Business & Management Structure
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Business plans describe the business structure, which includes who will own the business and the company’s legal status. Business plans also describe the management structure, that is, who will run the company and what roles they will play. Determine who else you wish to include in your founding team. To develop an excellent business rapidly, try to attract a talented and diverse team, one that is capable of doing what is needed.
Business Structure
The business model you choose will define who owns the company, what legally defined structure you will follow, the effect on taxes, and your personal liability for business debt. Most startups choose the structure of a corporation eventually, but many start as a limited liability company (LLC). Both protect the founders from lawsuits against the business.
(Entrepreneur, 2023; Leonard, 2015; SBA, 2023)
LLCs vs. Corporations:
Limited Liability Companies (LLCs)
LLCs protect personal assets from liability while passing profits and losses to your personal income tax, thus avoiding corporate tax rates. LLCs are often used for startups, especially initially. LLCs can also have tax advantages for individual investors.
Corporations
Corporations are separate, legal entities owned by shareholders and guided by a board of directors. Corporations offer the strongest protection from personal liability but cost more to form. The types of corporations most often used for biotech companies are . . .
S corp – A type of corporation with some tax advantages. Profits and losses pass to the owners, which avoids corporate tax rates. There are some limitations on stockholders and class of stock issued.
C corp – This is the standard form of corporation. Owners or shareholders in the business are taxed separately from the business. Income tax is paid at the corporate level, and shareholders pay taxes on the profits distributed as dividends. C corporations have fewer restrictions on ownership and stock options than S corporations.
Management Role
Decide what role you will play and who will be the founders and key personnel. Before taking on an executive role, consider whether you have executive experience, how well it went, and whether you could commit a lot of time (potentially unpaid initially, beyond typical business hours, and during crises). Note that some academic institutions do not allow their researchers to take on executive positions in companies arising from their research. You could choose to focus on any of the following business roles or focus on science and leave running the business to others.
(Heaslip, 2021; Investopedia, 2022)
Potential Role Choices:
Founder
Founders are engaged in starting the business. If this is your only role, after founding the company, you would hire someone to fully develop the technology and run the business. This would free you up to continue a research or academic career or to start another company.
Chief Investigator/Chief Science Officer (CSO)/Chief Technology Officer (CTO)
As CSO/CTO, you would run the business’s research and development.
You could also play a less active role by being on the company’s scientific advisory board and remain in academia.
Chief Executive Positions (CEO, COO, or CFO)
- Chief Executive Officer (CEO) – Highest-ranking position, reports to the board and maximizes the business value by focusing on long-term aspects of the business and setting future strategies. It is important to fill this position early.
- Chief Operations Officer (COO) – High-ranking position, maximizes business value by focusing on current operations.
- Chief Financial Officer (CFO) – High-ranking position, strengthens business value by using financial data to generate insights needed to make decisions.
References
Entrepreneur. Business Structure Terms | Small Business Encyclopedia. Entrepreneur. March 3, 2023.
Heaslip E. Executive Job Titles: What Do They Mean?. US Chamber of Commerce. March 8, 2021.
Bloomenthal A. What is the C Suite?: Meaning and Positions Defined. Investopedia. July 25, 2022.
Leonard MJL. Choice of Entity for Biotech Startups. San Diego Corporate Law. November 9, 2015.
SBA. Choose a business structure. Small Business Administration. Accessed March 6, 2023.
Tips
Invest in a lawyer with a sound understanding of corporate law when you incorporate rather than using a less costly one who specializes in something else.
When you select managers, be sure to consider the opportunities available for women-owned businesses (defined as being more than half owned and managed by one or more women).
Your business structure affects what taxes you will owe.
You may switch your business structure later to gain different advantages.
Although it may be possible to incorporate without an attorney, they can help you avoid costly mistakes.
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Roles You Can Play in the Business
Board of Directors
Select a Business Structure
Challenge:
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Cofounders and Partners
As you plan your company, decide whether you want to be the sole founder or have cofounders or partners. Consider who else you want on your founding team.
Pros and Cons of Cofounders and Partners
The right partner(s) and team can free you from having to know or do everything. The wrong partner may not supply what you need or may even limit your progress. Most experts on entrepreneurship recommend having cofounder(s) or partners, but they warn that you should choose them wisely.
What to Learn About Potential Cofounders/Partners Before Committing
- Make sure you share goals and values.
- Look for compatible work styles, business philosophies, visions, and ethics.
- Decide who will be considered a founder and how much equity you should each get.
- What connections and potential sources of money do they bring?
- What other commitments do they have?
- Agree upon responsibilities and time commitments.
- How much salary do they need, and can they defer it if needed? Are they financially stable?
- What would lead them to leave the partnership?
- How do they deal with problems and handle stress? Make a plan for conflicts that are not easily resolved.
- How long did they stay at their jobs, and what accomplishments do they have?
(Gascoigne, 2018)
Reference
Gascoigne Adriana. Tech Boss Lady: How to Start-up, Disrupt, and Thrive as a Female Founder. Seale Press. October 9, 2018.
Dividing Equity Among the Founding Team Members
Be sure to talk with each member of the founding and executive team about equity distribution. The proportion of equity is typically determined by the value an individual brings to the business and includes consideration of . . .
- Who had the business idea.
- Who did the work.
- The extent of each person’s involvement after the inception of the business.
- Value added to the business by a scientist’s or executive’s reputation for past work.
(Krawczyk, 2023)
Work out these details early with a lawyer. Plan carefully so that founders are left with some equity despite dilutions from investors.
Reference
Krawczyk R. How to split equity amongst founders? (Updated in 2022) | RST Software. RST. 2023.
Tips
Keep in mind that investors look for a management team that can implement the business plan.
Make sure you can see yourself working intensely with a potential partner for several years.
Look for partners and management who have the same vision and goals for the business.
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Cofounders, Partners, and Founding Team
Challenge:
Instructions: Please review this transcript of an interview with a potential business partner (fictional) and rate how much you would like them as a partner. Submit your response to compare your answer to that of others.
What goals and values are most important for you if we partner in this business?
I put the success of the company above all else, except for my health and my life partner.
Please tell me about your work style and business philosophies.
I will work 12 to 18 hours a day for a few years and expect the same from my partner.
How many founders are you willing to have and how much equity do you think we should each get?
If we do this, I don’t want any other founders and want equal equity with you.
What connections and potential sources of money do you bring?
I don’t have financial resources to contribute, nor any connections with money. But you can count on me being knowledgeable about how to get SBIR funding.
What other commitments do you have?
I have a life partner who is on board with me committing to this partnership, but I will consider their wishes before making further commitments. Other than that, this company will be my top priority.
What responsibilities and how much time can you commit to at this point in time?
I think we can work all that out later as we go.
Are you financially stable and secure enough that you can defer a salary if needed?
I can defer a salary for up to a year and expect you to do the same if we need it for the company to survive.
What would lead you to leave the partnership?
Anything unethical or if you do not fulfill your part of our agreement.
How do you deal with problems and handle stress? What do you propose for conflicts that are not easily resolved?
I give the most effort to the most important problems. To avoid conflict, I think it is important to have good communication. I would really listen to my partner and try to see their point of view. If we cannot work it out, we could engage the help of a neutral third party.
How long did you stay at your jobs and what accomplishments do you have?
I have jumped around every year or so in different biotech companies and different types of positions, to gain a broad understanding of the industry.
Question:
