• A managers biggest challenge is to manage employees

• Successful employee relations takes effort and patience

• The most important management skill is empathy. Without it, you will never relate to your people.

• People are messy — they have lives outside of work

• Getting the people right is just as important as getting the product right

• Management comes in various styles from collaborative to authoritative to dictator and all points in between.

• Ultimately, someone has to be in charge. Corporate democracy only works to a point.

Discussion

A friend of mine once told me that when he was a teacher, he went to his boss (the principal) for some advice. Being a new teacher, he figured that his boss would have some insightful tips on how to manage his kids. What he got was what most mangers think but never say: if it were not for the people, my job would be easy. Now, that’s a bit glib and unrealistic but out of all the management challenges, nothing comes close to managing people.

Emotions, Ego and Miscommunication

If you were to pick the top three things that make managing people so hard, it’s got to be: emotions, ego and miscommunications. All three of these things will, at some point, conspire against you. No manager is immune to the volatile cocktail that results when any one of these three ingredients are in the mix.

Emotions

People are emotional — they just can’t help it. Some people are more emotional than others but all of us have something that makes us emotional. Emotions are a powerful thing. They can make a normal person quiver in a corner, drenched in their own urine or fly off into a psychopathic rage. All of these states are bad. As a manager, your job is to be the control rod for emotional situations. This takes a keen sense of self and how your words and actions affect other people. When dealing with emotions, it’s important to keep a couple of things in mind:

1. High emotional states make people irrational: When tempers flare, people can get nasty and irrational. Make sure to lower their emotional state before dealing with whatever problem.

2. Emotions can make people defensive: Sometimes people get defensive when confronted with a problem that they might have caused. Defusing this requires focusing on the situation and not the person.

3. People can be vulnerable: Someone that is emotionally drained or “beaten” down will be susceptible to all sorts of suggestions that might not be a good idea. Be careful when making decisions or having people sign up for tasks when they are vulnerable.

4. Staying motivated is challenging: Motivation can wane when people are emotional. Strive to understand what motivates your staff so that you know when emotions might be getting in the way.

5. Resolutions can take longer: When you mix all of the above together, you get a situation that requires a lot of work to get stuff done. This will lead to resolutions taking longer than required. Be sensitive to this and watch out for the warning signs.

Ego

We all have an ego. It’s that little voice inside our head that pushes us to be recognized and admired. When that little voice gets in the way of rational decision making, things start to get personal. When managing people, careful attention needs to be paid to their ego. Consider some the different types of people you might manage and how their ego affects how you interact with them:

• Starter: They want to start new things but never seem to finish anything. They really like the fuzzy front end of defining and launching projects. That for them is enjoyable. It’s best to let the starter start and pair them with a finisher.

• Finisher: Enjoys nothing more than getting stuff done but never wants to start anything new until everything is done. They are usually good at following checklists and don’t get bored with the mundane tasks associated with making products shippable.

• Mechanic: Has a deep desire to make progress and get stuff done. They really don’t care why it works or how it works just that it works. They have a deep desire to do because to them, that is what work is all about — getting stuff done.

• Scientist: Wants to understand why things work. If given the opportunity, they will think and ponder all day. Task completion is a little more of a challenge with a scientist because of the deep desire for understanding. This can sometimes get in the way of progress.

• Superstar: Produces great work and gets along with everyone. They are your “go to” people that will one day have your job. They strive for more and more challenging projects and feel that they constantly have to prove themselves.

• Solid Citizen: Works hard and does a good job performing tasks. They are a pleasure to manage since they understand what to do and just do it. They aspire to better things but will remain patient until the time comes.

• Higher Life Form: Thinks they are always right and are the only people who “get it.” These types of people will be your most challenging person to manage. Sometimes you may even need to get rid of them because they just can’t work as a member of a team.

Of course, there are many shades in between these groups but remember that ego and motivation go hand in hand. Someone who likes to start things will respond differently than a finisher. The mechanic has different ego needs that the scientist. The trick is to identify these ego needs and cater your management approach to each different type.

