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28
Sep

Project Management Tips for Launching a Startup

The goal of growth-oriented entrepreneurs is, or should be, the creation of a sustainable business that will survive, thrive and grow.  However, the reality is that the first few weeks and months often look more like an intense project management exercise focused on getting things up and running smoothly, getting a viable initial version of the product or service out the door and laying the foundation for the next step.  Acknowledging this means that some of the following “project management tips for launching a startup” offered by Rocheleau, originally intended for web designers but applicable to many other types of startups, can be extremely practical and valuable: 

  • There will always seem to be more things to do than there are resources and time to do them and this means that special care must be taken to select the essential tasks that need to be completed before venturing into other areas.
  • While creating a detailed business plan may be difficult at the startup stage, entrepreneurs must nonetheless invest adequate time and effort into identifying a target market share and setting some solid goals with respect to what the business hopes to achieve during the startup phase.
  • Set aside time to engage in marketing and branding every day from the very beginning including a concerted effort to find where prospective customers congregate in the online world and spreading the word about the company’s new product or service.  Don’t wait for them to find you—go out and grab their attention and curiosity.  Make sure that a healthy balance is struck between “nitty gritty” development work and outreach into the customer community.
  • While many companies swear by just getting the product “out there” and then relying on customers to help with fixes, the better course is often to be sure that every step of the development process is 100% focused on making sure that fundamental features are done well and provide immediate value without the customer having to wait for a subsequent version.  At the same time, care must be taken not to get bogged down in minor pieces of the new product that will take a long time to “get right” and don’t really have a large impact on the customer experience.
  • All products and services, regardless of complexity, begin with small and manageable pieces.  Prior to launching the new company, sit down and collect all the ideas regarding possible features and make sure they are recorded somewhere for easy access.  Then, select a handful of the most important and start with those, making sure they can be completed in a relatively short time frame to keep momentum going.  In other words, strive to do what Rocheleau referred to as "breaking down larger ideas" and remember that if a reasonable timetable for completing a feature is more than a week or 10 days it might be a good idea to take a closer look to see if the team is being asked to do too much.
  • Before things get started try and put together a competent team that can work together smoothly to accelerate the completion of all the initial steps mentioned above.  This will save time and facilitate scaling of the business; however, in order to for all this to work the founders need to understand and apply best practices for team management.
  • In addition to focusing on the initial development activities and marketing and branding, growth-oriented entrepreneurs need to keep an eye on where they want the company to be 12 to 24 months down the road and establish plateaus that represent validation of the development efforts and acceptance in the marketplace and stable launching pads for the next phase of growth.  While “stability” seems at odds with “disruption”, startups that can get to a point where they can “catch their breath” will have a much greater chance at achieving long-term success.
  • As mentioned above, offerings to customers should be complete and as close to “bug free” as possible; however, achieving those goals should not derail the company from working in quick development phases that get the offerings out into the market so that badly needed feedback can be gather quickly and changes in course can be made before too much time, capital and enthusiasm is wasted.  As long as the offering has a solid set of core features, customers will generally take the time to contribute ideas and thoughtful criticism that they hope will lead to a new version that will be even more useful.  Be sure to supplement the data you collect from your own users with research on how the market seemed to receive similar features from other firms.  It makes sense to try and learn from the mistakes of others.

Source: J. Rocheleau, “Project Management Tips for Launching a Startup”, Web Design Ledger (blog), August 1, 2012, http://webdesignledger.com/tips/project-management-tips-for-launching-a-startup [accessed July 3, 2015].

 

 

 

24
Sep

Law Firm Policies and Procedures

Law firms, like any other business, must establish policies and procedures that govern a wide range of matters and activities.  This month's report includes some suggestions about the policies that might be needed on issues such as associate performance evaluation, diversity and pro bono activities.

21
Sep

Google to Alphabet: An Ambitious New Conglomerate Experiment

In August 2015 Google Inc. announced a dramatic and sweeping change in its organizational structure: Google would become one of several autonomous subsidiaries of a newly-formed holding company named “Alphabet”.  The restructuring would separate, at least on paper, the company’s wildly successful search business, which was quite profitable and generated significant amounts of cash, from a handful of other initiatives focusing on ambitious and difficult problems such as developing a driverless car and life-extension technology.  While the company’s efforts outside of the search business had attracted a good deal of publicity and scrutiny, they were far from profitable and quite risky.  The company’s founders, Larry Page and Sergey Brin, argued that by putting Google and the other businesses into separate subsidiaries, and forming new subsidiaries for other businesses the company launched or acquired in the future, the operations of the entire company could be made cleaner and more accountable and they could avoid getting too “comfortable”, relying on incremental changes, and continue to pursue the revolutionary ideas that would drive the new growth areas that Alphabet needed to stay relevant.  According to Page, “Alphabet is about business prospering through strong leaders and independence”, and Page explained that each subsidiary would have a strong CEO and that the role of the founders would be to “rigorously handle capital allocation and work to make sure each business is executing well”.

