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HPA’s 5 Biggest Lessons from 2016

2016 was an incredible year for entrepreneurship and innovation in Chicago and the Midwest, in large part due to our ecosystem’s willingness to share resources and provide the tools necessary for success. In that spirit, we looked back on all of our blogs from 2016 and hand-picked the top 5 most read and shared to get your 2017 off to the most educated start. Read on for our biggest entrepreneurial lessons.

1) Effective Board Management Is Critical to Your Startup’s Success
World-class entrepreneurs and investors Jim Gray (Co-Founder, OptionsXpress), Amanda Lannert (CEO, Jellyvision), Badal Shah (Co-Founder and CEO, TurboAppeal), Michael Small (CEO, gogo), and Kevin Willer (Partner, Chicago Ventures) shared their insights on attracting and managing board members with Pete Wilkins (Managing Director, Hyde Park Angels) and outlined multiple strategies for success. In particular, Amanda provided key steps for building good boards and managing meetings well. It breaks down into four key areas:

  • Keep your board small, three to five members is ideal
  • Leverage your advisors for help in managing your board members
  • Focus board member attention on strategy
  • In board meetings, own the agenda from start to finish

Michael Small and Pete Wilkins added to this list with their own key recommendations. Michael stressed that when “management and the board don’t understand their respective roles,” chaos ensues, so as the Founder and CEO, you need to reiterate your core responsibilities versus theirs. Pete Wilkins added that, “you can gain consensus [among your board members] by setting board expectations in board meetings.”

For more insights into how to manage board members, as well as attract advisors and investors, read the full story here.

2) To Get Investment, Take Catalytic’s Advice
After investing in Catalytic, we spoke with HPA member Andy Bokor (CEO and Founder, Truss and Co-Founder, Trustwave), who led our investment efforts, and Catalytic’s Founder and CEO, Sean Chou (formerly CTO, Fieldglass) about their experiences as seasoned entrepreneurs and what they learned about the fundraising process that all early-stage entrepreneurs should know. They both shared critical advice for entrepreneurs looking to access funding.

According to Sean, you must “First and foremost, believe you are solving a meaningful, significant problem. If you do not believe this, go back to the drawing board. When you’re raising capital, think about your business from an investor’s perspective. Most entrepreneurs think from the customer’s perspective. You have to take the time to learn and shift gears to the investor mindset while raising capital. Learn the lingo, read their blogs, leverage the multitude of templates and other tools.”

Andy’s main takeaway was simple to understand but absolutely necessary for success. “In order to get an investment, entrepreneurs must have a solid, well thought-out and nominally tested idea that can scale. They must assemble a capable executive team that ideally has a track record of success. The market conditions must be ripe for the idea. Success is often based on timing as well as execution.”

To learn more from Sean’s and Andy’s interview, read the full story here.

3) Venture Debt May Be a Perfect Fit for You… If You Have the Right Investors
We spoke with John Hoesley, head of Technology Banking at The PrivateBank and former venture capitalist, to build on our understanding of venture debt and figure out what it takes to actually get a deal done. Among his many choice insights was this:

Banks aren’t just evaluating you, but also your investors. Your investors need to show enthusiasm and excitement for the deal since banks are underwriting you with your institutional investors in mind. A strong show of commitment from your investors doesn’t just validate your startup, but also indicates to banks that you have the support to continue growing, and more importantly, pay back the debt in the future.

Banks look closely at the strength of your institutional investors. What is their reputation for standing by their companies, investing in follow-on rounds, or being attentive to their needs? Do they have existing relationships with the bank? Do they take a partner-like approach to business?

To learn more about how venture debt deals are done, read the fully story here.

4) Consider Vesting Shares as Part of Fairly Dividing Equity Among Co-Founders
Vesting shares means an individual does not have the right to all of the shares up-front, but instead earns them over a defined period of time. Typically, the vesting occurs monthly over four years. The advantage comes down to team alignment. Specifically, the future is difficult to predict and vesting creates a built-in mechanism where everyone’s incentives are aligned to create value over the long term.

We can break this down into a concrete example. Let’s say your Co-Founders decide to leave in the early stages of your company. There are two different scenarios that will unfold. If you structured your shares as vesting, then your Co-Founders will only be able to take the shares that they have earned from the time they put into the company. However, without vesting, they will get the full value of the shares, regardless of how long they work on growing the company. That means you would increase the value of the company, but they would reap the benefits as if they had made the same contributions as you.

To access formulas and see an example of how to put this into practice, read the full story here.

5) Cap Tables Fundamentally Impact Ownership and Exit Values
A capitalization table is a table that takes all of the shareholders in your business and lays out who owns what, how much each one owns, and what value is assigned to the stock they do own.

As a result, cap tables fundamentally define control. When you accept capital from investors, you give up both equity and control. For the purposes of this blog, let’s imagine a scenario where fairly standard terms were established. In this case, the majority shareholders approve new funding and vote to elect new board members. This is critical since the Board of Directors is a startup CEO’s boss. The directors can remove or direct the CEO as they see fit. Additionally, to sell a company, there must a two-thirds majority of shareholders who vote “yes” to the sale.

Second, cap tables track ownership. Ownership becomes increasingly important as you raise more capital because you will give up more shares, affecting control and your exit return potential. To accurately assess the costs of taking on capital, you have to understand your ownership, your investors’ ownership, and how both would be treated in an exit scenario.

To learn more about how to calculate exit returns, read the full story here.