Miscommunication

Nothing makes a stressful situation descend into chaos like miscommunication. The most evil form is the email flame war where the escalation of the rhetoric gets downright nasty. Avoiding miscommunication, or rather clearly communicating, is vital to managing people. Your style of communication will vary depending on the situation but there are some general guidelines that are worth following:

• Set exceptions: Most miscommunication centers around the expectations that people have. It’s critical that you ensure that exceptions are communicated clearly and repeatedly.

• Keep on topic: Nothing distracts and confuses like discussing multiple topics. Try to remain on one topic at a time until conclusions are made.

• Use simple, declarative speech and prose: Vital to clear communication is to always craft your message to your audience. This does not mean you dumb down your message but it does me you use common prose that is easily understood.

• Respect debate and decent: Nothing closes off channels of communication faster than squashing honest debate and decent. Respectful debate will always clarify positions and allow people to truly understand what is being discussed.

• Make decisions: Decisions solidify communications into something tangible that can lead to action. Indecision will just leave things hanging and people wondering what to do next.

• Admit when you are wrong: Critical to constructive dialog is to admit when your or someone made a mistake. This allows for people to voice concerns and shows that correct communication is more important than appearing to be right.

Management Styles

Part of effectively managing people is to figure out your management style and how that affects people. The type of people you manage will require you to adjust your style to meet their needs. In general, most people want to feel that their manager is fair, balanced, respectful and listens to them. These traits go a long way in effectively managing people. If you were to bucket the types of managers into categories, it would look something like this:

1. Collaborative: Managers that collaborate try hard to include their staff in all important decisions. This style relies a lot on inputs from others and an understanding of the political dynamics of your group.

2. Authoritative: Tend to make decisions and stick with them. Authoritative managers like titles and use these titles to garner influence and get their way.

3. Dictator: Manages by decree with zero input from their staff. This type of manager will never admit they are wrong and will continue on a course even if it will lead to disaster.

4. Micro-Manager: Wants to control every aspect of how work gets done. They have the attitude that they are the only ones that know the “right way” to do things. These type of managers tend to burn out quick as they ascend to power since their management bandwidth gets stretched thinner and thinner.

5. Mash-up: Most managers are a mix of the above categories but tend to gravitate to one dominate trait. At times, it makes sense to be more like a specific category, given the situation.

Empathy is Your Friend

One skill that every manager needs to nurture is empathy. Out of all the skills a manager must rely on, empathy for the plight of others is far and away the most important. Being able to understand where people are coming from while also seeing why they behave in certain ways will make you a better manager. A couple of ways to work on your empathy include:

1. Listen: Most managers don’t listen enough. Listening is such an important skill that it should be practiced everyday. Truly listening will allow you to get at the heart of matters quickly and without miscommunication.

2. Experience What Your Staff Experiences: Nothing opens a managers eyes more than experiencing what their employees experience. Sometimes the decisions a manager makes has implications that are not obvious until the decision is implemented.

3. Communicate Your Expectations: Setting expectations about performance and behavior allows the manager and employee understand what is acceptable. This also allows for easy correction and clarification when things start to go wrong.

4. Trust People: Ultimately, a manager has to trust their people. Without trust, nothing can be accomplished. Trust is a two way street that must be earned and constantly fostered. As a manager, you should always trust your people unless given a solid reason not too.

Things To Ponder

1. Write two paragraphs on your management style. What type of manager are you? If you are not a manger, then describe your present manger’s style.

2. In two paragraphs, describe your ideal manager. What traits does she have? Why are these traits important to you.

3. Recall a particularly stressful interaction with an employee. Why was it stressful? How did your manager handle it? Could the situation have been avoided?

4. What do you look for in a good employee? How does your interview process find these good employees?

5. Take a sheet of paper and draw a line down the middle. On the left side write easy. On the right side, write hard. List as many traits of easy/hard employees to manage. Compare the lists. Which one has more?

Exploring Further

• Personal MBA Reading List

• Maslow’s Hierarchy of Needs wiki article

• The Quick MBA Managing People page

• The Art and Science of Management

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Topic #19: Managing People originally appeared on The Daily MBA on March 9, 2010.