Initially the portfolio of Alphabet subsidiaries would include Nest (smart homes), Fiber (affordable and super-fast Internet and cable television for consumers), Calico (life-extension technology), Google X (drones and self-driving cars), Sidewalk Labs (new technologies to improve urban life) and Google Ventures and Google Capital (early and late-stage investments) apart from the Google subsidiary itself, which would still have a sprawling mandate covering search, apps, Android, You Tube, ads, maps and technical infrastructure.  The company enjoyed a modest bump up in its market capitalization after the restructuring was announced and, not surprisingly, the move was subjected to a high level of scrutiny and analysis.  An article in The New York Times written just after the announcement of the restructuring noted that many pundits had been struck by the decision of the company’s founders to create what amounted to a “conglomerate” and set out to explore what the experiences of three well known 20th century conglomerates—Berkshire Hathaway, General Electric (“GE”) and AT&T/Bell Labs—might tell us about what could be in store for Alphabet and some of the issues that Page and Brin will likely need to address. 

Berkshire Hathaway has been guided for decades by Warren Buffett, who has made himself one of the wealthiest people in the world and turned his company into one of the most valuable in the world through a continuous stream of acquisitions of businesses in a wide array of industries and markets. While insurance is the largest sector in the Berkshire Hathaway portfolio, Buffett has also been willing to place bets on mobile homes, private jets, Heinz ketchup, Duracell batteries and aerospace parts.  One of the apparent similarities between Berkshire Hathaway and the proposed Alphabet structure is the practice, rigorously followed by Buffett, of providing management of the various businesses with broad discretion to manage day-to-day operations.  In fact, Buffett keeps only 24 employees in Berkshire Hathaway’s corporate office in Omaha to watch over businesses that employ 340,000 people worldwide.  A key difference, however, is that Berkshire Hathaway’s portfolio of businesses was carefully culled to emphasize companies that were “well established, with proven models for profitability, at favorable prices” and which were based on proven and/or reasonably projectable business models.  In fact, Buffett rarely invested in businesses that represented large bets on a particular technology.  While Page and Brin promise Buffett-like autonomy for the Alphabet subsidiaries, for now at least they will all be seeking to create products and services that do not exist and for which the markets are far from certain.  As such, Alphabet shareholders cannot expect the same sort of smooth ride that Buffett has provided to his investors, especially since nobody can credibly predict the outcome of the innovative activities the subsidiaries will be undertaking.  There is the possibility that Page and Brin will fold established businesses into future subsidiaries, as Buffett has done, but this would clearly be a radical see change from where they were at the time they announced the restructuring. 

The initial similarities between GE and Alphabet follow from the diverse range of technologies and businesses that GE has been involved with since the company was launched with the help of Thomas Edison.  GE researchers, designers, manufacturers and marketers have played an innovative and pivotal role in the development, improvement and commercialization of light bulbs, locomotives, X-ray machines, electrical appliances, radios and televisions, fiber optic cables and M.R.I. body scanners, to name just a handful of the technologies that bear the imprint of GE.  The businesses of the initial Alphabet subsidiaries—for example, search and driverless cars—are certainly as different as light bulbs and locomotives; however, for Alphabet to be able to tap into GE’s secret formula it will need to find a way to make its various business lines stronger under the Alphabet umbrella than they would be standing on their own.  GE did this by maintaining a strong organizational culture among independently operated businesses by creating and vigorously guardian linkages between the businesses and the people that worked in them that benefitted everyone.  GE was also adroit at leveraging a centralized research and development capacity to create and disseminate technologies that could be applied across a range of businesses (e.g., laser technology developed by GE researchers was used by business units active in medical devices and telecommunications).  The question for Alphabet, as posed in the article: “… is whether it becomes a centralized innovation machine or a bunch of separate projects that happen to have the same corporate parent but not much else in common. Can it make its various initiatives more than the sum of their parts?” 

AT&T/Bell Labs aligns well with Alphabet’s aspirations for successfully solving difficult and life-changing technological problems.  Just as Alphabet can reasonably expect to generate significant revenues from the Google search business, AT&T could rely on a continuous stream of cash from its position as the monopoly provider of telephone services in the US.  In 1925 AT&T set up Bell Labs as a free-standing research unit and over the next 70 years Bell Labs, using money provided by AT&T, was a preeminent center of basic research that developed technologies that were central to a wide range of inventions including the transistor, the laser, communications satellites and solar cells.  It was not always clear that AT&T shareholders benefitted significantly from the work done at Bell Labs, particularly when the work was basic research that was accessible to other companies; however, the parent company’s support of Bell Labs was not overly concerning to its shareholders as long as the profits coming from the monopoly continued to pour in.  In other words, there was plenty to go around.  The profits from Google might serve a similar purpose within Alphabet: a lot of the research in the relatively new and unknown fields occupied by the other subsidiaries is essentially “basic”.  The  founders will need to strike the appropriate balance in allocating Google-generated profits and will need to be mindful that while Google is strong in search right now there are no shortage of competitors and regulators around the world clearly have reigning in Google’s actual or perceived monopoly on their agendas. 

