By Richard Harroch | In: Starting a
Business
Starting a business entails understanding and
dealing with many issues—legal, financing, sales and marketing, intellectual
property protection, liability protection, human resources, and more. But
interest in entrepreneurship is at an all-time high. And there have been
spectacular success stories of early stage startups growing to be
multi-billion-dollar companies, such as Uber, Facebook, WhatsApp, Airbnb, and
many others.
In this article, I give an overview of 35 key
steps for entrepreneurs who are starting a business, with links to additional
articles addressing some of the topics in more depth.
1. Understand the Commitment and Challenges
Involved in Starting a Business
Starting a business is a huge commitment.
Entrepreneurs often fail to appreciate the significant amount of time,
resources, and energy needed to start and grow a business.
Here are some of the biggest challenges to
starting and growing a business:
·
Coming up with a great
and unique product or service
·
Having a strong plan
and vision for the business
·
Having sufficient
capital and cash flow
·
Finding great
employees
·
Firing bad employees
quickly in a way that doesn’t result in legal liability
·
Working more than you
expected
·
Not getting
discouraged by rejections from customers
·
Managing your time
efficiently
·
Maintaining a
reasonable work/life balance
·
Knowing when to pivot
your strategy
·
Maintaining the
stamina to keep going even when it’s tough
2. Protect Your Personal Assets by Forming the
Business as a Corporation or LLC
Never start a business as a “sole
proprietorship,” which can result in your personal assets being at risk for the
debts and liabilities of the business. You will almost always want to start the
business as an S corporation (giving you favorable flow through tax treatment),
a C corporation (which is what most venture capital investors expect to see),
or a limited liability company (LLC). None of those are particularly expensive
or difficult to set up. My personal preference is to start the business as an S
corporation, which can then easily be converted to a C corporation as you bring
in investors and issue multiple classes of stock.
Many business owners, however, are under the
mistaken impression that they are completely protected from personal liability
by filing a Certificate of Incorporation for a corporation. This is not
true. The mere process of incorporating does not completely protect the
business owners. To lessen the likelihood of such personal or shareholder
liability, you should make sure to adhere to certain procedures:
·
Always
use the corporate name. The name of the corporation should be used in full, including
“Inc.” or “Corp.” on all contracts, invoices, or documents used by the
corporation. This clearly indicates the existence of the corporation as a
separate entity.
·
Always
use proper signature. This
means that you will sign on behalf of the corporation, using the name of the
corporation and your title. You should typically use the following format
when signing contracts on behalf of the corporation:
CORPORATION NAME
By: ___________________________________
Your name – authorized signing officer and
corporate title
·
Follow
all corporate formalities. This includes following bylaws, issuing stock properly, holding
meetings of the Board of Directors, recording the meeting minutes, and
following other corporate formalities.
·
Make
sure to keep funds separate. Corporate funds and the funds of individual shareholders should
not be in the same accounts or combined for any reason.
·
Make
sure to keep taxation separate. The company taxes should be paid entirely from corporate
accounts and separate tax returns filed for the corporation.
·
All
transactions made by the corporation should be clearly separate from any
individual transactions. Essentially, by never blurring the line between individual
shareholders, owners or the Board of Directors, and the company (which stands
as a separate entity), you run less risk of any personal liabilities for the
debts of the business.
3. Come Up With a Great Name for Your Business
Selecting the right name for your startup can
have a significant impact on your business success. The wrong name could result
in insurmountable legal and business hurdles. Here are some basic tips on how
to name your startup:
·
Avoid hard-to-spell
names.
·
Don’t pick a name that
could be limiting as your business grows.
·
Conduct a thorough
Internet search on a proposed name.
·
Get a “.com” domain
name (as opposed to “.net” or another variant).
·
Conduct a thorough
trademark search.
·
Make sure you and your
employees will be happy saying the name.
·
Come up with five
names you like and test market the name with prospective employees, partners,
investors, and potential customers.
4. Focus on Building a Great Product—But Don’t
Take Forever to Launch
When starting out, your product or service has
to be at least good if not great. It must be differentiated in some meaningful
and important way from the offerings of your competition. Everything else
follows from this key principle. Don’t drag your feet on getting your product
out to market, since early customer feedback is one of the best ways to help
improve your product. Of course, you want a “minimum viable product” (MVP) to
begin with, but even that product should be good and differentiated from the
competition. Having a “beta” test product works for many startups as they work
the bugs out from user reactions. As Sheryl Sandberg, COO of Facebook has
said, “Done is better than perfect.”
5. Build a Great Website for Your Company
You should devote time and effort to building
a great website for your business. Prospective investors, customers, and
partners are going to check out your site, and you want to impress them with a
professional product. Here are some tips for building a great company website:
·
Check out competitor
sites.
·
Start by sketching out
a template for your site.
·
Come up with five or
six sites you can share with your web site developer to convey what you like.
·
Be sure the site is
search engine optimized (and thus more likely to show up early on Google search
results).
·
Produce high-quality
original content.
·
Make sure your site is
optimized for mobile devices.