Questions

1. Without a constant stream of new ideas, a company will:

A. Thrive and survive

B. Sell more new products

C. Slowly decay

D. Attract more customers

2. Which practice helps ensure that your innovation pipeline is full?

A. Yell and scream when things fail

B. Slash R&D when your product is done

C. Wait till you need to innovate

D. Have a patent process

3. What are the four main types of Intellectual Property?

A. Patents, Trademarks, Copyrights and Trade Secrets.

B. Patents, Copy Prevents, Trade Law and Trade Secrets

C. Patents, Trademarks, Service marks and Trade Secrets

D. Proof of Concepts, Trademarks, Copyrights and Trade Law

4. How long is a copyright valid for?

A. For all of time

B. 20 years after the authors death

C. 70 years after the authors death

D. Up until the author dies.

5. Which item is not part of a go to market strategy?

A. Collateral Plan

B. Detailed product design

C. Field and Support Training

D. Manufacturing Ramp Plan

6. What are the stages of a Product Life Cycle?

A. Introduction, Growth, Mature and Decline

B. Introduction, Trough, Growth and Mature

C. Brainstorm, Introduction, Mature and Decline

D. Brainstorm, Trough, Mature and Decline

7. What plays a vital role in a properly functioning operations group?

A. Intellectual Property

B. Press Plans

C. Processes

D. Trademarks

8. SPC stands for:

A. Special Process Control

B. Super Process Control

C. Spectacular People Contributing

D. Statistical Process Control

Answers

1. C

2. D

3. A

4. C

5. B

6. A

7. C

8. D

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Celebration Of Knowledge #5 originally appeared on The Daily MBA on March 3, 2010.

A Quick Definition

Closing the loop is akin to following up, checking in or closing the deal. The term comes from control systems where they close the control loop in order for the system to remain stable. The opposite of a stable system is one that is unstable. In control system parlance, this is referred to as an open loop system since it has no feedback and thus will likely spin out of control — kind of like projects without any follow-up. I am sure most of you have had situations where you thought someone would do something and it turns out they either forgot, ignored you or did the wrong thing. All of these issues are a result of not closing the loop. In order to save you from suffering and heartache, here are some steps that will ensure that you close the loop every time.

Step 1: Have Clear Objectives

One of the biggest challenges with getting stuff done is understanding your true objectives. Nothing will frustrate you more than launching someone off on a task that is really time but not communicated that way. Having clear objectives means that you think about what needs to get done and craft a plan that makes senses. The trick to this is to prepare carefully and nail down what objectives are important and who you need to do them.

Step 2: Communicate Clearly

Clear communication means that your message or task is registering with the audience. This does not mean you talk slow or use 4th grade english. Rather, you need to have points in your meeting or conversation where you query for clarity and that your message is getting across. Remember, that what you say may not be communicating the message you intended. That’s why you need to constantly listen to what people say and confirm that you message or task is getting across.

Step 3: Create Natural Follow Up Points

One thing that most people struggle with is how to follow up with someone on a task or assignment. This can be a challenge for some people because it’s unclear when to follow up. If you create natural follow up points, then all sides will feel a lot more comfortable in taking your call or email. These natural follow up points are created by the person that desires the action to be completed the most. A couple of examples of natural follow up points are:

• Taking the action to follow up in a week if you don’t hear from someone

• Set a mutual deadline that everyone agrees to

• Providing information or feedback before a certain date

• A personal action to follow up with data/recommendations, etc.

• Providing a status update when something material happens (e.g. another deal closed, hit a milestone, etc.)

There are several other natural follow up points that will become obvious to you once you start looking for them.

Step 4: Document Discussions/Actions/Agendas

Probably the single best thing you can do to close the loop is to send out meeting agendas, notes, actions and conclusions. This may seem like a lot of work but it’s a great focal point for discussion. When you send out a meeting notes, you are opening up a natural follow-up point that can be leveraged to close the loop on several actions. Without this focal point, all those dangling actions will have no home. Your meeting notes and follow-up on them will provide those actions a natural home.