Google and its founders are not strangers to being compared to iconic businesses frm the past.  For example, in a December 2014 article in The New Yorker, Lemann described some parallels between the “pre-Alphabet” Google and General Motors (“GM”) in its early days.  First, both Google and GM accelerated their growth paths through aggressive acquisition of small companies that provided technology and, in the case of Google, large crowds of users that could be usefully integrated into their larger businesses.  Second, Alfred P. Stone, GM’s iconic leader from the early 1920s, foreshadowed Google’s fixation on “the user” by offering a range of styles and prices for consumers that allowed GM to tap into the subtleties of demand rather than relying on the on-color, one-style and one-price approach used by competitors such as Ford.  Third, Sloan, Page and Brin were all in agreement that they oversaw “engineering” companies.  Finally, the three men also shared a hunger for pursuing high-risk, high-reward projects that flew in the face on the demands for short-term earnings and profits that came from the investment community.  Lemann noted that Sloan actually launched a technical center that looked a lot like something one would see in Silicon Valley decades later, complete with what Sloan called “fine cafeterias”, and implemented programs that tied managerial compensation to the performance of GM stock. 

The Google to Alphabet restructuring was welcomed in many parts of the investment community as a means for achieving more transparency about the financial situation of the company’s “Hail Mary” businesses.  Presumably reporting profits and losses for each of the subsidiaries, as well as the transfers of capital between subsidiaries, will make it easier for investors to understand how the Alphabet portfolio approach is working.  Interestingly, this is another area where Page and Brin are making moves similar to those made by Sloan after he had completed his own “organization study” of GM to find ways to address financial and administrative chaos left by his predecessor.  Sloan was one of the pioneers of new organizational design techniques and decided that the best approach was to establish autonomous divisions based on “product lines” (e.g., Chevrolet, Buick, Cadillac etc.), each of which would have its own president and operating budget.  As autonomy was being disbursed among these new business units the headquarters office would, much like the parent company in the Alphabet structure, monitor performance of the divisions and take the lead in providing specialized services that all of the divisions might need at some point such as finance and research.  While the reorganization at GM did distribute large numbers of employees into different groups, Sloan remained mindful of the advantages of commonality and implemented uniform training and supervisorial programs overseen by professional managers to improve and maintain productivity and instill in all of the employees a sense that they were valued contributors to a larger endeavor that bound all of the divisions together. 

It is fair to suggest parallels and similarities between the initial visions and promises for Alphabet sketched out by Page and Brin and the positive experiences of Berkshire Hathaway, GE and AT&T/Bell Labs; however, Page and Brin will continue to face the classic tradeoffs between doing what is best in the short-term for shareholder value and making long-term bets on extremely risky innovation.  Doubling down on big ideas is not new for the company—it’s already made big investments in the businesses that will be operated in the new subsidiaries and the company’s organizational culture has always included explicit permission for employees to set aside time to work on personal projects.  But, the restructuring invariably changes the entire picture and some of the things that will be watched closely as the Alphabet experiment begins are the following: 

  • Loose supervision, lack of formality and “ship and iterate” have been mainstays of Google’s organizational culture and managerial practices since the very beginning.  All of this obviously worked very well as the core business grew and prospered; however, maintaining some semblance of order has become a higher priority and the restructuring likely represents an effort to clarify who does what and how decisions will be made.  It is imperative that the found clearly and cleanly demarcate the boundaries of the businesses and construct the links between them that will facilitate communication and tap into the value of having small groups collaborate to solve mutual problems.
  • While Alphabet enjoys substantial cash reserves built up from Google’s past successes, Google’s path remains crucial to the progress of all of the businesses until they reach a point where they can sustain themselves on their own and attract investor capital independently without the search business being offered as collateral.  Google is under a lot of pressure to keep users engaged, which means finding ways to continuously add new users, more information, new reasons to engage with Google, and new search features.  To be determined is whether or not Google will need to continue its strategy of acquiring small companies, most of which have been unprofitable or barely profitable, at obscene valuations in order to maintain the growth path of audience share and/or applications that will help keep existing users from straying.
  • While the ambitions of the founders are clearly sprawling, doubts have been raised about the company’s ability to internally develop groundbreaking new products and critics have often pointed out that the products that have been most successful for the company—Page Rank and AdWords, YouTube, Google Maps and the Android operating system—came into the fold through acquisitions.  All of this raises questions about the value that the “parent” can provide to its subsidiaries apart from cash and close attention will be paid to how delegation and autonomy is handled.  Early indications were that the founders were indeed committed to selecting strong CEOs for the subsidiaries and following the approach they took after acquiring NEST of leaving them alone to carry on with what had worked well in the past.
  • All of the letters in Alphabet, perhaps none more so than Google, will operate in a turbulent external environment that is rapidly changing and populated by competitors and stakeholders from all over the world.  Google must fend off threats to its market dominance, which is solidly but tenuously based on its intellectual property, and appears to be destined to decades of arm-wrestling with regulators.  Google cannot reasonably expect to fend off the rise of large competitors in the search area in enormous markets such as China.  One must wonder how much time the founders will have to divert their attention from the Google business.
  • While an “alphabet” implies order, the letters can be moved around to form new words and letters can be added and subtracted.  Will the founders add new areas and challenges to their list and, if so, how will those be supported and how will that impact other pieces of the structure.  Will the founders follow the path of Bell Labs and throw money at basic research to generate ideas to refresh the structure?  What will be the growth and exit strategies for each of the subsidiaries: spinoff, public offering, alliances or what?
  • A uniform culture is difficult to maintain even when employees remain in close proximity but in different buildings spread out among several locations.  While the founders see Alphabet as a noble pursuit to better many parts of our world, it will be difficult to create and maintain an Alphabet organizational culture that will provide the foundation for collaboration and communication. The burden falls heavily on the founders to make this happen.  Will that culture track the early days of Google?  Difficult to see that given that company is now much larger and those who have stayed on and become managers have graduated to middle age.  Moreover, identifiable sub-cultures will like emerge in each of the businesses in the subsidiaries.
  • Google, like many other modern companies in the technology space, lacks the social vision that bound employees to their companies for decades and organizational culture must be built in an environment in which both the company and its employees do not expect that employees will remain with the company for long and both side will do what is best for them in terms of economic efficiency.  As such, work-life balance has seemingly not been a priority at Google and the line from the Google evangelists has been that employees get to focus on things that are so interesting and meaningful that they rarely see any of it as being “work”.  Smart people come there to work with other smart people, experience what they need for themselves, and then move forward on their own.