·
Make sure the site
loads quickly.
·
Keep it clean and
simple; visual clutter will drive visitors away.
·
Make sure you have a
Terms of Use Agreement and Privacy Policy (and comply with the European GDPR
rules).
·
Make the navigation
bars prominent.
·
Obtain and use a
memorable “.com” domain name.
·
Make the site visually
interesting.
·
Make sure it’s easy
for site visitors to contact you or buy your product.
6. Perfect Your Elevator Pitch
An “elevator” pitch is intended to be a
concise, compelling introduction to your business. You should be able to
slightly modify your elevator pitch depending on whether you are pitching to
prospective investors, customers, employees, or partners. Here are a few tips
for developing and delivering a great elevator pitch:
·
Start out strong.
·
Be positive and
enthusiastic in your delivery.
·
Remember that practice
makes perfect.
·
Keep it to 60 seconds
in length.
·
Avoid using industry
jargon.
·
Convey why your
business is unique.
·
Pitch the problem you
are solving.
·
Invite participation
or interruption by the listener—this shows they are interested and engaged.
7. Make the Deal Clear With Co-Founders
If you start your company with co-founders,
you should agree early on about the details of your business relationship. Not
doing so can potentially cause significant legal problems down the road (a good
example of this is the infamous Zuckerberg/Winklevoss Facebook litigation). In
a way, think of the founder agreement as a form of “pre-nuptial agreement.”
Here are the key deal terms your written founder agreement needs to address:
·
How is the equity
split among the founders?
·
Is the percentage of
ownership subject to vesting based on continued participation in the business?
·
What are the roles and
responsibilities of the founders?
·
If one founder leaves,
does the company or the other founder have the right to buy back that founder’s
shares? At what price?
·
How much time
commitment to the business is expected of each founder?
·
What salaries (if any)
are the founders entitled to? How can that be changed?
·
How are key decisions
and day-to-day decisions of the business to be made? (by majority vote,
unanimous vote, or are certain decisions solely in the hands of the CEO?)
·
Under what
circumstances can a founder be removed as an employee of the business?
(usually, this would be a Board decision)
·
What assets or cash
does each founder contribute or invest into the business?
·
How will a sale of the
business be decided?
·
What happens if one
founder isn’t living up to expectations under the founder agreement? How will
it be resolved?
·
What is the overall
goal and vision for the business?
·
If one founder wants
to leave the business, does the company have the right to buy back his or her
shares? At what price?
8. Obtain a Tax ID
In most instances, you will need to get a tax
ID from the IRS for your company. This is also known as an “Employer
Identification Number” (EIN), and it’s similar to a Social Security number, but
for businesses. Banks will ask for your EIN when you open a company bank
account. You can get an EIN online through the IRS website.
In some states, a state tax ID may be
necessary as well (for example, California, New York, and Texas require a state
ID, which can be obtained online).
9. Set Up a Good Accounting and Bookkeeping
System
You will need to set up a
bookkeeping/accounting system to keep track of your finances—income, expenses,
capital expenditures, EBITDA, profit and loss, etc. This is important in order
to understand your business’s cash flow situation and also for tax-filing
purposes.
There are a number of online software solutions
that can be helpful in this regard, such as QuickBooks, Zoho, FreshBooks, and Xero.
10. Perform a Comprehensive Reference Check
Before You Hire an Employee
Many employers conduct a limited and
incomplete reference check when interviewing job candidates, which can result
in hiring people who are unable to perform their required duties or who don’t
work well with others. A comprehensive reference check includes:
·
Verification of job
titles and dates of employment
·
Verification of
educational degrees and dates of attendance at schools
·
Verification of
starting and ending salary
·
Verification of prior
job role and responsibilities
·
Inquiry as to why the
applicant left the prior employer
·
Conversations with
prior supervisors as to the applicant’s strengths and weaknesses
·
Inquiry as to the
applicant’s ability to get along well with other employees and customers
·
Inquiry as to the
applicant’s ability to take on the new role
·
Inquiry as to
punctuality or absenteeism issues
·
Reference checks with
other people not listed by the applicant as a reference
The purpose of these checks is to make sure
that the applicant will fit into the company’s culture and to ensure that they
have been truthful and accurate in their resume and employment application.
However, the process is carefully regulated by the federal government (through
the Fair Credit Reporting Act) and the laws of many states; failure to follow
the highly technical process can lead to class action lawsuits. Consider
consulting legal counsel and, for general information, see the EEOC’s Background Checks: What Employers Need to Know.
It is also useful to require all prospective
employees to complete an employment application.
11. Use a Good Form of Employee Offer Letter or
Employment Agreement
Oral agreements often lead to
misunderstandings. If you plan to hire a prospective employee, use a carefully
drafted offer letter, which the employee should be encouraged to review
carefully before signing. For senior executives, a more detailed employment
agreement often makes sense. A good offer letter or employment agreement will
address the following key items:
·
The job title and role
of the employee
·
Whether the job is
full time or part time
·
When the job will
commence
·
The salary, benefits,
and any potential bonuses
·
Whether the position
is “at will” employment, meaning either party is free to terminate the
relationship at any time without penalty (although employers may not terminate
employees for legally prohibited reasons, such as for age discrimination or
retaliation from sexual harassment allegations, etc.)