Step 5: Follow Up When Promised

If you want people to promptly follow up on your actions, then you need to set the example. The tone and tenor of your follow-up coupled with your punctuality will show that you care about closing the loop and this will naturally rub off on others. Nothing tells someone that it’s important to close the loop like doing everything you can do make it easy for them.

Step 6: Repeat Until Closed

Just because you ask someone to do something, does not mean they actually heard you or acknowledged that it will get done. This means that you have to repeat the above steps until you reach the resolution you want. This might take several meetings or phone calls. In fact, it might take longer than you anticipated. The thing to remember is that you must be diligent if you want something done. That requires you to constantly communicate your desired results and close the loop to make sure it gets done.

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6 Steps to Closing The Loop originally appeared on The Daily MBA on February 27, 2010.

• Operating a company is far different than building a product

• Operations is critical to the day to day existence of the company

• Processes play a vital role in a proper operations organization

• The day is won or lost on logistics no matter how great your products are

• Ideally, manufacturing wants to make one and only one thing.

• The more consistent and standard you make your product, the better manufacturing can build it.

• Continuous Improvement, Lean Manufacturing and 6 sigma all strive to measure and improve a manufacturing line

Discussion

For most of you creative types, operations and manufacturing are just those guys overseas that make the stuff you invent. This is partly true. Depending on what you make, your operations and manufacturing organization can be flung far and wide. Coordinating this logistical nightmare usually rests on either the VP of Operations or the Chief Operating Officer (COO). These folks are part general, part cheerleader and part magician.

A Typical Operations Group

When you think of operations, think of the daily tasks that keep the company afloat. This can range from making sure the bathrooms are clean to figuring out how much to pay for raw materials. Operations and manufacturing probably have the most diverse set of people in your organization. Their skills can range from the basics of a line worker to the Ph D. statistician looking at product yields. In a sense, these groups cut across more of humanity than any other group. That’s a great strength and a bear to manage.

If you look at a typical operations organization, the following functions can be found:

• Manufacturing: Anything the company makes will be done in manufacturing. Even software that is bundled in packages, which nowadays is kind of silly, needs to be manufactured.

• Configuration Management: Most companies have a vast array of products. Keeping track of all those options falls under configuration management. This is important to get right because this information feeds into what to manufacture and purchase.

• Purchasing: Anything the company buys usually goes through purchasing. The job of purchasing is to get the company the best deal they can on the materials they need to design and build products. This is usually why they like to deal with big companies and standards configurations.

• Inventory: If a company physically makes something, then it will have some sort of inventory. Inventory is the finished goods that are ready to be sold. They can be already sold and just waiting to ship or the the company can build up inventory to meet customer demand. In a lean operation, the goal would be to have zero inventory, which is next to impossible.

• Service and Support: Once the product is done and at the customers site, there needs to be a support team that services (if required) and takes support calls. All products have problems, so the support staff needs to be able to rapidly fix any issues customers have.

• Quality: Critical to a properly functioning manufacturing line is the compliance to quality standards. A poor quality product will get more support calls and make customers angry. The overall goal of the quality group is to catch all those defective products before they leave the factory.

• Logistics and Transportation: Logistics is responsible for moving all those products, raw materials and people to where they need to go. Without a detailed knowledge of where your raw materials, people and products are, you can miss deadlines, ship things to the wrong place and run out of inventory.

• Facilities The physical location of where the company does it’s businesses is important to maintain and keep compliant to local laws and codes. The facilities group is in charge of making that happen. This includes routine maintenance (like cleaning the bathrooms) all the way to selecting and building a new factory.

• Distribution Channels: Companies can have many distribution channels for their products. Distribution channels are just places where your companies products are sold. Think of it like this. You can go to a store to buy an ink cartridge or you can by it on-line. Each is a distribution channel (actually, more like a sales channel). Another example would be buying direct from the manufacture or via a third party.

As you can see, an operations group has a lot going on. A well run operations group is an invaluable asset to a company. Many a company has folded because their operations were sloppy and they could not get their innovative products to market.

