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Flashcards in Unit 3 Deck (26):
1

What is Proof of concept?

Evidence that a technology, product, business model or idea is feasible
2 types of POC:
1) Technology or product POC
2) Business model POC

2

Proof of Concept Scale

1. Working Prototype
2. Letter of Intent for Beta Test
3. Final Product
4. Purchase Order
5. Customer Sales

3

Entrepreneur’s Micro Strategy for Proof of Concept consists of three primary elements

1. Outcomes: near-term goals the entrepreneur is attempting to achieve
2. Assets: human, social, physical, and financial needed to achieve the desired outcomes
3. Actions: tasks entrepreneur must undertake to achieve the necessary outcomes

4

Micro Strategy Decision Making Points:

-Today’s environment necessitates a greater use of intuitive decision making.
-Avoid potential failure points by conducting a premortem.
***Common failure points:
1) Pattern recognition bias (“We always do it that way”)
2) Overly optimistic forecast of markets

5

Benefits of Proof of Concept with a Prototype:

1. Entrepreneur develops clear understanding of customer needs.
2. Changes can be made early in the process when they are less costly.
3. The prototype reduces the risk of failure

6

Proof of concept with purchase orders and customer sales tip:

Customers that pay up front save company on inventory costs and fund manufacturing costs.

7

Name the Investors Interests:

Rate of growth
Return on investment
Degree of risk
Degree of protection

8

Name the Bankers’ & Lenders’ Interests:

- Company margins and cash flow projections
- The amount of money needed
- The kind of positive impact the loan will have on the business
- The kinds of assets the business has for collateral
- How the business will repay the loan
- How the bank will be protected if the business does not meet its projections
- The entrepreneur’s stake in the business

9

Name the Strategic Partners’ Interests:

- Licenses for manufacturing and assembly
- Supply of raw materials in exchange for equity interest
- Formal or informal partnership agreements

10

Components of Business Plan:

Executive Summary
The Business
Founding/Management team
Industry/market analysis
Product/service development
Operations plan
Organization plan
Marketing plan
Financial plan
Growth plan
Contingency plan & harvest strategy
Timeline to launch
Appendices
Endnotes

11

Financial Plan Components:

1. Complete set of financial statements:
Statement of cash flows
Income statement
Balance sheet
2. Key ratios to gauge progress
Current ratio
Profit margin
Return on Investment (ROI)
Inventory turnover

12

Mistakes in Developing the Business Plan:

- Projected rapid growth that requires capabilities beyond those of the founding team
- Envisioning a three-ring circus with only one ringleader
- Reporting performance that exceeds industry averages
- Using price as a market strategy for a product/service
- Not investing capital in their own businesses

13

Answering Questions Tips:

- Investors like to ask what they already know the answer to.
- Trick questions are likely.
- Don’t be afraid to not know the answer.
- Founding team can join the CEO for questions.

14

Name the different Legal Forms of Organizations:

Sole Proprietor or Partnership
LLC - S Corporation
Nonprofit - C Corporation

15

Advantages & Disadvantages of Sole Proprietorships:

Advantages:
Easy and inexpensive to create
100% of ownership + profits stay with the owner
Complete decision making authority for the owner
Income is taxed only at the owner’s personal income tax rate
No major reporting requirements exist

Disadvantages:
Legal and tax ramifications:
Owner has unlimited liability for all claims against the business-all debts must be paid from the owner’s assets.
Difficult for the owner to raise debt capital.
Survival of the business depends upon the owner.

16

Advantages & Disadvantages of Partnerships:

Advantages:
Same advantages as sole proprietorships
Shared risk of doing business
Shared partner clout with multiple financial statements
Shared ideas, expertise, decision making
Partners receive pass-through earnings and losses taxed at their personal tax rates.

Disadvantages:
Partners are personally liable for all business debts and obligations.
Individual partners can bind the partnership contractually.
Partnership dissolution results when a partner leaves or dies (unless otherwise stated in partnership agreement).
Partners can be sued individually for the full amount of partnership debt.

17

Corporation (U.S. Supreme Court Definition)

“An artificial being, invisible, intangible, and existing only in contemplation of the law.”

18

Powers of Corporations include rights to:

Sue and be sued
Acquire and sell real property
Lend money

19

Owners rights of Corporations:

As stockholders they invest capital in exchange for shares of ownership
No liability for corporation’s debts
Can only lose the money they invest

20

Advantages of C-Corporation:

Limited liability for owners
Capital can be raised through sale of stock
Ownership is transferable
Enjoys status and deference in business circles
Employee access to retirement funds, defined-contribution, profit-sharing and stock option plans
The entrepreneur can hold personal assets which can be leased back to the corporation for a fee

21

Disadvantages of C-Corporation:

More complex to organize
Subject to more governmental regulation
Cost more to create
Stockholders do not receive benefit of losses
Ownership control passes to the board of directors

22

S-Corporation:

Not a tax-paying entity
Has largely been replaced by the LLC (Limited Liability Company), a more flexible form
May have no more than 100 shareholders who must be U.S. citizens or residents
Profits & losses must be allocated in proportion to each shareholder’s interest

23

Advantages & Disadvantages of S-Corporation

Advantages:
Business losses can be passed through for taxation at entrepreneur’s personal tax rate
Avoids double taxation of income

Disadvantages:
Not a favorable option if there is desire to retain earnings for expansion or diversification
No deductions on medical reimbursements or health insurance plans

24

LLC (and PLLC, etc)

Licensed service professionals’ corporation organized to provide their services

25

Two distinct hurdles for nonprofit operation and tax-exempt status:

1. Must meet state requirements for being designated as a nonprofit corporation and operating as such in a given state

2. Must meet the federal and state requirements for exemption from paying taxes by forming a corporation that falls within the IRS’s narrowly defined categories

26

Choosing the right Legal Form at each milestone:


Know the strategic plan from the outset.
Know the possibilities for changing legal form.
Know the expected capital and liquidity needs.
Know the tax implications for owners and members.