Structuring a startup

Posted on Tuesday, February 17, 2009 at 8:53AM by

Jeff |

Johan writes:

I am looking to start a new software company based on my idea. a current co-worker is my potential development partner (I am idea man + initial funding). Where can I find basic start-up rules, i.e. how to structure initial organization, protect myself (and partner), set us up to grow, create structure so that I can maintain control yet hire key employees. I am sure you have written about this somewhere, or may recommend an article? Not looking for a book, just how to get started (e.g. do I incorporate, just have an NDA, promissory note..?).

Oh, where to begin. This brings back some memories as to the things I did to try and get established when I setup my first "real" business when I was in college. My business partner and I headed down to the county courthouse and said "we want to start a business, what do we do?" and no one had any idea. Three days of running around, being redirected from office to office, eventually led us back to the courthouse where we got some kind of license that I'm sure now was completely unnecessary. LOL.

In any case, getting started really isn't as hard as we made it on ourselves that first time. If you are chomping at the bit to get started, I'd recommend you setup an LLC now to start working under. It's easy to change into a full C-Corp later, it's relatively inexpensive to establish, and it's easy to manage from a tax and paperwork standpoint. You can setup an LLC at LegalZoom pretty cheaply, and you'll be up and going. For that matter, you can do the same with the C-Corp, but if you aren't sure that's what you want, I'd start with the LLC and then convert it later on.

Legalzoom will have a ton of the other docs you might be looking for as well - NDAs, promissory notes, employment agreements, etc.

Another thing to consider as you get more serious about your business is to talk to some actual law firms about your questions. Any good law practice will meet with you at no cost to discuss your needs and their services. If you're starting the kind of business where you might be raising venture capital, it's not uncommon for a firm to take a small piece of equity in lieu of cash during the startup period. They can help you decide what kind of structure you need.

BUT... all of this is really secondary: Having a solid business plan is the first thing. You don't need to have some hundred page document that's filled with meaningless information you'll never use. You just need to articulate your business in words and pictures over the course of 5-15 pages. What do you sell, who will buy it, why will they buy it, how many of them are there, how do you reach them, how do you make money, how much will you make? Those are the basic questions. Get those answered on paper and it will help you tremendously, even if no one else ever reads that document. Likewise, sitting down with an excel spreadsheet and running some numbers is where I like to start even before hitting the business plan. Make some assumptions and see how your business grows. Then you'll be able to see where the real focal points are to make your business work.

Those two topics are worthy of multiple posts themselves, but we'll leave that for when someone asks. In the mean time, I'd start with that spreadsheet, if you find something that works with your assumptions, start answering those questions on paper so you can articulate your business. If you've got that done, then perhaps it's time to get talking to a lawyer. At any time you can create that first LLC so you can start tracking expenses and things. If you're committing to working on this business full or even part time, even if it's just in the planning stage, setting up an LLC through LegalZoom is probably the way to go to give you that initial framework for setting up shop.

You might also scan through some of my past articles to see what might be helpful. In particular, you may want to see this one on structuring equity for th founders, and this one that looks at the differences between LLCs, s-corps, and c-corps.

Good luck!

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