What’s not Measured, Does Not Improve

One aspect of operations that warrants some additional discussion is manufacturing. A companies manufacturing line is what creates, in volume, the companies products. Without a properly functioning manufacturing line, a company will struggle to produce products. For the manufacturing group, the single more important thing is to produce high quality products at the lowest possible price. To achieve this, they will constantly look at ways to improve efficiency while still maintaining a high level of quality. The tools they use to achieve this include:

• Statistical Process Control (SPC): This method uses statistics to measure and monitor critical process steps so that actions can be taken. The output of SPC is usually a control chart that shows how a particular process step is trending and whether or not it’s “in control.”

• Lean Manufacturing: Deals with eliminating as much waste (be it time or materials) as possible so that an optimum cycle time through the manufacturing process is achieved. It tends to focus on simplify process steps and reducing the need for inventory at each step.

• Continuous Improvement: Probably the most well know continuous improvement is the Japanese KAIZEN, which means improvement. It’s basically a method to maintain and improve a production process by always looking for ways to do tasks better. All levels of the organization work together to make that happen.

• 6 Sigma: Refers to a process and level of quality that a company wishes to strive for. Six sigma refers to the overall outgoing quality of a product and when achieved means that only 3.4 defects per million opportunities are seen by the customer.

Operations and manufacturing are intensely data driven because they are always looking for ways to improve both costs and quality. That’s why most people who work in those areas adhere to the mantra, what is measured, improves. Remember that the next time you wonder what they do over in operations and manufacturing.

Things To Ponder

1. Ask your VP or Operations or COO how many facilities they manage and where they are. Ask them what’t it like to manage all those sites.

2. Look up a manufacturing procedure. How complex is it? What are the components that it contains? Write two paragraphs on what you learned.

3. Interview one of your companies purchasing professional. Ask them what criteria they use to make decisions. What makes a good vendor as opposed to a bad vendor? Write a paragraph on what you find.

4. Visit your companies manufacturing line. Ask the supervisor to give you a tour of the line and have them explain what they make and how much. Write two paragraphs on what you learned.

Exploring Further

• Wikipedia article on Operations Management

• Free Management Library article on Operations Management

• Wikipedia article on Manufacturing Process Management

• What is 6 sigma? article

• Lean Manufacturing definition

• KAIZEN — The Japanese Strategy for Continuous Improvement article

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Topic #18: Operations / Manufacturing originally appeared on The Daily MBA on February 24, 2010.

In particular, these two paragraphs really capture the essence of innovative companies:

Unfortunately, when the addiction to systems and structures rules the day, an organization’s quest for a culture of innovation degenerates into nothing much more than a cult of innovation. Organizations do not innovate. People innovate. Inspired people. Fascinated people. Creative people. Committed people. That’s where innovation begins. On the inside.

Systems and processes are fine. In fact, you need them to run a functioning company. I think where companies fall down is when they institute a layer of process that stifles creative people. The balance seems to be the happy medium between creative freedom and rigid process that makes repeatable products.

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Blogging Innovation: Innovation From The Inside Out originally appeared on The Daily MBA on February 22, 2010.

I particually like:

“Practice Good Enough.” and “Done is better than right.”

Too often, people get wrapped up in creating their masterwork when all they really have to do is good enough. You can always revise later.

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Zenhabits: 4 Simple Principles of Getting to Completion originally appeared on The Daily MBA on February 19, 2010.

• Launching the product is just as important as developing it

• It’s important that your Go to Market Strategy be aligned with your development plans.

• Customers and partners needs to be engaged early and often for a successful launch

• Managing the launch and support provides valuable customer feedback

• The Product Lifecycle is important to understand since it can dictate your development schedules.

• Knowing when to kill a product is just as important as launching it

Discussion

Too often, people focus on getting the product done and little time on how to launch it into the marketplace. This oversight delays many a good idea from realizing its full potential. Product launch is just as important as developing the product itself. The logistics required are immense. Sales needs to be trained, marketing needs to get materials together, manufacturing has to figure out how to build it and development needs to wrap up those last features and functions. To do a product launch right, you need to have a plan.

