Entrepreneurs face hundreds of decisions when they start a company, and there’s often a temptation to optimize each one of them—sometimes by breaking new ground. However, it’s best to focus one’s energy and attention on milestone issues. My experience and expertise is with US companies, but these are generally accepted startup practices:
- Corporate structure. Every country has different commercial entities, such as corporations, partnerships, limited-liability corporations, and cooperatives. You want a corporate structure with three characteristics: one that is familiar, if not comfortable, for investors; sellable to other companies or on the public stock market; and capable of offering financial incentives to employees. In the United States, if your goal is to create “the next Google,” you want to form a Delaware C corporation.
- Intellectual property. A startup should unequivocally own or unequivocally have licensed its intellectual property. This means that there are no lawsuits, or any risk of lawsuits, by former employers and no charges that the intellectual property infringes on someone’s patents. Also, the intellectual property and licenses should belong to the startup, not the founders. This is because you never want a situation where a disgruntled founder leaves the startup and takes the intellectual property with him—crippling the startup.
- Capital structure. This refers to the ownership of the startup. There are four warning signs: 1) few founders own the vast majority of the startup, and they are not willing to extend ownership to other employees; 2) dominant control by a small group of investors that doesn’t want dilution of ownership, 3) dozens of small investors that make managing shareholders a burdensome and slow task; and 4) overpriced previous rounds of financing that make an investment unattractive to new investors.
- Employee background. Areas of concern include executives who are married to each other and executives who are related to one another; unqualified friends in high-level positions; and high-level employees with criminal convictions. These issues may signal that the startup isn’t a meritocracy.
- Regulatory compliance. This refers to issues with state or federal laws and regulations, nonpayment of taxes, and solicitations of unqualified investors. Typically issues with regulatory compliance indicate clueless or crooked management—both are unacceptable and will hinder progress.
Experts have written entire books about these five topics, so don’t make decisions based on my brief explanation of such complex issues. These are areas where you only need to know what you don’t know, so that you can find an expert who does.
This post is a tiny part of Guy Kawasaki’s latest book, The Art of the Start 2.0. Read it and reap…