Having been a start-up lawyer, entrepreneur, and venture capitalist, I have been asked many of the following questions over the years from entrepreneurs when starting a business. Sometimes there isn’t an easy answer, and as lawyers often like to say, “It depends on the circumstances.” But, here are my short-hand answers to the frequently asked start-up questions, which hopefully will be right 95% of the time.
1. Should I form my company as C corporation, an S corporation, an LLC, a partnership or a sole proprietorship?
Start it as an S corporation, unless you have to issue both common stock and preferred stock; in that case start it as a C corporation. And an S corporation can easily be converted later into a C corporation. LLCs are popular, but can get overly complicated. Partnerships and sole proprietorships are to be avoided because of the potential personal liability to the owners of the business.
2. Where should I incorporate my business? The standard answer to this is Delaware because of its well developed corporate law. My answer is that it should be the state where the business is located, as this will save you some fees and complexities. You can always reincorporate later in Delaware.
3. How much should I capitalize my business with at the beginning? As much as you can reasonably afford, and in an amount to at least carry you for 6-9 months with no income. What you will find is that it always takes you longer to get revenues, and that you will experience more expenses than you anticipated.
4. How likely will it be that I can get venture capital financing? Extremely unlikely. Get a product done, gain some traction, get a good management team, and then consider getting venture financing.
5. Should I require prospective angel or venture capital investors to sign a Non-Disclosure Agreement (NDA) so they don’t steal my idea?
No, don’t waste your time. It will be counterproductive and slow down your fundraising. And many investors will refuse anyway. It’s hard enough to get a meeting with an investor – don’t put another roadblock in the way. For the most part, it’s not the idea that is important, it’s the implementation of the idea and the entrepreneurs behind it.
6. How much dilution in share ownership of my company should I give up to investors in my business?
Whatever amount gets you funded. Don’t try to over-optimize on ownership. Get cash to grow your business and make your investors happy as well.
7. How big should a stock option pool for employees be?
15-20%. Standard vesting for options is 4 years, with a one year “cliff vesting” and monthly vesting after that. “Cliff vesting” in this context means the employee must be employed by the company for a minimum of one year before the employee earns any of the options.
8. How can I get a venture capitalist to pay attention to me?
Any of the following:
- Get a ton of traction in the marketplace
- Have meaningful growing revenues
- Have a world-class management team
- Have truly innovative technology with a big market opportunity
- Get a personal introduction to one of the VC firm partners from a respected colleague
9. How can I come up with a great name for my business?
This is difficult. First brainstorm with a bunch of different names. Then do a Google search to see what is already taken, and that will eliminate 95% of your choices. Make it easy to spell. Make it interesting. Don’t pick a nonsensical name where people won’t have a clue as to what you do (with all due consideration to names like “Google,” “Yahoo,” and the like). Do a trademark/tradename search on the name. Then make sure you can get the domain name. Consider hiring a name consultant like Alexandra Watkins at www.eatmywords.com.
10. What are the biggest challenges to starting a business?
The answers are:
- Shortage of capital and cash flow
- Having a good business plan
- Coming up with a great product or service
- Sticking to it
- Working more than you expected
- Getting through the frustrations of being constantly rejected by customers
- Hiring good employees
- Knowing when to fire bad employees
- Having to wear so many hats
- Managing your time
- Maintaining some kind of work/life balance
11. What kind of business should I start?
A business that
- You are passionate about
- Doesn’t take a kazillion dollars to fund
- Has the potential to grow into something big in a reasonable time frame
- You have some experience in (avoiding the problem of “you don’t know what you don’t know”)
- You would enjoy doing (don’t build a business that you will dread going to everyday)
- One that can cause meaningful improvement in users’ lives
12. What are the biggest mistakes made by start-up entrepreneurs?
- Not starting with enough capital
- Thinking that success will come quickly
- Not carefully budgeting
- Not focusing on the quality of the product or service
- Underestimating the importance of sales and marketing
- Not adapting or iterating quickly enough
- Not understanding the competitive landscape
- Ignoring legal and contract matters
- Hiring the wrong employees
- Mispricing the product or service
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13. How can I protect my great idea?
Ideas are a dime a dozen. It’s the actual implementation of an idea that is more important. If it’s truly unique, get a patent for it (see www.uspto.gov). You may get some protection through copyright, trade secret programs, or NDA’s, but not a lot.
14. Do I need a lawyer to start a business?
No. If it’s a simple business with one owner, as you can incorporate through online services like LegalZoom.com and RocketLawyer.com. But, it’s usually a good idea to have an experienced business lawyer on your team who has advised many start-ups. Hire only a business lawyer, not a general practitioner or divorce lawyer. Experience matters.
15. How can I obtain the domain name I want?
Every good “.com” domain name is already taken. And I usually only recommend “.com” names. Ultimately, 99% of domain names are available to be bought – you just have to be prepared to pay for the name. Do a “WHOIS Search” at www.networksolutions.com to find out the contact information for the owner of the domain name you are interested in, and offer to buy the name. Don’t be naive and offer $500 for a premium domain name. You will be ignored. Be willing to pay a fair amount for a good name.
16. How can I drive traffic to my website for my business?
Entire books are written on this topic. The key ways 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, Tumblr, and other free social media sites.
17. I have an invention idea. What do I do to check that someone hasn’t already invented this idea?
- Do a Google search on the key words associated with your invention.
- Do a search online of the U.S. Patent and Trademark Office at www.uspto.gov.
- If that works and you want to get a patent on the idea, hire a patent lawyer.
18. Do I need 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. Then get input from trusted business/finance advisors. But don’t go overboard with a 50-page business plan. In reality many start-ups have to deviate from their plan.
19. Where can I get money for my business?
Many books and articles have been written on this subject as well. Here is a summary of the most effective sources of capital:
- Personal funds
- Credit cards
- Friends and family
- Angel investors
- Crowdsourcing sites such as Indiegogo.com and Kickstarter.com
- Bank loans/SBA financings
- Venture capitalists
- Equipment loan financing
20. What permits, licenses or registrations do I need for my 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
- Sellers permit
- Health department permits (e.g., for restaurants)
- Federal and State tax/employer ID’s
21. What do I need to worry about in hiring an employee?
- Have you done a reference check?
- Does the employee have relevant experience for the job?
- Will the employee fit in with the company culture?
- Do you have a good form of employment “at will” letter for the employee to sign (allowing you to terminate the employee for any reason if it’s not working out)?
22. What kind of books and records do I need to keep for my business?
- 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
23. What kind of insurance does my business need?
Consider the following, depending on 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 insurance
- Key man life insurance
24. How should equity be divided among co-founders of a start-up?
There is no one right answer. But you should discuss it and agree upon it right up front to avoid any 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 relative value of the contributions of the 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 founders will be contributing cash as investment in the business
- Whether one person wants to maintain control over decision making
25. What online resources are helpful for learning more about starting a business? www.AllBusiness.com
Copyright © by Richard D. Harroch. All Rights Reserved.
Richard 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 investing in Internet and Digital Media companies. He is the author of several books on startups and entrepreneurship. He was also the founder of several Internet companies. He is the co-author of Poker for Dummiesand a Wall StreetJournal bestselling book on small businesses. He was also a corporate partner at the law firm of Orrick, Herrington & Sutcliffe, with experience in startups, mergers and acquisitions, strategic alliances, and venture capital.