Go To Market Strategy

Hopefully, that new gizmo you are working on had some thought put into who will actually buy it. If not, your efforts will be for not. Your go to market strategy is critical to your products success. Without it, your product will languish. To better understand how integral this strategy is, lets take a look at the components of a solid go to market strategy.

1. Market Analysis: Redo your market analysis to make sure your target market is still valid. As a general rule, you should be monitoring your market during product development so you can react to changing needs.

2. Competitor Offerings: Scan the competitive landscape to see if anyone has released something similar to your product. If they did, then figure out how well it launched and where they failed. This kind of intelligent will make your launch more successful.

3. Target Customers: Always be cultivating your target customers and make sure your pilot or beta customers are actively engaged. It’s also good to validate your target.

4. Unique Value Position: Before launch, you should have a pretty good idea of your unique value position and should be refining your message to hammer it home. Again, this is a continuous task that should be done throughout the product development process and validated at launch.

5. Pilot or Beta Customers: Your first few customers will be critical to your success. Make sure that their experience is the best it can be. These customers will be who you will ask to vouch for you.

6. Collateral Plan: There is a lot of collateral that needs to be generated to launch a product. Make a checklist of everything you will need and ensure that plenty of stock is on hand when you, hopefully, get flooded with inquires.

7. Measurable Success Metrics: Each product launches differently. Make sure you have several measurable metrics that track your progress. Be realistic and check them often. Some metrics to consider include: customer inquires, quotes, sales, returns, support calls or customer feedback.

8. Field and Support Training: If your product is complex and requires extensive support, then make sure it’s in place before your product hits the market. I know this sounds obvious but there are plenty of companies who fail at this. The failure usually stems from lack of training or buy in from the support staff. This means you need to get buy in early and often.

9. Press Plan: Coordinating the press will assist in your overall launch and promotion efforts. A proper press plan will garner a ton of great free publicity if you cultivate those relationships.

10. Manufacturing Ramp Plan: Your operations and manufacturing people need to be prepared to actually make your product. Don’t just assume that when you throw it over the fence, they will catch it. Manufacturing lines and procedures take time to develop and debug. The early and often mantra also applies here. The sooner you are engaged with your manufacturing and operations group, the smoother your launch will go.

As you can see, launching a product takes more than just getting the thing done. There are several critical logistical and collateral plans that need to be executed along with your product development. Integrating the two is a great way to check and balance the other. This means that marketing have to be actively involved in both defining, planing and executing the product.

Product Lifecycle

Managing your product or line of products requires a keen understanding of how your customers use your products and how your competitors complete against you. Naturally, this is a process that goes through many stages. These stages include: Introduction, Growth, Mature and Decline. Part of the product lifecycle is knowing when your product offerings are maturing and you need to develop new and better products. Most companies define their product lifecycle around some industry metrics or trade shows. For example, the semiconductor industry uses Moore’s Law to drive the development and launch of new technologies, toy companies focus on the christmas sales season, while consumer electronics are pretty much defined at the Consumers Electronics Show (CES). All of these product categories have a well defined product lifecycle that all companies need to manage.

Pruning the Product Tree

Since technology evolves so rapidly, it’s natural that some products will become obsolete. Well, obsolete is a strong word since some of your customers will be happy to use your old products forever. Knowing when to prune your product tree also has the benefit of moving your customers on to your latest and greatest offerings. Some customers will clearly be annoyed by this because your old products might work just fine for them. This is a tough judgement call since you want to please your customers but you also want to move on to selling and supporting new products. It’s best to have an up front policy as to when you refresh your product lines or when product support for your aging product lines will stop.

Things To Ponder

1. Recall a product launch that was wildly successful. Write a paragraph or two about why it was so successful.

2. Think of a product launch that flopped. Write a paragraph or two about the flop. Compare the two launches. What were the differences.

3. Research a product that had a strong launch but then fell flat. What product management mistakes did the company make? How would you have salvaged the produce.

4. Make up a product to launch. Answer the go to market strategy questions above to craft your launch plan.

5. Look up a favorite companies product line. Which one should the purge or cut? Write a paragraph as to why you would cut it.

Exploring Further

• Product Launch Checklist

• An informative blog on Product Management

• Product Launch Blog

• Product Development and Management Association site

• Product Life Cycle post

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Topic #17: Product Launch / Management originally appeared on The Daily MBA on February 17, 2010.

Date: Feb 22nd, 2010

Time: 5:00pm-8:00pm

Location: Tied House Cafe & Brewery 954 Villa Street, Mountain View, CA 94041-1236

Come join me to celebrate the release of my 1st book, Frustration Free Technical Management. Please bring your books so I can autograph them and personally thank you for your support. No host bar. Hope to see you there.

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Silicon Valley Book Signing: Feb 22nd 2010 originally appeared on The Daily MBA on February 15, 2010.

This will probably be the first uncomfortable meeting you and your co-founders will have. To help reduce your anxiety, let’s take a look at a some scenarios that you might find yourself in so that when this topic comes up, at least you have a starting point.

Scenario #1: The Golden Three

In this scenario, you ideally have three co-founders. One is the CEO that has experience starting and raising money. Number two is the technology guy who has a track record for building really cool stuff. The third is the marketing guy who knows anyone and everyone in your target market. These are the golden three that will start and build your new company into what will become the next “insert your favorite successful company here.” In this scenario, the distribution of founders equity is pretty easy — each person gets a third. The reasoning is that each will play a critical role in the success of the venture and without them, the venture would fall flat. Now, I am sure there is some debate about whether two or three founders is the ideal number. There are plenty of successful examples for both. Just keep in mind that you need those skills and your foundering team needs to have them.

Tip: When the golden three are present and contributing, equity should be distributed equally.

Scenario #2: Money Bags

Unfortunately, we live in a world where it takes a certain amount of money to get stuff done. Startups are no different. The first permeation on our ideal scenario is the founder with a ton of money. To be honest, this is a mixed blessing. On the one had, you need the money. Actually, you really need the money. On the other hand, a founder with a lot of money will want more control and will tend to dominate the decision making process. This is why it’s best to not have a founder with a huge dollar stake in the business. I know, the temptation is huge to take the money but the cost of this money is more than the equity you give up. You see, gentle reader, this money will control the business more than it should. The co-founder that has a huge financial stake will make bad decisions for the business since what might be good for the company may not be good for an investor. Case in point, when an exit strategy presents itself, the co-founder with the huge equity stake will probably revert to investor getting a return mode than executive that wants to build a company. Granted you might have a founder that puts in a little more than the rest but that’s unavoidable and manageable.

Tip: Beware the co-founder with a potential huge financial stake in the business.

Scenario #3: Connected

Have you ever seen a Rolodex? Back in the day, your “manhood” as a mover and shaker was directly proportional to the size of your Rolodex. Today, it would be the number of connections you have on LinkedIn. Someone that’s well connected will have tons and tons of contacts. These contacts are a potential source of customer leads and/or money. Read that last line again. These contacts are a potential source of customer leads and/or money. It’s great that a potential founder might have a huge list of people they can call to get business. Does this mean they should get more equity? Maybe but that’s a big maybe. Contacts are only good if you can convert them to something tangible. If they can do that, then it’s worth it. In terms of the split, it would be fair and related to the contribution.

Tip: Setup some realistic goals that can prove the power of their connections.

Scenario #4: Wunderkin

Some hotshot techie dude , who either invented the Internet, C++ or Python or all three, has this great idea for his next new invention. The only problem, he has no clue about business or the market or how to raise money but the idea is uber cool and can “sell itself”, he tells you. Sure. Are you also interested in a bridge? It turns out that it’s actually hard to sell stuff and raise money. The idea or technology is only the beginning of a long and painful assent to a real company. Now, the idea is important and if your Wunderkin actually built the silly thing or has a bunch of patents on it, then he deserves a little more equity. If it’s just an idea, then that’s just like a contact that’s not converted. Ideas do change over time and once you get a bunch of smart people working on a problem, that great idea will have morphed into something completely different.