·
Confirmation that the
“at will” agreement may not be changed unless signed by an authorized officer
of the company
·
Confirmation that the
employee will need to sign a separate Confidentiality and Invention Assignment
Agreement (described below)
·
If the company
chooses, a statement that any disputes between the parties will be resolved
solely and exclusively by confidential binding arbitration (also discussed
below)
·
Any stock options to
be granted to the employee and the terms of any vesting (details usually laid
out in a separate Stock Option Agreement)
·
The supervisor to whom
the employee will report
·
Protective language
stating that the offer letter constitutes the entire agreement and
understanding of the parties with respect to the employment relationship, and
that there are no other agreements or benefits expected (unless additional
provisions are laid out in a handbook, which should be referenced if
applicable)
Companies should ensure that the employee and
the company sign the letter, the Confidentiality and Invention Assignment
Agreement, any Stock Option Agreement, and any first-day paperwork (such as the
IRS W-4 Form for withholding and the I-9 form mandated by law).
12. Make Sure All Employees Sign a
Confidentiality and Invention Assignment Agreement
Companies pay employees to come up with ideas,
work product, and inventions that may be useful to the business. Employees have
access to a good deal of their company’s confidential information, which can be
very valuable, especially in technology companies.
One basic way to protect proprietary company
information is through the use of a Confidentiality and Invention Assignment
Agreement. This type of agreement deals with confidentiality issues, but can
also ensure that the ideas, work product, and inventions the employee creates
that are related to company business belong to the company—not the employee.
A good Employee Confidentiality and Invention
Assignment Agreement will cover the following key points:
·
The employee may not
use or disclose any of the company’s confidential information for their own
benefit or use, or for the benefit of others, without authorization.
·
The employee must
promptly disclose to the company any inventions, ideas, discoveries, and work
product related to the company’s business that they make during the period of
employment.
·
The company is the
owner of such inventions, ideas, discoveries, and work product, which the
employee must assign to the company.
·
The employee’s
employment with the company does not and will not breach any agreement or duty
that the employee has with anyone else, nor may the employee disclose to the
company or use on its behalf any confidential information belonging to others.
·
Upon termination of
employment, the employee must return any and all confidential information and
company property.
·
While employed, the
employee will not compete with the company or perform any services for any
competitor of the company.
·
The employee’s
confidentiality and invention assignment obligations under the agreement will
continue after termination of employment.
·
The agreement does not
by itself represent any guarantee of continued employment.
Venture capitalists and other investors in
startups expect to see that all employees of the company have signed these
kinds of agreements. In an M&A transaction in which the company is sold,
the buyer’s due diligence team will also be looking for these agreements signed
by all employees.
A sample form of Employee Confidentiality and
Invention Assignment Agreement can be found at the Forms & Agreements section of
AllBusiness.com.
Similarly, it will be appropriate that all
consultants of the company also sign a Confidentiality and Invention Assignment
Agreement.
13. Consider the Steps You Should Take to
Protect Your Intellectual Property
It is important to protect your company’s
intellectual property (IP). Ever wary of minimizing burn rate, startups may be
tempted to defer investment in intellectual property protection. To those who
have not tried to protect intellectual property, it feels complex and
expensive. Too often, startups end up forfeiting intellectual property rights
by neglecting to protect their ideas and inventions.
Some simple and cost-effective techniques can
minimize the anxiety, yet help protect core assets.
Companies sometimes think that patent
protection is the only way to protect themselves. Technology startups
frequently ignore the value of non-patent intellectual property. While patents
can be incredibly valuable, it does not necessarily ensure that a company’s
product is a good product or that it will sell well. Trade secrets,
cybersecurity policies, trademarks, and copyrights can all be forms of IP that
can be protected.
Here is a summary of the types of intellectual
property protections available:
·
Patents. Patents are the best protection you can
get for a new product. A patent gives its inventor the right to prevent others
from making, using, or selling the patented subject matter described in the
patent’s claims. The key issues in determining whether you can get a patent
are: (1) Only the concrete embodiment of an idea, formula, or product is
patentable; (2) the invention must be new or novel; (3) the invention must not
have been patented or described in a printed publication previously; and (4)
the invention must have some useful purpose. In the United States you obtain a
patent from the U.S. Patent and Trademark Office, but this process can take
several years and be complicated. You typically need a patent lawyer to draw up
the patent application for you. The downside of patents is that they can be
expensive to obtain and take several years,
·
Copyrights. Copyrights cover original works of authorship,
such as art, advertising copy, books, articles, music, movies, software, etc. A
copyright gives the owner the exclusive right to make copies of the work and to
prepare derivative works (such as sequels or revisions) based on the work.
·
Trademarks. A trademark right protects the symbolic value
of a word, name, symbol, or device that the trademark owner uses to identify or
distinguish its goods from those of others. Some well-known trademarks include
the Coca-Cola trademark, American Express trademark, and IBM trademark. You
obtain rights to a trademark by actually using the mark in commerce. You don’t
need to register the mark to get rights to it, but federal registration does
offer some advantages. You register a mark with the U.S. Patent and Trademark
Office.
·
Service
Marks. Service marks resemble
trademarks and are used to identify services.
·
Trade
Secrets. Trade secrets can be a
great asset for startups. They are cost effective and last for as long as the
trade secret maintains its confidential status and derives value through its
secrecy. A trade secret right allows the owner of the right to take action
against anyone who breaches an agreement or confidential relationship, or who
steals or uses other improper means to obtain secret information. Trade secrets
can range from computer programs to customer lists to the formula for
Coca-Cola.
·
Confidentiality
Agreements. These are also
referred to as Non-Disclosure Agreements or NDAs. The purpose of the agreement
is to allow the holder of confidential information (such as a product or
business idea) to share it with a third party. But then the third party is
obligated to keep the information confidential and not use it whatsoever,
unless allowed by the owner of the information. There are usually standard
exceptions to the confidentiality obligations (such as if the information is
already in the public domain). See The Key Elements
of Non-Disclosure Agreements.
·
Confidentiality
Agreement for Employees and Consultants. Every employee and consultant should be
required to sign such an agreement, as discussed above.
·
Terms
of Service and Privacy Policy. If you are a company that conducts its business on the internet,
it is important to have a terms of service agreement that limits what users can
or cannot do on your website and with the information on your site. Closely
related is your Privacy Policy, which sets forth what privacy protections are
available to your users. The new European GDPR rules may also need to be
addressed.
14. Become a Strong Salesperson
If the business is to become successful, you
must become a great salesperson. You are going to have to learn how to “sell”
your business—not only to customers but also to prospective investors and even
to potential employees.
It’s important to be positive, trustworthy,
and to learn how to listen. You must practice your sales pitch, get feedback
from a variety of people, and then refine your pitch. Even if you are not
naturally an extrovert, you need to show confidence, follow up, and ask for the
sale.
15. Understand Financial Statements and Budgets
It’s important to keep on top of your expenses
and learn how to thoroughly understand financial statements and budgeting. Many
startups fail because the entrepreneur isn’t able to adjust their spending to
avoid running out of cash. Establishing a detailed, month-by-month budget is
crucial, and this budget must be reviewed regularly.
Understanding your financial statements will
also help you answer questions from prospective investors. Here are some
financial statement questions you can expect to get from investors:
·
What are the company’s
three-year projections?
·
What are the key
assumptions underlying your projections?
·
How much equity and
debt has the company raised, and what is the capitalization structure?
·
What future equity or
debt financing will be necessary?
·
How much of a stock
option pool is being set aside for employees?
·
When will the company
get to profitability?
·
How much “burn”
(losses) will occur until the company gets to profitability?
·
What are your unit
economics?
·
What are the factors
that limit faster growth?
·
What are the key
metrics that the management team focuses on?
16. Market Your Business Like Crazy
To succeed in business, you need to
continually be attracting, building, and even educating your target market.
Make sure your marketing strategy includes the following:
·
Learn the fundamentals
of SEO (search engine optimization) so that people searching for your products
and services online might find you near the top of search results.
·
Use social media to
promote your business (LinkedIn, Facebook, Twitter, Pinterest, etc.).
·
Engage in content
marketing by writing guest articles for relevant websites.
·
Issue press releases
for any significant events.
·
Network continually.
17. Use Consultants and Freelancers to
Supplement Your Team
At the early stages of your startup, you will
likely want to have a small employee team to minimize expenses. A good way to
fill in for specialized expertise is to use freelancers or consultants. That
way, you avoid taking on employee costs and benefits payments. And there are a
variety of sites that can help you access freelancers, such as Freelancer.com, Guru.com, and Upwork.com.
18. Have a Great Investor Pitch Deck
Startups frequently prepare a “pitch deck” to
present their company to prospective angel or venture capital investors. The
pitch deck typically consists of 15-20 slides in a PowerPoint presentation and
is intended to showcase the company’s products, technology, and team to the
investors.
Raising capital from investors is difficult
and time consuming. Therefore, it’s crucial that a startup absolutely nails its
investor pitch deck and articulates a compelling and interesting story.
Too many startups make a number of avoidable
mistakes when creating their investor pitch decks. Here is a list of general
do’s and don’ts to keep in mind:
Pitch Deck Do’s
·
Do include this
wording at the bottom left of the pitch deck cover page: “Confidential and
Proprietary. Copyright by [Name of Company]. [Year]. All Rights Reserved.”
·
Do convince the viewer
of why the market opportunity is large.
·
Do include visually
interesting graphics and images.
·
Do send the pitch deck
in a PDF format to prospective investors in advance of a meeting. Don’t force
the investor to get it from Google Docs, Dropbox, or some other online service,
as you are just putting up a barrier to the investor actually reading it.
·
Do plan to have a demo
of your product as part of the in-person presentation.
