4 Initial Startup Steps to Starting You Own Startup
Startups aren’t easy. They often require a level of attention, commitment, and energy that is unrivaled in the business world. The problems that arise when it comes to startups are often much more uncertain, since startups aren’t established companies with the kind of experience or relationships that might neutralize that particular problem much easier.
Here, we will talk about some of the initial steps you must take in your quest to help your startup make its initial first steps, before it (hopefully) goes on to make you and your team wealthy.
- Form a C-CORP: The very first startup step is to form a C-Corp. The alternatives are S companies and LLCs, but the truth is that investors really only invest in C-Corps, and this is the natural path to go as a startup founder. This is a step that must be taken at the right time, as there is no reason you should be creating a corporation, which is, by definition, a separate legal entity, if you aren’t 100% serious about taking the startup path. For example, if you are at your day job, and brainstorming some great product ideas, and have a marketing strategy or two, but haven’t assembled a team, or really researched your market or demographic – it certainly is nowhere near the time to actually incorporate anything.Creating a C-Corp is a step that should be taken after you know exactly what you want your company to be, exactly how it should be governed, and to formally assign shares in the company. One great thing about incorporating in the US is that it only takes 24 hours to incorporate in Delaware. Delaware has become THE place to incorporate. For some context, over half of all the publicly-traded companies and over 60% of all Fortune 500 companies are incorporated in Delaware. It’s important to note that incorporating in the United States is possible, even if you are not physically in that state, or even plan on doing business in that state! It’s important to note that many companies outside of the US choose to do this because US investors are typically only interested in investing in companies that are incorporated within the States.
- Find a Competent Lawyer: It’s important during this time to find a competent lawyer to make sure that the process continues seamlessly. This will cost several thousand dollars, and often times, you will be able to find a lawyer that will defer their payment until after you actually raise money, which obviously is an extremely convenient option. However, the importance of this cannot be stressed. We may all know a lawyer from a certain sector that believes that they could help, but if this process isn’t handled properly, it can mean many headaches down the road. There are startups, for example, that run into obstacles when it comes time to actually receiving funding, because they find that the lawyers that they used made a myriad of mistakes during the incorporation process. As a result, the funding may be put on hold, their reputation might be damaged, and the momentum of the company is affected dramatically.
- Incorporate your startup: Incorporation is a large step that will set the tone for years to come, which is why assigning equity is so important. There are many uncomfortable questions when it comes to co-founders and who should own what, because of what they bring to the table. It’s extremely important to make sure that your team is forward-thinking. These are all very much the first steps in what is likely to be a decade-long journey and more. The product that you are developing is only the prototype of what you may eventually bring to market. The problem that you are attempting to solve as a startup may evolve into something bigger, which could either bring its own obstacles or opportunities. If you are not surrounded by people who are thinking long-term and are concerned with taking that journey with you. We all know that not everything works out in the startup world – which is why there should already be agreements in place that state that if someone leaves, the shares that they own have certain restrictions on them.This is standard, as no one wants to be part of a company where the founders are selling all their shares too early, which could affect things down the road. There should also be options for founders to vest, so that they can repurchase stock in their own company. This is important because if there are three founders, and one is more or less “dead weight”, as in they are not working hard for the future of the company, but vacationing in Europe; vesting allows an option to make sure that the hard work the other founders are doing will be rewarded when the company is acquired, as they will have been strategically vesting and positioning themselves for a future payday.
- Transparency: A Simple Agreement for Future Equity, or SAFE, is very standard in Silicon Valley, as many investors are investing money because they believe in the potential of what they see as an undervalued company with a great team, intellectual property, market strategy, or whatever the case may be. In this agreement, an investor hands over money to purchase shares at a certain rate that reflects the risk that they are taking. This way, during a future round of raising money, this investor has already secured his shares in the company at a lower price, because he or she decided to take a chance before the startup was able to prove itself to other investors. This obviously could mean that an investor that takes a chance could end up being extremely wealthy if a company truly comes to fruition – to ensure fairness, there is often a cap on how much of the company they can own. This is beneficial to the founders because they can get the cash flow that they might desperately need, while still having enough skin in the game to feel comfortable about working those long days and nights for the startup’s future.
The bottom line is that within the infancy of a startup, there’s one thing to remember: transparency is paramount. The founders should be able to communicate fairly and openly about how they believe they should be compensated, and make sure that they are on the same page in terms of pursuing this particular vision and direction for many years to come.
There will be many problems to solve, and many investors to woo – and it’s important that everybody feel comfortable before diving in.