The questions and challenges above are specific to Alphabet and its founders; however, all growth-oriented entrepreneurs should recognize a universal set of imperatives that apply regardless of the size and scope of the enterprise: striking the proper balance between autonomy and collaboration across businesses, managing formality and establishing and maintaining the “parenting value” to be provided by headquarters and the founders, maintaining a lazar focus on the core business and competitive advantage, guarding tested values and norms of the organizational culture while skillfully executing appropriate acquisitions of technologies and human resources and allowing sub-cultures to emerge and flourish, continuously scanning the external environment, making sure that the customer’s expressed needs rather than founders’ notions of how their lives should be remain the focus of product development, tracking and appreciating legitimate concerns about the social impact of the products being incubated, and forging a social contract with knowledge workers which respects and meets the needs of both sides.  

Sources for this article included J. Yarow, “Google just announced a massive overhaul of its business structure”, Business Insider (August 10, 2015); N. Irwin, “Alphabet, Viewed Through the Lens of 3 Companies”, The New York Times (August 12, 2015), B3; L. Page “G is for Google” (blog post to employees and investors at https://abc.xyz/); and N. Lemann, “When G.M. was Google”, The New Yorker (December 1, 2014), 76.

17
Sep

Documenting Complex Capital Structures in Articles of Incorporation

The chapter on Articles of Incorporation in Business Transactions Solution (BTS §§ 31:1 et seq.) covers the decisions and procedures relating to the preparation, execution and filing of the articles of incorporation of a general business corporation and amendments to such articles that may be approved by the board of directors and shareholders after the corporation is formed. 

If the principals have had an opportunity to consider the structure for internal governance of the corporation, the articles of incorporation may well reflect these decisions and include detailed provisions relating to the powers and actions of the directors; the various rights and preferences of the authorized stock (e.g., terms of preferred shares); and certain matters relating to the shareholders (e.g., preemptive rights, transfer restrictions). See BTS Master Form at § 31:61.

Drafting the articles of incorporation for a corporation with a complex capital structure that includes both common and preferred shares requires a lot of care and attention. The first step is to collect certain general information relating to the preferred stock such as designating the name for each class of stock to be issued (e.g., common stock, preferred stock or class a preferred stock); determining the number of shares to be authorized in each class; determining whether any limitations will be placed on issuance of each class of stock; determining whether stock will be issued in series; determining differences among classes and series relating to rights, preferences, privileges and restrictions of each class or series; determining whether the board of directors will have the right to fix rights, preferences, privileges and restrictions of any class or series; determining whether the board of directors will have the right to increase the size of the issue; and determining whether the board of directors will have the right to issue other classes of preferred stock, junior or senior.

Once these questions have been answered attention should turn to the specific rights, preferences and privileges of each series of preferred stock, making sure that the relative rights of multiple series have been considered and balanced. Issues to consider include dividend rights, including amounts and timing of payments, whether dividends will be cumulative or noncumulative and whether a particular series will have a preference as to dividends over other series; voting rights, particularly the right to votes as a separate class or series on specific matters such as mergers, sales of assets and issuance of new shares; rights on liquidation and dissolution, including preferential rights to liquidating distributions; conversion rights, including mandatory conversion into common stock upon the occurrence of certain events (e.g., initial public offering); and redemption procedures, including the rights of the company to require redemption and/or the rights of shareholders to require the company to redeem their shares. It is customary to also include protection provisions for preferred stock such as restrictions on changing the terms of issued preferred shares with approval of a stated percentage of such shares, prohibitions on the creation of any stock issue on parity with or senior to the outstanding preferred shares, and requirements for obtaining approvals from a stated percentage of preferred shares in order to consummate specific corporate actions.

