Every start up founder thinks that administrative aspects are boring.
You are unlikely to think about lawyers and accountants when you dream up a piece of software that will change the world. Yet if you want to build a real company you need to take care of the basics. While not the primary focus of your business administrative functions are very important because they have impact on the daily life and long term growth. The main trick is to be aware of what needs to be done and do it quickly and effectively.
1. Setup a real company
The first step in setting up a business is to declare it to the world. Lots of startups in the garage might think that setting up a company does not make sense until you get the business of the ground. The idea of first writing the code and then incorporating is just plain wrong.
First you need to figure out what kind of company are you creating and what is the ownership structure. Setting up company is cheap and quick and it is important starting point for your business. What you will get in return for doing it is: legal protection, alignment of the expectations and basic knowledge about how companies work.
Law treats a company as a legal entity, just like it treats an individual. One of the advantages in setting up a company is to protect your personal and
family assets. Since company is a legal entity, when you incorporate you, for the most part, remove personal liability.
The next advantage is that you will have to discuss equity. When the company is created each co-founder will likely become a shareholder. Will everyone have the same share? Having this discussion early on is important to align expectations and to avoid conflicts and disappointments in the future.
Finally, and most importantly, you will learn how companies are structured. Any company has three major players: the shareholders, the directors and the officers. The company shareholders elect the board of directors. The board sets the strategic direction for the company and also appoints officers - CEO, CFO, CTO, which run the company on the day-to-day basis. It is valuable to understand how all this works because the founders of a startup wear all three hats - shareholders, directors and employees. Knowing which hat to put on at any given time is on is going to help you both in th early days and as particularly as the company matures.
2. Get a Delaware LLC or INC
Likely the best way for you to setup a company is to create a Delaware Limited Liability Corporation (LLC) of an full C-Corporation (Inc). Delaware has traditionally been good for setting up the companies because of its tax laws. The important difference between LLC and an Inc is in how they treat taxes and number of shareholders.
The LLC is generally much simpler to maintain and it allows pas through taxes, which is good for companies that have income in the early days. The revenue can be treated as an as income to shareholders and only taxed once. In an Inc the tax is paid twice, first by the corporation and then again by the employees, as part of their regular withholding.
The catch with LLC is that it can only have up to 70 or so shareholders, so LLC can never become a public company (can’t have it shares traded on a stock exchange). Because of this limitation the Venture Capitalists (VC) will never fund an LLC. Typically it is not a big deal to convert. AdaptiveBlue started as an LLC and then became an Inc before Series A.
If your are definitely going the VC route you may as well create an Inc right away. If you think you can actually bootstrap on your own for a while and have revenues then LLC is the way to go.
3. Don’t Save Money on a Lawyer
A lawyer? Are you kidding me!? Why would we need a lawyer for our brand new startup in a garage? As it turns out, a whole bunch of things and there is not much wiggle room here. Because a company is a legal entity having a lawyer is essential. For starters here is the list of things and documents that your lawyer should do for you in the first days and months of your business:
- Incorporate your business
- Create Articles of Incorporation
- Create Bylaws and maintain board minutes
- Create Shareholder Agreement
- Create Employment Agreements
- Create Stock Options Plan
It is best to work with one lawyer instead of hiring many at different ones so that the lawyer would know the specifics of your business and develop a relationship with you. Ideally this person is someone you know from your past, but if not, then look around for a recommendation. It is best to reach out to your friends who’ve done startups or work through your network on LinkedIn. What you are looking for is a corporate lawyer - a very different kind from personal lawyer who does injuries and divorces. You need a lawyer that specializes in corporate law and ideally already has a startup experience.
Now the painful part. Of course good lawyers are not cheap. Depending on where you are the rates are likely to around $250 per hour. But a good lawyer would get most of these basic stuff done very quickly, and will be worth the money. Let me repeat this again - a good lawyer is worth the money. Article of incorporation, bylaws and shareholder agreement are standard documents and an experienced lawyer would start with the template and then tweak things to fit your case. So overall your first year bill for all legal infrastructure should be less than 10K.
Of course it is tempting in am early stage startup to just Google this stuff and then tweak it on your own based on common sense. You can do that but beware that law and common sense do not always overlap. And just like there is a point in writing the code there is point in having a good lawyer - it is the person who would keep you out of trouble.
And finally, if you still have doubts, you should know that unless your business is setup and operated properly there maybe serious consequence and questions. From litigations from competitors and users to problems arising during due diligence process when your company is being acquired, the money that you will save on the basic legal work is simply not worth the risk.
4. Get an Accountant and, More Importantly, a Bookkeeper
Just like the legal aspects of a startup can not be ignored neither can be finances. And unlike the legal stuff, which is mostly one time deal, finances are ongoing and require continuous attention. To deal with finances you need two kinds of people accountants and bookkeepers. The Accountants are skilled in complexities and intricacies of tax law. They also conducts audit or review of the company, typically once a year.
Accountants typically do not keep books because they are expensive (kind of like lawyers, maybe a bit cheaper). Instead the books are kept by
bookkeepers and so to find a kick ass bookkeeper is another really important thing you need to do when you start a company. You can go either with an individual or with a service. I always prefer an individual became there is an opportunity to develop a relationship and get more personalized service.
The trick about startup finances is the same as with personal ones - keep it simple! Do common sense things like minimizing the number of different accounts and payees. You really only need one bank account and one credit card. Make sure that both can integrate with Quick Books, which is the software that most people use to do accounting for small businesses.
Most of the expenses in the early startup test say are people related - salaries and insurance. You can go with HR services firm which all take care of this stuff or you can get a bookkeeper savvy enough to do it for you. Having bookkeeper handle the payroll is perfect for a small company as it will keep things simple and allows the bookkeeper to have complete control over how daily finances are handled.
Insurance is another major thing to deal with. For many people especially the ones with the families health coverage is a very important issue. It
makes sense to make people happy and to get the best coverage that you can afford. If you are running a funded startup it is not going to make a big difference to the company’s budget but it will make a difference to the individuals.
5. Turn Boring into Learning
You have to take care of legal and financial aspects of the startup, so why not turn it into learning? The legal and finance aspects of the company are important and interesting, there are a lot of new things and ideas that you will encounter that are likely to impress you.
Administering a startup is definitely not the most exciting part of building a company. But it needs to be done and it needs to be done right. You
need to know the basics about how things work, what legal documents you need and how to run the finances. If you figure out the basics and set things up in a pragmatic and simple way all this administrative stuff will not be a time suck.
You will learn a bunch of things and have a piece of mind.