·
Do tell a compelling,
memorable, and interesting story that shows your passion for the business.
·
Do show that you have
more than just an idea, and that you have gotten early traction on developing
the product, getting customers, or signing up partners.
·
Do have a soundbite
for investors to remember you by.
·
Do use a consistent
font size, color, and header title style throughout the slides.
Pitch Deck Don’ts
·
Don’t make the pitch
deck more than 15-20 slides long (investors have limited attention spans). If
you feel you need to add more information, include it as an appendix.
·
Don’t have too many
wordy slides.
·
Don’t provide
excessive financial details, as that can be provided in a follow-up message.
·
Don’t try to cover
everything in the pitch deck slides. Your in-person presentation will give you
an opportunity to add and highlight key information.
·
Don’t use a lot of
jargon or acronyms that the investor may not immediately understand.
·
Don’t underestimate or
belittle the competition (and never say “we don’t have any competition”).
·
Don’t have your pitch
deck look out of date. You don’t want a date on the cover page that is several
months old (that is why I avoid putting a date on the cover page at all). And
you don’t want information or metrics in the deck about your business that look
stale or outdated.
·
Don’t have a poor
layout, bad graphics, or a low-quality “look and feel.” Think about hiring a
graphic designer to give your pitch desk a more professional look.
19. Drive Traffic to Your Website
While entire books have been written on this
topic, the key ways to drive traffic to your website are as follows:
·
Pay Google, Bing,
Yahoo, or other search engines to send you traffic (such as through the Google
Adwords program).
·
Build a great site
with lots of high-quality, original content that is search engine optimized.
·
Have a smart social
media plan to drive traffic from Facebook, Twitter, LinkedIn, and other free
social media sites.
·
Get links to your site
from high-quality sites.
20. Make Sure Someone Hasn’t Already Invented
Your Great New Idea
Here are the key things to do if you have a
great new invention idea:
·
Do a Google search on
the keywords associated with your invention.
·
Do a search online of
the U.S. Patent and Trademark Office at uspto.gov.
·
If nothing comes up
and you want to get a patent for your idea, hire a patent lawyer.
But keep refining the concept of the
invention, as version 1 of your idea probably can be improved and enhanced
through version 2 and version 3.
21. Don’t Go Overboard on a Business Plan
It’s useful to come up with a business plan to
think through what you want to do for the development of the product or
service, marketing, financial projections, and more. And you should then get
input from trusted business and finance advisors. But don’t go overboard with a
50-page business plan. In reality, many startups have to deviate from their
plan as the business develops.
22. Secure Capital to Finance Your Business
Here is a summary of the most effective
sources of business capital:
·
Personal funds
·
Credit cards
·
Friends and family
·
Angel investors
(see Angel Investing:
20 Things Entrepreneurs Should Know)
·
Crowdsourcing sites
such as Indiegogo.com and Kickstarter.com
·
Bank loans/SBA
financings/online lenders
·
Venture capitalists
·
Equipment loan
financing
One of the biggest mistakes made by startups
is not raising sufficient capital.
23. Determine Which Permits, Licenses, or
Registrations You Will Need for Your Business
Depending on the nature of the business, you
may need the following permits, licenses, or regulations:
·
Permits need for
regulated businesses (aviation, agriculture, alcohol, etc.)
·
Sales tax license or
permit
·
Home-based business
permits
·
City and county
business permits or licenses
·
Zoning permit
·
Seller’s permit
·
Health department
permits (such as for a restaurant)
·
Federal and state
tax/employer IDs
24. Set Up Appropriate Books and Records for
Your Business
You will need to keep multiple books and
records for your business, including:
·
Financial statements
(P&L, balance sheet, cash flow)
·
Employee records
·
Board and stockholder
minutes and consents
·
Stock and options
ledger
·
Tax filings and
records (federal, state & local income, sales and property taxes)
·
Secretary of State
filings (Certificate of Incorporation, annual filings, etc.)
·
Invoices &
contracts
·
Bank accounts
·
Creditor records
25. Properly Insure Your Startup
If you are going to go through the time and
effort to start a business, you need to protect it by purchasing appropriate
insurance coverage.
Your first order of business should be to
determine your specific insurance needs based on the nature of your business.
Ask yourself what risks must be covered and how much coverage will be
sufficient. Then find and evaluate insurance providers or insurance brokers to
determine which companies handle the types of coverage that suits your needs.
While shopping for insurance, you will want
answers to these types of key questions:
·
What are the
deductibles?
·
Are the coverage
limits high enough?
·
What items or occurrences
are excluded from coverage?
·
Are there any gaps in
the coverage?