Common examples of complex capital structure include the following:

  • Common shares, typically issued to the founders and employees of a corporation, and an initial series of preferred shares, typically referred to as “Series A”, to investors participating in the corporation’s initial round of outside equity financing and requiring the full range of economic and voting rights described above. See BTS Specialty Form at § 31:149
  • Common shares as above and multiple series of preferred shares (i.e., Series A and Series B) issued in multiple rounds of financing to outside investors. See BTS Specialty Form at § 31:147
  • Common shares as above and an initial series of preferred shares with limited voting rights and no special economic rights, a structure that might be used when investors have purchased convertible notes and demand the voting preferred shares as a means for participating in management control of the corporation until the notes are converted upon closure of a traditional equity financing round. See BTS Specialty Form at § 31:149.70.
  • Two classes of common shares with one class being issued to the founders and having super voting rights (i.e., 10 or more votes per share) and the other class with regular voting rights (i.e., one vote per share) being issued to employees and consultants and to outside investor upon conversion of preferred shares that might be issued to them in the future, a structure that is designed to ensure that the founders maintain the right to control key decisions regarding the corporation made at the stockholder level. See BTS Specialty Form at § 31:149.30

 BTS materials cited above are available to Westlaw Next subscribers.

14
Sep

Work-Life Balance Programs: Challenges and Opportunities

In an op-ed article appearing in The New York Times in August 2015 Weisberg discussed a “new raft of ‘perks’” announced with great fanfare by private equity firms and well-known businesses such as IBM, Facebook and Apple that have been framed as an effort to accommodate the needs of working mothers and women who want to be mothers and maintain their fast-paced career paths.  Working women with newborns now have opportunities to have their companies pay for both their baby and a nanny to tag along on business trips during the first year after the baby is born and companies are also willing to ship home breast milk pumped on a work-related junket.  Companies have also implemented programs for reimbursement of costs incurred by employees who want to freeze their eggs so that they concentrate on their jobs but keep open the option of getting pregnant in the future.

While Weisberg conceded that progress has been made on providing support for working mothers, she pointed out that while most married workers are dual-income couples, a majority of business leaders, about 80% of whom are men, are not significantly involved in providing care for their children and are able to rely on spouses who do not work full-time outside of the house.  Weisberg argued that this situation makes it difficult for male business leaders to understand the multiple roles that most of their employees, particularly women, have to fill it they want to have and support a family and advance and thrive in their careers.  Research showing that giving power to people reduces their ability to appreciate the perspective of others only exacerbates the problem.

Weisberg described several surveys that illustrate the challenges associated with effectively implementing work-life balance policies.  For example, a survey of over 1,000 men and women in various stages of their careers conducted by Bain & Company uncovered “a deeply ingrained ‘ideal worker’ model” in which the most important characteristics for promotion were “maintaining a high profile in the organization, and an unwavering commitment to long hours and constant work.”  As for stubborn adherence to traditional gender roles, while 51% of the respondents in a Pew research survey believed that children were better off if their mother stayed home to care for them, just 8% of the respondents said that children would be better off if their fathers stayed home.  Another study of close to 1,000 male managers found that “men in traditional marriages are more likely to have negative attitudes toward women in the workplace” than men in dual-income marriages and rely on their own personal beliefs and marriage structures when they evaluate work-life policies in the workplace.

The bottom line for Weisberg, a senior vice president of the Families and Work Institute at the time the article was written, was that the perks described above were not enough to achieve the work-life balance eluding many women and men in the workplace and that leaders needed to embrace and publicly practice a new set of behaviors that break down the long-standing ideal worker paradigm and empowers people at all levels of the organizational hierarchy to get their work done effectively, remain on their chosen career paths, and confidently step away from their jobs at a reasonable time without guilt or angst to be meaningfully and fully present for their families.

Many companies have adopted work-life policies that are less dramatic than paying for traveling nannies and storing eggs: flextime, telecommuting and other types of working remotely flexibility, paid leaves for parents of newborns, job switching flexibility and childcare subsidies.  These are certainly positive steps and a global study of management practices and work-life balance practices involving 732 medium-sized manufacturing firms in the US, France, Germany and the UK found that the best managed firms tended to also have the most progressive work-life policies.  While the same study failed to uncover a positive correlation between implementation of such policies and high productivity after adjusting for quality of management, other surveys have provided support for the proposition that businesses that are able to effectively address and management work-life balance issues will see significant increases in productivity among their workers. 

Weisberg is one of many who continue to push for changes in organizational culture so that work-life balance coupled with unfettered access to advancement opportunities is embedded among the values and norms of the organization and its members.  In many cases, adoption of work-life policies is a response to employee requests or an attempt to remediate problems that have already arisen due to challenges that employees have encountered juggling their personal and professional lives.  Rather than being reactive, companies should proactively implement reasonable work-life policies that are responsive to the specific needs of their target human resources pool.  The best way to approach this is for the founders of the company to explicitly focus on the type of experience they want workers with families, both women and men, to have if they choose to come to work for the company.  This means going beyond the usual elements of the employment relationship—salaries, bonuses, insurance benefits, stock options—to consider the full palette of professional and personal needs of the employee. 

Founders should consider that surveys have consistently shown that employees attach great importance to work-life balance, second only to compensation, and that one in five workers would be willing to give up 5% of their salary in exchange for the flexibility to work offsite one or two days a week.  Another important factor to consider is that companies that have embraced work-life balance policies have enjoyed higher levels of employee satisfaction and retention, bringing stability to the workplace and allowing firms to retain valuable employees who have built up firm-specific knowledge and experience that would be difficult and expensive to replace.  Work-life policies are a natural extension of very real values with an organizational culture—a sense of familial connection in the workplace, loyalty and mutual respect and understanding—and thus must and should be nurtured from the day that the company is launched.

