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. Show
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 BusinessStarting 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:
2. Protect Your Personal Assets by Forming the Business as a Corporation or LLCNever 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:
CORPORATION NAME By: ___________________________________ Your name – authorized signing officer and corporate title
See An Overview for Incorporating a Businessand 10 Key Issues in Setting up an LLC. 3. Come Up With a Great Name for Your BusinessSelecting 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:
For more advice, see 12 Tips for Naming Your Startup Business. 4. Focus on Building a Great Product—But Don’t Take Forever to LaunchWhen 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.” Other Articles From AllBusiness.com: 5. Build a Great Website for Your CompanyYou 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:
6. Perfect Your Elevator PitchAn “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:
7. Make the Deal Clear With Co-FoundersIf 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:
8. Obtain a Tax IDIn 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 SystemYou 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 EmployeeMany 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:
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 AgreementOral 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:
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). For a good sample employee offer letter, see 13 Key Employment Issues for Startup and Emerging Companies. 12. Make Sure All Employees Sign a Confidentiality and Invention Assignment AgreementCompanies 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:
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. See Key Issues with Confidentiality and Invention Assignment Agreements with Consultants. 13. Consider the Steps You Should Take to Protect Your Intellectual PropertyIt 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:
14. Become a Strong SalespersonIf 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 BudgetsIt’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:
16. Market Your Business Like CrazyTo succeed in business, you need to continually be attracting, building, and even educating your target market. Make sure your marketing strategy includes the following:
17. Use Consultants and Freelancers to Supplement Your TeamAt 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 DeckStartups 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
Pitch Deck Don’ts
For additional advice and a sample pitch deck, see How to Create a Great Investor Pitch Deck for Startups Seeking Financing. 19. Drive Traffic to Your WebsiteWhile entire books have been written on this topic, the key ways to drive traffic to your website are as follows:
20. Make Sure Someone Hasn’t Already Invented Your Great New IdeaHere are the key things to do if you have a great new invention idea:
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 PlanIt’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 BusinessHere is a summary of the most effective sources of business capital:
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 BusinessDepending on the nature of the business, you may need the following permits, licenses, or regulations:
24. Set Up Appropriate Books and Records for Your BusinessYou will need to keep multiple books and records for your business, including:
25. Properly Insure Your StartupIf 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:
Here is a list of the types of insurance that may be appropriate for your business:
26. Determine How to Divide Equity Among the Startup’s Co-FoundersThere 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:
27. Understand These Key Points About Seeking Venture Capital FinancingStartups 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:
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. For a comprehensive article on the venture capital financing process, see A Guide to Venture Capital Financings for Startups. 28. Pay Attention to Your Business ContractsBusiness 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:
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:
See 10 Key Contracts for Small and Growing Businesses. 29. If You Plan to Lease Office Space for Your Business, Focus on These Key IssuesLeasing 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:
See How to Negotiate the Best Office Lease for Your Startup. 30. Thoroughly Research Your CompetitionMake 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:
31. If You Are Seeking Angel Investing Financing, Know These Important PointsIn reviewing a prospective investment, angel investors especially care about:
Angel investors will want to initially see the following from a startup:
There are a variety of ways to find angel investors, including: 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. See Angel Investing: 20 Things Entrepreneurs Should Know. 32. Consider Adopting a Stock Option Plan to Attract and Motivate EmployeesStock 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:
For a comprehensive article on this topic, see How Employee Stock Options Work in Startup Companies. 33. Focus on Offering Exceptional Customer ServiceCompanies 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 AttorneyYou 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:
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 SpeakingThe 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. Related Articles on AllBusiness: Copyright © by Richard D. Harroch. All Rights Reserved. Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a large venture capital fund in the San Francisco area. His focus is on Internet, digital media, and software companies, and he was the founder of several Internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the author of several books on startups and, co-author of Poker for Dummies and Mergers and Acquisitions of Privately Held Companies (Bloomberg), and a Wall Street Journal-bestselling book on small business. He was also a corporate and M&A partner at the law firm of Orrick, Herrington & Sutcliffe, with experience in startups, mergers and acquisitions, and venture capital. He has been involved in over 200 M&A transactions and 250 startup financings. He can be reached through LinkedIn. This article was originally published on AllBusiness.com. Read all of Richard Harroch’s articles. |