With the new year comes a new opportunity to pursue business ventures. Many entrepreneurs look to the start of the year as a fresh canvas to create their enterprise. Unfortunately, while the “what” of business seem to change almost daily, the basics of business start-up are not so dynamic and rarely change.
I am committed to empowering entrepreneurs. The following 12 decision points – one for each month – will help entrepreneurs with Doing It Right!
Many early stage entrepreneurs belabor the question of whether to form a corporation or a limited liability company. The answer to this question is based on many factors including, industry type, owner participation, capitalization and exit strategy as well as taxation. To do it right, the start-up entrepreneur should focus less on the “what” sort of business to form and more on the “when” should I form a business entity. Legally, incorporating a newly formed business into any sort of business entity is better than engaging in business start-up activities as a sole proprietor. The law easily allows us to “correct” entity selection missteps. To do it right, an entrepreneur should form some sort of entity as soon as he or she starts to spend money (and not his or her own time) on activities related to the start-up.
February – Raising Money
Many entrepreneurs will need to raise money from outside investors to launch or take their business to the next level. To do it right an entrepreneur should follow the securities laws, which put restrictions on who you can raise money from, how much you can raise, how you can raise money and what information you need to give to investors. The laws also regulate who you can pay to help you raise money. Doing it wrong can lead to enforcement actions by federal and/or state regulators or investor lawsuits, any of which could force you to return any money you received, plus pay significant penalties. Doing it right means staying realistic about how long it will take to raise money, working your network harder than you can imagine and being honest with investors about the company and its prospects.
March – Employees v. Independent Contractors
As a start-up business begins to scale or grow, the question of how to hire a staff or professionals to do the work centers around using an employee or an independent contractor model. This is not a choice between Uber or a Taxi. The issue is really one of what sort of work needs to be done and what type of “worker” needs to do the work. Getting this wrong, known as “misclassification” – treating and paying someone as an independent contractor who should have been classified as an employee – can be very costly. To do it right, entrepreneurs should error on the side of paying and classifying those who work permanently full-time for the business (and for no other clients) as an employee.
April – Trademarks
As a startup, entrepreneurs are beginning to build a reputation and intellectual property. One part of protecting these “assets” is registering a trademark. To do it right, entrepreneurs may want to protect their business name, company logo, and brand names within the business. By registering a federal trademark, competitors are prohibited from using a confusingly similar mark. By doing it right, this allows entrepreneurs to invest in their brand, knowing they have legal protection from competitors hijacking their brand with a confusingly similar name or mark.
May – Your First Commercial Lease
Most startups will eventually need to think about when to move out of the home office, the garage, or an office share and into a space that works for your business whether it’s a hip and trendy office or an industrial building. At this stage of the game, most companies are not in the position to buy real estate, so your startup will likely be leasing. To do it right, an entrepreneur should interview and engage a commercial real estate broker and commercial real estate lawyer early in the process. Getting into a new space that reflects your startup’s culture and meets your space needs doesn’t happen overnight. Doing it right means identifying your search parameters right away, developing a plan to search the market, negotiating hard on the right business terms and making sure that the lease accurately reflects your business deal.
June – Company Governance
Unless you can start a business by yourself, you will likely have to deal with others who will make decisions about the future of the company. This is the essence of governance –who makes what decisions. Doing it wrong can lead to hurt feelings, founders leaving in anger, bad decision making and very often death of the business. Doing it right means everyone understands their role in the business, whether as a shareholder, officer or director, or even as all three. Each has a different role and rights and creating and obeying a consistent set of rules that work for your company is critical to doing it right.
July – Discipline and Discharge
Once your business has employees, it is only a matter of time before there is a need to discipline and then discharge someone. Doing it wrong means acting out of anger or frustration to discipline or discharge someone without collecting backup information, creating a plan for improvement or being inconsistent. Doing it even more wrong is doing something against someone in a protected class – gender, race, age or other discrimination. Doing it right means keeping emotions out, having clear documentation of the problems and performance. If the necessary action is discipline providing the person with a plan of improvement and if discharge making sure the decision is consistent with past practices or any applicable employee handbook.
August – Social Enterprises: Benefit v. Nonprofit v. For Profit Corporations
The landscape of enterprise options available for entrepreneurs today is vast. Social entrepreneurs – those who want to pursue a social mission – have many more options on how to do it right in order to establish, capitalize and operate social enterprises. There is no longer just one type of business form for the social entrepreneur. To do it right, social entrepreneurs need to understand and appreciate all of the options available to them to pursue sustainability and social impact.
September – Preventing and Managing Shareholder Disputes
This can be a simple doing it right: don’t bring on other shareholders. If, like most companies, this isn’t possible, then entrepreneurs need to be prepared for how to manage second guessing investors. . Doing it right means understanding the role, limitations, and rights of investing shareholders, but also the duties owed to shareholders by officers, directors and big shareholders. Doing it wrong can lead to a dysfunctional company, inability to make decisions, unnecessary and time-consuming distractions of the directors and officers and even shareholder lawsuits.
October – Equity Incentive Compensation
Sometimes start-up entrepreneurs do not have cash available to compensate talent at a rate commiserate with the level of skills being brought to the table. At other times start-up entrepreneurs want to incent their teams to participate in the upsize growth of the business. There are many tools available that use equity or contract rights for equity to address these situations. Equity incentive compensation is a powerful tool that most start-up entrepreneurs should consider but doing so blindly can cause long-term and short-term tax and business issues. To do it right entrepreneurs should carefully consider how to use equity incentive compensation in a way that does not dilute their ownership but also does not create unintended consequences for the recipients and the enterprise.
November – Business Succession Planning
Ironically, even start-up entrepreneurs need to consider succession planning. The unintended events of life can leave even the most intrepid business owner with unwanted partners (or former spouses of partners) or leave his or her families with obligations and burdens but no method to easily transfer a business and its operations. To do succession planning right, even in the beginning, start-up entrepreneurs need to consider and imagine what the world of their family and business will look like if life-changing events happen. The most important thing to remember with business succession planning is doing nothing and ignoring is actually doing it wrong for family members and the future of any business endeavor.
December – Company Valuations
Raising money always involves the following question for founders: “how much of the company should we sell to raise the money?” Doing it right means understanding that there is no perfect answer to this question and, like selling anything else, it all depends on what a buyer is willing to pay. Many a company has failed to launch because it would not change a too aggressive valuation. Doing it wrong means having a valuation that is not well supported by comparisons to similar companies, based on unrealistic goals. An unrealistic valuation ultimately results in a company that fails to gain the interest of investors. A common saying among start-up advisors to founders is “would you rather have x% of something big or 100% of nothing?”
I am committed to empowering our clients with the tools they need to do it right and succeed with their business endeavors. The Doing it Right events are a series of monthly cohort style events held throughout the Twin Cities where start-up entrepreneurs and seasoned advisors can connect, discuss, and work through the various challenges of Doing it Right!