Sources and other resources for this article included A. Weisberg, “What Flying Nannies Won’t Fix”, The New York Times (August 24, 2015); N. Bloom, T. Kretschmer and J. Van Reenen, “Work-Life Balance, Management Practices and Productivity” (April 2006); Work-Life Balance Programs Benefit Employers and Employees; and The Society of Human Resource Management, Workplace Flexibility in the 21st Century (2008).  Further information on human resources management is available from the Growth-Oriented Entrepreneurship Project and those interested in receiving regular updates on topics of interest to growth-oriented entrepreneurs are welcome to send a connection request to the author.

10
Sep

Protections of Children’s Online Privacy

Given the tremendous popularity of the Internet among children and the potential for unscrupulous Internet actors to prey on the inexperience and naivety of young people, it is not surprising that the federal government intervened early on in the development of the online world with the enactment of the Children's Online Privacy Protection Act (“COPPA”), which became effective April 21, 2000 and can be found at 15 U.S.C.A. §§ 6501 et seq. In general, COPPA prohibits unfair or deceptive acts or practices in connection with the collection, use and/or disclosure of personal information from and about children on the Internet [16 C.F.R. § 312.1].  The Federal Trade Commission (“FTC”) has developed regulations for implementation of certain provisions of COPPA which have been documented as the Children's Online Privacy Protection Rule (“Rule”) in 16 C.F.R. Pt. 312.  After several years of soliciting comments and internal debate, the Rule was substantially changed by the FTC as of July 1, 2013, and the changes have been touted as bringing online child protection into the 21st Century. 

From the time it was first adopted COPPA applied to commercial Web sites or online services (1) directed to children under the age of 13 that collected personal information from children, or (2) that operated general audience Web sites and had actual knowledge that they collect personal information from children. [15 U.S.C.A. §§ 6501, 6502]. The definition of a “Web site or online service directed to children” provided several factors (e.g., subject matter; visual and audio content; age of models; language or other characteristics; advertising appearing on or promoting the site or service; competent and reliable empirical evidence of audience composition; evidence regarding the intended audience; and whether the site uses animated characters or child-oriented actives or incentives) the FTC could use to determine whether a site is directed at children. [15 U.S.C.A. § 6501(10). According to the Statement of Basis and Purpose of the FTC's Children's Online Privacy Protection Rule (64 Fed. Reg. 59888, 59892 (Nov. 3, 1999)), a Web site operator possessed “actual knowledge” if it “learns of a child's age or grade from the child's registration or a concerned parent …,” or learns of such information from other age-identifying questions.] The original Rule defined the term “operator”, for purposes of determining who would be subject to COPPA, to include any person (i) who operated a Web site located on the Internet or an online service and who collected or maintained personal information from or about the users or visitors or (ii) on whose behalf such information was collected or maintained. The intent was to be sure that Web site operators who explicitly engaged “agents” to act on “their behalf” to collect personal information from children would be covered by COPPA.

As time went by, however, new tools were developed that did not fit within the original notion of “agent” but nonetheless allowed Web site operators to collect information in ways that arguably should be subject to COPPA. In response, the Rule was revised to provide that: “Personal information is collected or maintained on behalf of an operator when: (a) it is collected or maintained by an agent or service provider of the operator; or (b) the operator benefits by allowing another person to collect personal information directly from users of such Web site or online service.” Web site operators need to comply with COPPA if they enable third party apps that collect personal information about children or integrate outside services, such as plug-ins or ad networks, that collect such information. Accordingly, operators need to conduct a thorough investigation of their practices with respect to third party apps and other outside services to determine whether COPPA is applicable to their online activities.

Since its inception COPPA and the Rule have required protection of easily understood personally identifiable information such as a child's full name, home address, e-mail address, telephone number, or any other information that would allow a third person to identify or contact the child. [64 Fed. Reg. 59888, 59892 (Nov. 3, 1999)] COPPA was also understood to be covering other types of information, including hobbies, interests, and information collected through the use of cookies or other types of online tracking mechanisms, whenever such information was associated with a particular child. [16 C.F.R. § 312.2]  As time has gone by, however, there has been a growing recognition of the substantial changes that have occurred in communications technology since COPPA first became law and this led to changes in the Rule to expand the definition of “personal information” for purposes of the Rule to include “online contact information,” including instant messaging user identifiers, voice over internet protocol (VOIP) identifiers and video chat user identifiers; a “screen or user name where it functions in the same manner as online contact information;” “persistent identifiers,” including an Internet Protocol (IP) address or mobile device IDs that can be used to recognize a user over time and across different Web sites or online services; a photograph, video, or audio file where such file contains a child's image or voice; and geolocation information sufficient to identify street name and name of a city or town.

For detailed discussion of COPPA’s general requirements on website owners, privacy notices, parental consent requirements and the FTC’s “safe harbor” program under which an operator is deemed to be in compliance with the Rule if the operator complies with FTC-approved self-regulatory guidelines, see §§ 128:95 – 128.99.

