David S. Rose is an entrepreneur, investor, and mentor, and the author of The Startup Checklist: 25 Steps to a Scalable, High-Growth Business. He’s been present at the birth of businesses for decades, and knows what makes them grow–or not. Rose shares the simple, practical things that you can do right from the start of your business that will potentially save it lots of money later, and will give you the best chance for success.
1. Decide if you want to be a small, independent business or a high-growth startup.
This is a binary, critical, fundamental decision that will immediately answer over a dozen other questions. It will determine what type of corporate structure you use, which state you register in, what kind of financing you will be able to receive, how you will compensate your employees, and much more. A good test is to ask yourself, “Will I try to raise money from outside investors?” and “Do I plan to offer stock options to any of my employees?” If the answer to either is yes, you have no choice but to head down the more complicated, high-growth path. Switching from one to the other later is possible, but that can be very expensive.
2. Figure out who The Entrepreneur is in the company.
It’s tempting to say that “anyone can be a founder,” and “all founders on the team are equal,” but in the real world, that’s just not true. While experience has shown that founding teams of two people (what serial founder and venture capitalist Paul Graham describes as “a hustler and a hacker”) tend to be more stable and successful, in every case one person is the primary driver. This is the person who is prepared to do anything for the business, give up work-life balance, and be the one whom investors, employees, and partners look to. The buck has to stop somewhere, and if you don’t figure that out before you start, you are in for a world of hurt.
3. If you have more than one founder, all of them must have vesting schedules for their equity.
While it is tempting to assume that “vesting is for everyone else,” I have seen far too many startups crash and burn when one founder leaves a company–along with half of that company’s equity. Vesting protects everyone, including a startup’s founders, so be sure that every employee’s options vest, and every founder’s stock reverse-vests from the very beginning. (Reverse vesting gives the company the right, decreasing over time, to buy back a founder’s stock.) Trying to fix this one down the road will be very costly–and possibly a company killer.
4. Whatever you do, do it with a professional.
A penny saved on professional advice today is $100,000 lost in cleanup expenses down the road. While there are plenty of books and internet postings claiming that you can incorporate yourself and download forms from the web, you can’t! Or, at least, you shouldn’t. Every single serial entrepreneur with whom I have spoken has told me,
“If only I hadn’t tried to do it myself, I would’ve saved $100,000!” There’s a reason lawyers and accountants go to school for this stuff. While starting a company might not be quite as difficult as brain surgery, I guarantee if you try to do it all on your own, you will screw it up–and then pay 10 times as much to get a professional in to clean it up.
5. Don’t start by raising money.
Although it may come as a surprise to a lot of ambitious entrepreneurs, investors do not fund ideas, no matter how good or how potentially profitable they are. A typical angel investor looks at 40 opportunities for every investment made; a typical VC looks at 400. And the investments they make will be in companies, not ideas. Spending months trying to raise funds for an idea is fruitless and dispiriting. Do not even think about raising money from outside investors until you have developed your product and have at least a handful of pilot or beta customers. Otherwise, it’s like trying to teach a pig to sing: All it does is waste your time and annoy the pig.