important stakeholders more closely in decision-making processes – for example, the lead investors, the business angels who are often very active in operations, but also experts from the company’s own industry who bring in an external perspective – and who may want to invest themselves later on.
4. Seeing eye-to-eye with the bank
Similarly to their own family and co-founders, entrepreneurs should view the bank as a team member in a common goal, rather than a difficult opponent to conquer. “The bank is still seen as something conservative. But we want to put ourselves on the same level as the founders. If you are on a first-name basis with the startups, then we are not the evil bank, but we are perceived to be on the same wavelength” says Polster. “We as a bank see ourselves as a team member.”
The most essential thing, she argues, is to have an open talk about potential causes of failure and reasons for failure from the outset. That way, she and her team at the GründerCenter would succeed in gaining the trust of the startup founders. “The open conversation takes away a lot of that bank-customer distance” Polster says.
Once this basic trust has been established, it is possible to work together in a completely different way. The bank is then no longer the place where you appear as a supplicant for an essential loan, but a partner with whom you can, for example, fine-tune your financial strategy, “and do so when things are not burning yet” says Polster. Her strongest argument that the bank is a critical partner for the firm rather than an adversary that only wants the money back: “The bank is the last to file for insolvency, usually it is suppliers, customers or authorities“.
5. See employees as partners
At startups, employees expect flat hierarchies, plenty of room to maneuver, responsibility and co-determination – no, they even demand it. In listed companies, employee participation in the sense of loyalty to the company has long been common practice – and has also found its way into the startup world. Today, it is imperative that founders keep in mind that they need to retain core employees and up-and-coming talents in the startup for the long term. “A lot of investors and potential team migrants these days expect there to be employee programs” Polster says. “That is how you communicate to the team that you want to operate at eye level and in collaboration rather than top down“.
The Austrian federal government is still working on how employee participation should be legally structured in the future. But founders already have a choice of different models, each of which should be discussed and implemented with legal advisors. The most important terms here are:
- ESOP: The abbreviation stands for Employee Stock Ownership Plan and is the umbrella term for different types of employee share ownership. In general, key employees can participate in the GmbH’s share capital in the form of a classic equity investment, either in the form of options on shares or shares themselves. This entails both rights and obligations.
- Phantom shares/stocks: These are virtual shares in a company. In this way, employees can participate in the company’s success in the same way as other shareholders, but without formally granting them a position as shareholders. In this way, the cap table remains simple, the shareholder structure is not “fragmented” and bureaucratic hurdles such as resolutions in the shareholders’ meeting do not become more complicated than they already are.