In addition to complying with the requirements of COPPA, website operators must be mindful of laws and regulations that have been adopted at the state level.  For example, an operator of an Internet Web site, online service, online application, or mobile application directed to minors (referred to herein as an “operator”) must comply with California's law regarding Privacy Rights for California Minors in the Digital World [Bus. & Prof. Code, §§ 22580 to 22582] which prohibits them from knowingly marketing or advertising the following products or services to minors [Bus. & Prof. Code, § 22580, subd. (i)]:

(1) Alcoholic beverages, as referenced in Sections 23003 to 23009, inclusive, and Section 25658.

(2) Firearms or handguns, as referenced in Sections 16520, 16640, and 27505 of the Penal Code.

(3) Ammunition or reloaded ammunition, as referenced in Sections 16150 and 30300 of the Penal Code.

(4) Handgun safety certificates, as referenced in Sections 31625 and 31655 of the Penal Code.

(5) Aerosol container of paint that is capable of defacing property, as referenced in Section 594.1 of the Penal Code.

(6) Etching cream that is capable of defacing property, as referenced in Section 594.1 of the Penal Code.

(7) Any tobacco, cigarette, or cigarette papers, or blunt wraps, or any other preparation of tobacco, or any other instrument or paraphernalia that is designed for the smoking or ingestion of tobacco, products prepared from tobacco, or any controlled substance, as referenced in Division 8.5 (commencing with Section 22950) and Sections 308, 308.1, 308.2, and 308.3 of the Penal Code.

(8) BB device, as referenced in Sections 16250 and 19910 of the Penal Code.

(9) Dangerous fireworks, as referenced in Sections 12505 and 12689 of the Health and Safety Code.

(10) Tanning in an ultraviolet tanning device, as referenced in Sections 22702 and 22706.

(11) Dietary supplement products containing ephedrine group alkaloids, as referenced in Section 110423.2 of the Health and Safety Code.

(12) Tickets or shares in a lottery game, as referenced in Sections 8880.12 and 8880.52 of the Government Code.

(13) Salvia divinorum or Salvinorin A, or any substance or material containing Salvia divinorum or Salvinorin A, as referenced in Section 379 of the Penal Code.

(14) Body branding, as referenced in Sections 119301 and 119302 of the Health and Safety Code.

(15) Permanent tattoo, as referenced in Sections 119301 and 119302 of the Health and Safety Code and Section 653 of the Penal Code.

(16) Drug paraphernalia, as referenced in Section 11364.5 of the Health and Safety Code.

(17) Electronic cigarette, as referenced in Section 119405 of the Health and Safety Code.

(18) Obscene matter, as referenced in Section 311 of the Penal Code.

(19) A less lethal weapon, as referenced in Sections 16780 and 19405 of the Penal Code.

With respect to marketing or advertising provided by an advertising service, an operator shall be deemed to be in compliance if the operator notifies the advertising service, in the manner required by the advertising service, that the site, service, or application is directed to minors. [Bus. & Prof. Code, § 22580, subd. (h)(1)] If an advertising service is properly notified, the advertising service is prohibited from marketing or advertising a product or service on the operator's Internet Web site, online service, online application, or mobile application that is included in the list above. [Bus. & Prof. Code, § 22580, subd. (h)(2)]

 

7
Sep

Understanding the Basic Concepts of Organizational Structure

Leading early organizational theorists such as Max Weber, Frederick Winslow Taylor and Henri Fayol all argued, to some degree, that organizations can and should be structured in accordance with certain universal rules and principals.  The result of all this was “bureaucracy” and “scientific management” that treated organizations as machines to be run in a mechanistic fashion relying on specialization of tasks, formal procedures and rules and centralized authority.  As time has gone by, however, the balance has shifted toward the so-called “contingency approach” based on the belief that the most important factor in designing the organizational structure is the organization’s operating environment and, specifically, the sources of uncertainty within that environment.  If this is true, senior managers and those working with them on organizational design cannot rely on a single “best structure” for all situations and must instead search for a unique structure that allows them to best control their external environment and quickly and effectively respond to contingencies that have been identified in advance.  This process can be difficult and time-consuming and should begin with making sure that the process of designing the organizational structure is understood.  The questions below can serve as a means of getting started: 

What does the term “organizational structure” mean?  Organizational structure is the way in which the members of an organization and their job responsibilities are arranged.  The key components of an organizational structure include roles and responsibilities (task allocation), coordination processes and relationships between members and groups of members, hierarchical structure of power and authority (supervision), monitoring and control mechanisms and channels for communications and information flows. 

What are the building blocks of an organizational structure? The organizational structure typically consists of various business units (i.e., groups of organizational members supported by appropriate resources) formed around functions (e.g., research and development, manufacturing, sales and marketing, finance, human resources, etc.), products, markets or customers that are arranged in a hierarchical fashion.  Eventually, many organizations evolve toward the use of some combination of two or more of these types (i.e., a “matrix” structure) as their activities continue to grow and become more complex.  

