This article by our founder, Laurie Stach, first appeared on lauriestach.com.
Okay, so you’ve done a LaunchX program (the summer program, clubs, or online course), understand your customer, and honed in on how to fill their need or solve their problem. You’re making progress on your product and proving its value. In other words, you’ve poured your foundation and it’s just about set. What comes next?
It’s time to start thinking about some of the logistical (read: structural and legal) considerations you must take into account. Here’s a quick look at what your next steps should be:
Align Your Team
Make sure that everyone on your team is in agreement on the planned trajectory of your startup. Get your milestones nailed down, get everyone aligned on what they’re doing to succeed in each of these goals, and consider how these goals will be tracked/ measured. Goals are no good without plans for how to reach them, and a way to stay on top of the tasks that will incrementally get you there.
You may find that you need to make changes later on as you get deeper in or that some milestones aren’t reachable using the same methods you’d anticipated using at the get-go. That’s fine. But, you have to start somewhere. Saying “we’ll just play it by ear and see how it goes,” is not going to make your company agile or creative, it’s just going to lead to confusion, misdirection, and stress. Plan your short-term and your long-term, develop a timeline of specific milestones and the components needed within each, and make sure everyone’s on board.
You may find that you need to make changes later on as you get deeper in. That’s fine. But, you have to start somewhere.
Speaking of which…
Get an Advisory Board
You’ll want to start building an advisory board pretty quickly. It doesn’t need to be formal early on. It can be a panel of a few mentors that you check-in with every month or two to share progress, get feedback, and keep your company on the right track. These meetings can help your team continue your momentum through holding yourself externally accountable to your mentors – you know that they’ll want updates from the last time you spoke!
Who you add to your advisory board depends on what skills you and others already involved in your startup lack. For instance, if you are already a savvy marketer, you may not need to add a marketing expert to your board. But, if you don’t know much about the legal aspects of business, you may want a lawyer there to broadly advise on those tough topics. If your business is in the healthcare space, you may want a doctor on your board.
It may be worthwhile to seek out at least one big-name or well-known person with skills relevant to your needs for your board. Having someone whose name commands respect and conveys industry knowledge can add to the credibility of your startup. And, of course, having a board member with proven know-how advising you is valuable in its own right, whether or not their connections and status get you any ins.
Eventually, you’ll need a Board of Directors — a more formal governing body — which votes on and makes big decisions about your startup’s future. Among the decisions your board will make is when it’s time to raise funding, which strategic partnerships to enter into, if (or when) you should terminate someone with a senior role in the company (when Steve Jobs was fired from Apple, it was a decision by Apple’s board that did it), and all other big picture choices.
Legal Entity Formation
Every startup that moves from the proto-business phase into a real company has to define itself as a legal entity. Lots of new entrepreneurs jump to this step too early, though there’s really two main instigators that could drive you to form your entity:
- Taking on a lot of risk – When you start having a lot of customers, generating revenue, and generally incurring risk with your business operations, it’s time to form a legal entity. This allows you and your team to limit your personal liability if there are any legal issues.
- Taking on investors – The paperwork will need to be in place to add investors to your equity allocations. Investment usually comes only after well over a year and a lot of testing of your business, so that the investor doesn’t end up needing to take a large portion of your company to account for the risks you haven’t yet mitigated.
When developing your legal entity, there are a few steps (please note – these steps assume legal entity formation in the United States):
- Apply for an EIN (Employer Identification Number) – this is pretty straightforward and can be done online.
- Decide which legal entity best fits your startup’s needs, limitations, goals, protection needs, etc. You may consider the options of an LLC (Limited Liability Corporation), S-Corporoation, C-Corporation, Sole Proprietorship, or many others. Officially defining your business in these terms has both general legal and tax ramifications, so you’ll need to do your research (and/or have expert advice) before you choose your path. You can find some basic information here. LegalZoom also has some good information and can be a good place to start to avoid hefty lawyer fees.
