Chapter 9

Building a New-
Venture Team
Bruce R. Barringer
R. Duane Ireland

Copyright © 2016 Pearson Education Ltd. 9-1

 Chapter Objectives

1. Explain the concept called liabilities of newness.

2. Describe a new-venture team and discuss the
primary elements that form such a team.
3. Identify professional advisers and explain their role
with a new-venture team.

Copyright © 2016 Pearson Education Ltd. 9-2

 New-Venture Team

• New-Venture Team
– Is the group of founders, key employees, and advisors that
move a new venture from an idea to a fully functioning
firm.
– Usually, the team doesn’t come together all at once.
Instead, it is built as the new firm can afford to hire
additional personnel.
– The team also involves more than paid employees.
• Many firms have boards of directors, boards of advisors, and
professionals on whom they rely for direction and advice.

Copyright © 2016 Pearson Education Ltd. 9-3

Separate Elements of a New-Venture Team

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 The Founder or Founders

• Founder or Founders
– The characteristics of the founder or founders of a firm and
their early decisions have a significant impact on the
manner in which the new-venture team takes shape.
• Size of the Founding Team
– Studies have shown that 50% to 70% of all new ventures
are started by more than one individual.

Copyright © 2016 Pearson Education Ltd. 9-5

Advantages and Disadvantages of Starting
a Venture as a Team
1 of 2

• Advantages
– Teams bring more talent, resources, and ideas to a new
venture.
– Teams bring a broader and deeper network of social and
professional contacts to a new business.
– The psychological support that the cofounders of a
business can offer one another can be an important element
of a new venture’s success.

Copyright © 2016 Pearson Education Ltd. 9-6

Advantages and Disadvantages of Starting
a Venture as a Team
2 of 2

• Disadvantages
– Team members may not get along.
– If two or more people start a firm as “equals,” conflicts can
arise when the firm needs to establish a formal structure
and designate one person as the CEO.
– If the founders have similar areas of expertise, they may
duplicate rather than complement one another.
– Team members can easily disagree in terms of work habits,
tolerances for risk, levels of passion for the business, ideas
on how the business should be run, and similar key issues.

Copyright © 2016 Pearson Education Ltd. 9-7

 Preferred Attributes of Sole Entrepreneurs
and Members of a New-Venture Team
1 of 2

• Higher Education
– Evidence suggest that important entrepreneurial skills are
enhanced through higher education.
• Prior Entrepreneurial Experience
– Founders familiar with the entrepreneurial process are more
likely to avoid costly mistakes than founders without similar
experience.

Copyright © 2016 Pearson Education Ltd. 9-8

 Preferred Attributes of Sole Entrepreneurs
and Members of a New-Venture Team
2 of 2

• Relevant Industry Experience

– Founders with relevant industry experience are more likely
to have:
• Better established professional networks.
• More applicable marketing and management skills.
• Broad Social and Professional Network
– Founders with broad social and professional networks have
potential access to additional know-how, capital, and
customer referrals.

Copyright © 2016 Pearson Education Ltd. 9-9

 The Roles of the Board of Directors
1 of 2

• Board of Directors
– If a new venture organizes as a corporation, it is legally
required to have a board of directors.
– A board of directors is a panel of individuals who are
elected by a corporation’s shareholders to oversee the
management of the firm.
– A board is typically made up of both inside directors and
outside directors.
• An inside director is a person who is also an officer of the firm.
• An outside director is someone who is not employed by the firm.

Copyright © 2016 Pearson Education Ltd. 9-10

 The Roles of the Board of Directors
2 of 2

• Formal Responsibility of the Board

– A board of directors has three formal responsibilities.
• Appoint the officers of the firm.
• Declare dividends.
• Oversee the affairs of the corporation.

Copyright © 2016 Pearson Education Ltd. 9-11

 Lenders and Investors

• Lenders and Investors

– Lenders and investors have a vested interest in the
companies they finance, often causing them to become
very involved in helping the firms they fund.
– Lenders and investors help new firms by providing
guidance and lending advice.

Copyright © 2016 Pearson Education Ltd. 9-12

Legal Forms of Business
Organization
• One of the first decisions an
entrepreneur needs to make –
ownership.
• Changing the type of ownership is
not irreversible. However, it can be
expensive and complicated.

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Legal Forms of Business
Organization
• Three Basic Ways to Organize an
Entrepreneurial Venture
1. Sole Proprietorship
2. Partnership
3. Corporation
Each form of ownership has its pros
and cons. Owner must get the ‘best
fit’.
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 Factors to Consider

• Tax consideration
• Liability exposure
• Start-up capital requirements
• Control
• Business goals
• Succession plans
• Cost of formation
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 Sole Proprietorship

• Owner maintains sole and complete

control over the business
• Personally liable for debts
• Most popular (73% of all businesses in
the US)
• Usually the first form of ownership
• Least complicated form of ownership

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 Sole Proprietorship

Advantage
• Simple to create
• Least costly form
• Total decision-making authority
• Profit incentive (all profits after tax,
expenses)
• No legal requirements for information
• Easy to discontinue

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 Sole Proprietorship

Disadvantage
• Unlimited personal liability
• Limited skills and capabilities
• Feelings of isolation
• Limited access to capital
• Lack of continuity (if owner dies, retires,
incapacitated)

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 General Partnership
• An association of two or more people who
co-own a business for the purpose of
making a profit.
• Partners share the assets, liabilities and
profits according to a partnership
agreement. Also states the terms of
operating the partnership, protects interest
of each partner.

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 General Partnership
• A written PA usually covers profit splits,
contributions, dissolution, drawing rights,
decision-making authority, workloads etc.
• Important to draft it correctly
• In the US, thousands of partners face
disputes that have to be solved in courts
every year

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 General Partnership

Advantage
• Easy to establish
• Complementary skills
• Division of profits – no restrictions
• Larger pool of capital
• Ability to attract limited partners – as
investors, not involved in operations
• No legal requirements for information
• Not subject to taxation
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 General Partnership

Disadvantage
• Unlimited personal liability
• Limited access to capital
• Difficulty in disposing off partnership
interest without dissolving partnership
• Continuity problems when a partner dies
• Personality and authority conflicts

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 Corporations
• A separate legal entity apart from its
owners that receives the right to exist
where it is incorporated
• The life of this corporation is independent
of its owners.
• Shareholders/directors can buy or sell
their interests without affecting its
operations.

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 Corporations
• Certificate of Incorporation
– A document that describes the business and is filed
with the registrar of companies
– Main tasks involved in setting up a
corporation
1. Naming a board of directors
2. Electing corporate officers
3. Issuing stock

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 Articles of Incorporation
• The following information is vital:-
1. Corporation name
2. Statement of purpose
3. Time horizon (usually in perpetual)
4. Place of business
5. Name and address of incorporators
6. Capital stock authorization
7. Capital required at time of incorporation
8. Restrictions on stock transfers

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 Corporations

Advantage
• Limited liability of stockholders
• Ability to attract capital
• Ability to continue in perpetual
• Transferable ownership

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 Corporations

Disadvantage
• Cost and time involved in the
corporation process
• Double taxation
• Legal requirements and regulatory red
tape.
• Loss of control by the founders
• Stock ownership for employees as
motivation

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