What are the most important influences on the design of the organizational structure?  The most important determinant of organizational structure is the strategy of the organization.  For example, if the strategy is based on identifying and satisfying the needs of a particular target group of customers, the human and other resources of the organization should grouped in the way that is most effective for creating and delivering the outputs demanded by those customers.  In addition to strategy, other factors that are thought to have a significant influence on organizational structure include the preferred styles of leaders and managers of the organization, the organizational climate and culture, the size and complexity of the organization, the skill capabilities of the members of the organization, the level of uncertainty in the organization’s external operating environment, the societal culture, the technology used in organizational activities, the geographic dispersion of the organization’s activities, the origin and history of the organization, the type of ownership and control of the organization and the degree of interdependence on other organizations. 

What dimensions are typically used for profiling and comparing organizational structures?  Researchers generally rely on some or all of the following dimensions of organizational structure for their comparative work: specialization (i.e., division of labor); standardization (i.e., reliance of regularly used and legitimized organizational procedures); standardization of employment practices; formalization (i.e., used of formal rules and instruction to guide organizational members in carrying out their activities); centralization (i.e., location of decision making authority); methods of coordination; and configuration. 

What are the key questions and challenges for organizational designers?  Organizational designers must wrestle with the appropriate degree of differentiation, both vertical and horizontal; the appropriate balance between differentiation and integration; the appropriate level of decentralization; and the appropriate balance between standardization and mutual adjustment. 

What are the most important goals and objectives when establishing the organizational structure?  The organizational structure should relate well to the being pursued by the organization and its overall environment including competitors, suppliers, government agencies and the like; facilitate the use and effective exploitation of the core competencies of the organization including its people and technology; motivate the members; and promote the flow of information necessary for all members of the organization to perform their activities and tasks.

3
Sep

West Legal Ed Center/Business Counselor Institute Program on Compliance Audits

All companies, regardless of their size, business model and scope of activities, must understand and comply with a plethora of laws and regulations in diverse areas such as employment, health and safety, intellectual property, real property, tax, antitrust, finance, securities law and consumer protection.  Given the complex legal environment that applies to every business organization, it is essential for companies to develop processes and procedures to conduct voluntary and self-analytical legal and compliance audits on a regular basis.  In fact, a number of federal and state laws and regulations, as well as the agencies responsible for their enforcement, specifically require companies to assume responsibility for policing their own conduct and compliance and to report any potential misconduct to the appropriate authorities. 

In light of this trend, internal compliance audits have taken on significant importance, and establishing adequate procedures for such audits is an essential part of the company’s overall compliance program, which should include appropriate monitoring and auditing systems (e.g., periodic reviews of company business practices, procedures and policies), internal controls for compliance with standards of conduct and special legal requirements imposed on the business, and internal or external compliance audits.  Just like internal investigations, compliance audits and investigations must be conducted carefully and managed by experienced lawyers and compliance professionals. Specifically, precautions must be taken to manage the expense of the process and reduce disruption to business operations.  Moreover, care must be taken in structuring and conducting routine compliance audits since there are circumstances where the results of the audit will not be eligible for protection under the attorney-client privilege.  

A variety of techniques can be used to complete the compliance audit process and those persons involved in conducting the audit often follow many of the procedures that are normally used when conducting a due diligence investigation in the transactional context.  Accordingly, questionnaires should be prepared and disseminated to various departments within the company, including sales and marketing, accounting and finance, human resources and legal.  The information collected from the questionnaires should always be supplemented by conversations with officers and employees responsible for functions that impact significant operations, as well as discussions with outside consultants and professionals.  If the company has already opened offices and facilities in foreign countries to conduct sales or manufacturing, questionnaires should be circulated to local managers and follow-up interviews should be conducted.  In addition to questionnaires and interviews, information regarding the company and its business processes can be obtained by reviewing business plans and disclosure documents prepared for distribution to investors, material contracts and written policies and procedures and through inspection of the company’s facilities and observation of managers and employees carrying out their day-to-day job responsibilities. 

Specific steps that should be taken include assembling the audit team and briefing the members on the goals of the audit and the relevant laws and regulations; collecting and reviewing background information about the company’s business and legal environment; establishing the scope of the audit and identifying the key issues to be covered by the review (e.g., changes in compliance procedures necessitated by changes in applicable laws and regulations); collecting and reviewing material contracts and other documents (e.g., policies and procedures); collecting information via questionnaires, inspections and interviews; reviewing the existing compliance policies and procedures and assess the company’s overall compliance environment; conducting searches of public records to verify registrations and recordings; and, finally, analyzing the information to reach a determination regarding the level of compliance and make suggestions for remediation. 

Compliance audits should not be “one time” events.  Rather, a consistent schedule of periodic compliance audits needs to be built into every legal compliance program.  Depending on the size of the company, the audit may cover all functions of the business, or separate audits of particular functions or business units may be performed in order to preserve scarce resources.  Companies should also consider conducting “unscheduled” audits to be sure officers and employees are diligently maintaining records and procedures on a day-to-day basis and not simply waiting until a prearranged audit period to get things in order.  Companies must also monitor the effectiveness of remedial actions during the periods between formal audits. 

Extensive information on Compliance Audits is available in Chapter 225 of Business Transactions Solutions (Westlaw Next).  In addition, a Business Counselor Institute program on “Conducting Compliance Audits” is being presented on Tuesday, September 8, 2015 at noon, Central time.   You can register for that program by clicking here. Registration information is available here.