Tip: Sweat equity requires some sweat. Ideas are great but something tangle is far better and should be rewarded.

Scenario #5: Delivered The Goods

Sometimes you get a founder that actually built something, got some sales and now needs to take it to the next level. These founders will have a huge vested interest in retaining more control then the “new guys.” This is just human nature, so don’t take it personal. The best way to handle this is to clearly state what everyone brings to the table. If the IP or product is really going to be part of the venture, then it makes a lot of sense to give that founder more. The problem will be in how much the IP or product is really worth. Those discussions can be contentious since human nature being what it is will mix some ego into the negotiations. Resist going down that path.

Tip: Take a hard look at contributed IP or products. Do a detailed evaluation on what it’s worth and agree with your fellow founders on how much equity you will give up for it.

Scenario #6: Hangers On

It’s also inevitable that your new whiz bang idea will attract people who think they can help you and really can’t. Or even worst, the people who could help but are either too distracted, too busy or just too lazy to step up. These hangers on will make splitting equity a challenge since they will expect far more than they actually contributed. The best way to deal with this is to gather up your real contributing founders and chat about how to handle your hangers on. A unified front will make the arguments on why they want more equity end quickly. You do need to be cautious since the “forgotten” founder problem can give you a major headache in the future. So, unless they really did nothing, you should give them a little something just to hedge your bets on future claims.

Tip: Get your real contributors together and discuss how to fairly deal with hangers on.

Scenario #7: The Mashup

Take all of the above scenarios, stick them in a blender and then hit liquify. The resulting mush will probably resemble your situation more than anything else. Every situation is different and having a formula or method that works for everyone will be hard to achieve. In general, you need analyze the situation from both a business and fairness perspective. Doing this will make the process a little less crazy and a lot more productive. In addition, there are a couple more guidelines that seem to work well. These include:

1. Founders agreement: Writing down the deal between founders is a great way to avoid the challenges of equity distribution. If you have triggers or vesting rules, put those in as well. Everyone should know what they are getting into.

2. Don’t incorporate right away: One problem with starting a company is that you really don’t know if it will work out. You also don’t know if these new founders will actually do what they say. That’s why it’s important to get your team to put in a little work up front to achieve some sort of milestone together. This way, you can vet the founders while getting something done.

3. Be fair and transparent: Treating everyone fairly is important. Part of being fair is to be as transparent as you can about how performance will be evaluated and equity distributed. If the goals are clear and the decisions are transparent, then things should go fine.

4. Sweat Equity to Founders Stock Conversion: Most founders choose to convert all that sweat equity into stock via some conversation factor. Whatever that factor is, make sure that it’s consistent and that the hour tracking is agreed upon. It usually better to do it based on some tangible work product rather than total hours spent since some people are slower than others. A good rule of thumb is to have everyones rate (dollars per hour) be the same and then have some sort of percent conversion after all the hours are added up. Better yet, setup milestones that earn certain equity percentages. Either way, make sure you write it down.

Founding a company is fun. Splitting the equity can be a nightmare. Take the time to think about each founders contributions and take a step back to really deal with what is fair and equitable. In the end, dealing with dividing your founders equity up front and transparently will set up your new venture up for success.

Additional Resources

• Neat tool on how to distribute equity.

• Venture Hacks Article on How to Fire a Founder

This post was inspired by the questions under the equity tag over at Answers OnStartUps

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How to Divide up Founders Equity originally appeared on The Daily MBA on February 13, 2010.

Maybe it has something to do about the price of the acquired knowledge. This part is particularly well stated:

“That’s the ironic part. If you had had to pay for this advice — if you had laid a cool three grand on the table and received this marketing plan in return — you would damn sure have put at least some of it into action.”

I guess I need to get my act together and start applying all this great advice.

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Copyblogger: Is Reading Blog Posts Worth Your Time originally appeared on The Daily MBA on February 10, 2010.