Here is a list of the types of insurance that
may be appropriate for your business:
·
General liability
insurance
·
Product liability
insurance
·
Professional liability
insurance
·
Property insurance
·
Worker’s compensation
insurance
·
D&O (directors
& officers) insurance
·
Health insurance for
employees
·
Business interruption
insurance
·
Commercial auto
insurance
·
Data
breach/cybersecurity insurance
·
Key man life insurance
26. Determine How to Divide Equity Among the
Startup’s Co-Founders
There is no one right answer to the question
of how equity should be divided among a company’s co-founders. But everyone
involved should discuss this issue and come to an agreement up front to avoid
misunderstandings later on. If you are the original founder and brains behind
the idea, a good argument can be made for more than 50% ownership. The split
should take into account the following:
·
The relative value of
the contributions of the co-founders
·
Vesting dependent upon
continued participation in the business (you don’t want to give away 25% of the
company to someone who leaves after a few months)
·
The amount of time to
be committed to the business
·
The cash compensation
to be paid as an employee
·
Whether the
co-founders will be contributing cash as an investment in the business
·
Whether one person
wants to maintain control over decision-making
27. Understand These Key Points About Seeking
Venture Capital Financing
Startups seeking financing often turn to
venture capital (VC) firms, which can provide capital; strategic assistance;
introductions to potential customers, partners, and employees; and much more.
Venture capital financings are not easy to
obtain or close. Entrepreneurs will be better prepared to obtain VC financing
if they understand the process, the anticipated deal terms, and the potential
issues that will arise.
To understand the process of obtaining VC
financing, it is important to know that venture capitalists typically focus
their investment efforts using one or more of the following criteria:
·
Specific industry
sectors (software, digital media, semiconductor, mobile, SaaS, biotech, mobile
devices, etc.)
·
Stage of company
(early-stage seed or Series A rounds, or later-stage rounds with companies that
have achieved meaningful revenues and traction)
·
Company location
(e.g., San Francisco/Silicon Valley, New York, etc.)
Before approaching a venture capitalist, try
to learn whether his or her focus aligns with your company and its stage of
development.
The second key point to understand is that VCs
get inundated with investment opportunities, many through unsolicited
emails—almost all of those unsolicited emails are ignored. The best way to get
the attention of a VC is to have a warm introduction through a trusted
colleague, entrepreneur, or lawyer friendly to the VC.
A startup must have a good “elevator pitch”
(as discussed in point #6) and a strong investor pitch deck (as discussed in
point #18) to attract the interest of a VC.
Startups should also understand that the
venture process can be very time consuming—just getting a meeting with a
principal of a VC firm can take weeks; followed up with more meetings and
conversations; followed by a presentation to all of the partners of the venture
capital fund; followed by the issuance and negotiation of a term sheet, with
continued due diligence; and finally the drafting and negotiation by lawyers on
both sides of numerous legal documents to evidence the investment.
VCs usually want to see that your business has
made some progress and gotten some traction in the market; they will typically
not fund a very early stage company or just an idea. For that, you are better
off seeking angel investors.
Most venture capitalists won’t agree to sign
an NDA, so don’t bother asking.
28. Pay Attention to Your Business Contracts
Business contracts are legally binding written
agreements between two or more parties. They are an important part of business
and such agreements need to be created and/or negotiated carefully.
While smaller businesses will often conduct
business based on informal handshake agreements or unspoken understandings, the
more that is at stake, the more essential it is to have a signed contract. A
contract serves as the rules that must be followed by both parties. It presents
each party with the opportunity to:
·
Describe all
obligations they are expected to fulfill.
·
Describe all
obligations they expect the other party (or parties) to fulfill.
·
Limit any liabilities.
·
Set parameters, such
as a time frame, in which the terms of the contract will be met.
·
Set terms of a sale,
lease, or rental.
·
Establish payment
terms.
·
Clearly establish all
of the risks and responsibilities of the parties.
A contract is, in essence, a written meeting
of the minds. While it is typically drawn up by one party and favors the needs
and requirements of that party, protecting them from most (if not all)
liabilities, it should initially be thought of as a work in progress that
changes and grows as each party contributes prior to signing, after which it
becomes an official document. “Consideration,” whether it is monetary or a
promise to do work or provide a service by a specified date, is at the root of
a contract.
The term “standard contract” is more myth than
reality, and too often people simply sign on the dotted line without reading or
negotiating the terms of a contract. A startup has to make sure it is
comfortable with all of the terms of the contract, and depending on the deal
dynamics, almost any term is negotiable.
Consideration, compensation, ownership rights,
liability, and risk are all areas that need to be worded carefully. You should
seek out help from a qualified attorney who is experienced in contracts to make
sure you have covered each of these areas in a clear manner.
The contract itself should stipulate how it
shall be enforced and what actions can be taken if one party fails to meet
their obligations. It is often to the benefit of smaller businesses to have a
confidential binding arbitration clause to resolve any disputes.
The key contracts that a startup should have
as its own form of “standard contract” (drafted in the startup’s favor)
include:
·
Sales or service
agreement
·
License agreement
·
Offer letter to
employees
·
Consulting agreement
with any independent contractors (you want to make sure that you will own the
intellectual property rights for anything they develop for your business)
·
Confidentiality and
Invention Assignment Agreement for employees and independent contractors
·
Non-disclosure
agreement
29. If You Plan to Lease Office Space for Your
Business, Focus on These Key Issues
Leasing office space is one of the largest
expenses a startup can incur. Negotiating the best lease possible can save your
company enough cash to hire a few more employees or launch a new marketing
campaign.