- Name your company. There is a lot of advice already out there on how to choose a catchy name, so I won’t go into that. I’ll just suggest that the main considerations to include as you name your legal entity include:
- Check if the entity name is available – Legalzoom has a means of helping check.
- Check for the domain name – while your business may not require a fancy website early on, you will want to have a domain name at some point that will be easy to find. This means you want to be able to say the domain and have people know how to spell it. Plus, you should ideally have a .com – I know there are a lot of other site types that have grown in popularity, but if someone else has the .com, that could pull credibility from your business and make your site difficult to find.
- Trademark search – check to see if anyone else already has the trademark for the name in your space.
- Open a bank account. It’s important to keep your company finances separate from your personal finances for legal reasons, so be sure to set this up early to be able to link it to payment methods and payroll software down the road.
Opinions differ on when the best time to incorporate is, but in my experience it’s best to wait until you absolutely have to do it. Usually, you’re past the point of no return and must define your business as a legal entity when you are either ready to accept investments or there is a high level of risk involved. Taking investments or making profits will have an impact on your personal taxes if you don’t form your business in the smartest way. It’s also critical to define your business’s form before big liabilities can come into play.
Your Founders’ Agreement
A founders’ agreement is a crucial document in the early stages of a startup. It lays out the contributions and responsibilities — financial and otherwise — of each founder at your company, as well as exactly what their share of the company (profits, assets, etc.) will be. That means, in part, including a clear vesting schedule. This limits the risk of drama around who did what and gets what should your startup take off, tank, or should some of the co-founders want to exit at any point. It can put you and your teammates in a difficult situation if any of these things happen and you haven’t decided up front how to handle it. Putting ink on paper to solidify what each person brings to the table and what they stand to gain is also a way to ensure that you don’t keep having that same conversation and that everyone is on board and things are done fairly.
The 3 most vital elements to include in such an agreement are:
- Each founder’s specific role
- Equity ownership/a vesting schedule
- The transfer of intellectual property (IP) rights to the company
For a more detailed analysis and breakdown, check out this Strtp article on how to draw up a founders’ agreement.
I’d like to go into a bit more detail about vesting schedules and IP.
A vesting schedule is basically a timeline of when each founder (and/or employee) can exercise their shareholder options (i.e. the ability to purchase or profit off the company shares they’re allotted as part of their compensation package). Most companies allocate a certain number of shares per founder or employee, based on their monetary and other contributions (ideas, resources), but they aren’t given all at once. They have to “vest” over a period of time before they can be used, which ensures that a person will remain committed and invested in the long haul, instead of simply buying up or selling off a large number of shares and then moving on a few months in. It also dictates how long someone has after leaving your company to exercise their share options (aka: buy shares at a very low price or cash out in the case of an IPO or acquisition).
It’s also important to assign or record intellectual property information to ensure your company retains the legal rights to all the innovations, designs, and other business collateral. For instance, let’s say one of your co-founders designs your logo, but at some point down the line decides to leave the company. If you don’t specify that anything designed for the company belongs to the company, they could take the rights to the logo with them. Your company would be left scrambling to either buy back that piece of your identity, or create a new one. In an even scarier scenario, your app developer could well claim IP rights to your company’s product if there’s any lack of clarity about the fact that the app belongs to the company, not the individual who developed it. Bottom line: Be very clear about who owns what rights in your founders’ agreement.
Public-Facing Legal Considerations
Your Terms of Service (ToS) spell out the ways in which your product and service may be used, along with your customers’ and company’s rights in the relationship, and what options customers have for dispute resolution. Make sure you’re specific about such things as who owns the right to any customer-submitted content, how various information available on your site can be used by others, the minimum age requirement for users of your site or for purchase of your product or service, and the repercussions for violating your business’s terms.
If running a business doesn’t sound as fun now in light of all these logistical considerations, keep in mind that most of the above just has to be done once if it’s done well. You may update your terms, policies, contracts down the line, but the biggest hurdle is doing it the first time. Do it right and you’ll avoid headaches that take you away from the vision and the work down the line.