Keep in mind that your ability to negotiate an
office lease is dependent on how much leverage you have. Do your homework. Are
other companies vying for the same space? Has the space been vacant for a long
time? Factors such as these may mean the difference between you calling the
shots, or a landlord insisting on onerous terms throughout the lease process.
Because no lease is standard, here are some
suggestions to help you become a little more lease-savvy and negotiate a
favorable office lease for your startup:
·
Length
of lease term. Landlords are
typically willing to make concessions for longer-term leases. However, your
company’s needs may change and you could find yourself locked into a lease for
an office space that is too small, too big, or with rent that is above-market
if demand for space subsequently declines. Try to negotiate a shorter-term
lease with renewal options—a two-year lease with a two-year renewal option, for
instance, rather than a four-year lease.
·
Tenant
improvements. Your new space may need
some improvements or alterations (a new paint job, new carpeting, a
reconfiguration of the space). Which party will pay for these improvements
depends on how tight the commercial office space market is in your city. Most
form leases stipulate that the tenant can’t make any alterations or
improvements without the landlord’s consent. Ask for a clause that says you can
make alterations or improvements with the landlord’s consent, and that the
consent won’t be unreasonably withheld, delayed, or conditioned. Often, you are
able to negotiate a “tenant improvement allowance,” which is an agreed-upon sum
of money that the landlord will provide for the improvements and alterations
you would like to make.
·
Rent
and rent escalations. Some
landlords will give free rent for the first month or two of a lease. Fixed rent
over longer-term leases is relatively rare. Sometimes landlords insist on
annual increases based on the percentage increases in the Consumer Price Index
(CPI). If your landlord insists on rent escalations, try to arrange for a CPI
rent increase that does not kick in for at least the first two years of the
term. Then, try to get a cap on the amount of each year’s increase. If you have
to live with a rent escalation clause, try to negotiate a predetermined fixed
increase; for example, a rent of $5,000 a month the first year that would only
increase to $5,200 a month the second year and $5,400 a month the third year.
·
Repairs,
improvements, and replacements. Be aware of a clause that says that at the end of the
lease you must restore the premises to their original condition. Try to
negotiate a clause that states the following: “The premises will be returned to
the Landlord at the end of the tenancy in the same condition as at the
beginning of the tenancy, excluding (1) ordinary wear and tear, (2) damage by
fire and unavoidable casualty not the fault of the Tenant, and (3) alterations
previously approved by the Landlord.”
·
Assignment
and subletting. Startup companies
should negotiate enough flexibility in the assignment and subletting clause to
allow for mergers, reorganizations, and share ownership changes. Watch out for
a clause that says a change in more than 50% of the company’s stock ownership
will be deemed an assignment that is prohibited without the landlord’s prior
approval. As your company grows and new people invest in it, this clause can be
inadvertently triggered.
·
Try
to avoid one-sided lease provisions. Landlords use form lease agreements that can be very one-sided.
Be on the lookout and negotiate on these types of provisions that are heavily
landlord-favorable:
o
The landlord is given
the right to pass on to the tenant, without limit, increased operating costs
such as property taxes, building repairs, or insurance premiums.
o
The landlord tries to
lease the premises “as is” or tries to disclaim responsibility for compliance
with environmental laws (e.g., asbestos issues) or the Americans with
Disabilities Act.
o
The landlord tries to
require the tenant pay any tax increases resulting from a sale of the property.
o
The landlord tries to
reserve the right to terminate the lease at the landlord’s convenience.
o
The landlord tries to
prohibit the possibility of subletting or assignment.
o
The landlord insists
on personal guarantee of the key shareholders of the company.
·
Consider
using a tenant broker. A good tenant broker can be invaluable and will represent your
company’s best interests. He or she will educate you on the current market;
locate spaces that meet your stated parameters; arrange tours and accompany you
to view these available spaces; and then prepare offer letters and negotiate
with landlords for all spaces that work best for your company.
30. Thoroughly Research Your Competition
Make sure you are thoroughly researching
competitive products or services, and keep on top of new developments and
announcements from your competitors. One way to do this is to set up a Google
alert to notify you when any new information about those companies shows up
online.
Expect that prospective investors in your
company will ask questions about your competitors. Any entrepreneurs who say
that “we don’t have competitors” will have credibility problems. So anticipate
these questions from investors:
·
Who are the company’s
principal competitors?
·
What traction have
those competitors obtained?
·
What gives your
company the competitive advantage?
·
Compared to these
other companies, how do you compete with respect to price, features, and
performance?
·
What are the barriers
to entry in your market?
31. If You Are Seeking Angel Investing
Financing, Know These Important Points
In reviewing a prospective investment, angel
investors especially care about:
·
The quality, passion,
commitment, and experience of the founders
·
The market opportunity
being addressed and the potential for the company to grow to become very big
·
A clearly thought out
business plan and early evidence of early business traction
·
Interesting
intellectual property or technology
·
A reasonable valuation
for the company
·
The likelihood of the
company being able to raise additional financing in the future if progress is made
Angel investors will want to initially see the
following from a startup:
·
A clearly articulated
elevator pitch for the business
·
An executive summary
or investor pitch deck
·
A prototype or working
model of the company’s product or service
·
Early adopters,
customers, or partners
There are a variety of ways to find angel
investors, including:
·
Venture capitalists
·
Investment bankers
·
Lawyers
·
Accountants
·
Other entrepreneurs
·
Crowdfunding sites
like Kickstarter and Indiegogo
The best way to find an angel investor is
through a warm introduction from a colleague or friend of an angel. Using LinkedIn
to ascertain mutual connections can be helpful.
32. Consider Adopting a Stock Option Plan to
Attract and Motivate Employees
Stock Option Plans are an extremely popular
method of attracting, motivating, and retaining the best employees, especially
when the company is unable to pay high salaries. A Stock Option Plan gives the
company the flexibility to award stock options to employees, officers,
directors, advisors, and consultants, allowing these people to buy stock in the
company when they exercise the option.
Stock Option Plans permit employees to share
in the company’s success without requiring a startup business to spend precious
cash. In fact, Stock Option Plans can actually contribute capital to a company
as employees pay the exercise price for their options.
The primary disadvantage of Stock Option Plans
for the company is the possible dilution of other shareholders’ equity when
employees exercise their stock options. For employees, the main disadvantage of
stock options in a private company—compared to cash bonuses or greater
compensation—is the lack of liquidity. Until the company creates a public
market for its stock or is acquired, the options will not be the equivalent of
cash benefits. And, if the company does not grow bigger and its stock does not
become more valuable, the options may ultimately prove worthless.
Thousands of people have become millionaires
through their stock options (Facebook being one famous example), making this
form of benefit very appealing to prospective employees. The spectacular
success of some Silicon Valley companies and the resulting economic riches of
those employees who held stock options have made Stock Option Plans a powerful
motivational tool for employees to work toward the company’s long-term success.
Here’s a general explanation of how stock
options are granted and exercised:
·
XYZ, Inc., hires
employee John Smith.
·
As part of his employment
package, XYZ grants John the option to acquire 80,000 shares of XYZ’s common
stock at 25 cents per share (the fair market value of a share of XYZ common
stock at the time of grant).
·
The options are
subject to a four-year vesting period with one-year cliff vesting, which means
that John has to stay employed with XYZ for one year before he gets the right
to exercise 20,000 of the options. The remaining 60,000 options then vest at
the rate of 1/36 a month over the next 36 months of his employment.
·
If John leaves the
company or is fired before the end of his first year, he doesn’t get any of the
options.
·
After his options are
“vested” (become exercisable), he has the option to buy the stock at 25 cents
per share, even if the share value has gone up dramatically.
·
After four years of
continued employment, all 80,000 of his option shares are vested.
·
XYZ becomes successful
and goes public, and its stock trades at $20 per share.
·
John exercises his
options and buys 80,000 shares for $20,000 (80,000 x 25 cents).
·
John turns around and
sells all 80,000 of his shares for $1.6 million (80,000 x the $20 per share
publicly traded price), making a huge profit of $1,580,000.
33. Focus on Offering Exceptional Customer
Service
Companies such as Zappos and Virgin America
became hugely successful because they focused on providing excellent customer
service and support. You want your early customers to give referrals and sing
your praises to their friends and colleagues. Thank your customers personally
by email. Go the extra mile to show your appreciation.
34. Hire an Experienced Startup Attorney
You need a savvy business lawyer for your
company, one who has regularly formed and advised many other entrepreneurs and
who specializes in startups. An experienced startup lawyer can help you:
·
Incorporate
·
Draw up contracts with
any co-founders
·
Prepare key agreements
for the business
·
Set up a stock option
plan for employees
·
Guide you through
potential HR landmines
·
Prepare protective
offer letters to prospective employees
·
Help you negotiate
terms with prospective investors
·
Limit your potential
legal liabilities
·
Protect your ideas and
inventions (through copyrights, patents, and non-disclosure agreements)
In a misguided effort to save on expenses,
startup businesses often hire inexperienced legal counsel. Rather than spending
the money necessary to hire competent legal counsel, founders will often hire
lawyers who are friends, relatives, or others who offer large fee discounts. In
doing so, the founders deny themselves the advice of experienced legal counsel
who could potentially help them avoid many serious legal problems.
Get recommendations for lawyers from other
entrepreneurs and venture capitalists. Make sure you have a good rapport with
the attorney. Meet with several potential attorneys before you make a final
decision (those first meetings should be free). And check out 10 Big Legal
Mistakes Made by Startups.
35. Get Comfortable With Public Speaking
The ability to communicate effectively can be
critical to landing customers, inspiring employees, and pitching to investors
to raise capital. Most people are not very good at public speaking and many are
even afraid of it. You must strive to overcome this fear. Consider working with
a public speaking or business coach to improve your public speaking skills.
Some of the most recognized entrepreneurs, such as Apple founder Steve Jobs,
were known for being great public speakers.
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