Who says you can’t start a business when you’re young? These days, more and more young entrepreneurs who are full of great ideas, passion, and drive are launching their own companies—any many are finding success.
I recently had the pleasure of serving as a mentor to a number of young entrepreneurs as part of the innovative U.C. Berkeley-Hass Entrepreneurship Program, which is under the outstanding leadership of Rhonda Shrader and Adeeba Fazil. The program offers undergraduates, graduates, and alumni an opportunity for career counseling, professional networking, and more to help boost their entrepreneurial endeavors.
More and more young entrepreneurs are launching their own companies. Here are answers to their most … [+]
The young entrepreneurs I counseled had some great, creative ideas for different startups, and many of them had already gotten some early traction in their businesses. They also had some great questions—questions that many entrepreneurs, young or old, have about starting, growing and financing a business. So I thought I would share my answers to those questions here.
The founders of a company must initially determine whether to organize the company as a limited liability company (LLC), general partnership, a sole proprietorship, or a corporation. If formed as a corporation, the company must also determine whether to file an election to have it taxed as an “S corporation” rather than a “C corporation.”
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their stockholders for tax purposes. Stockholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates (so called “flow-through taxation”). This allows S corporations to generally avoid double taxation on the corporate income.
A C corporation under federal income tax laws is one that is taxed separately from its owners. Generally, all for-profit corporations are classified as C corporations, unless the company validly elects to become an S corporation. A C corporation does not have limits as to who could be the stockholders (as S corporations do). And C corporations may have different classes of stock (such as preferred stock and common stock), which is not allowed for S corporations. Venture capitalists will typically only invest in preferred stock in a C corporation.
An LLC is another entity that provides limited liability to its owners the way C and S corporations do, and an LLC also provides flow-through taxation to its owners.
So what type of entity should a founder form?
For a comprehensive discussion of tax issues in startups, see Pay Attention to These 9 Essential Startup Tax Issues.
Corporations are formed pursuant to a state’s laws. Many people recommend incorporating under Delaware law, but my preference is to incorporate in the state where the business is located, as this will save you some fees, filings, and complexities. You can always reincorporate later in Delaware if desirable.
Ideas are a dime a dozen; it’s the actual implementation of an idea that is more important. If it’s truly unique, get a patent for it (visit www.uspto.gov). You may get some protection through copyright, trade secret programs, or NDAs—but not a lot (see The Key Elements of Non-Disclosure Agreements). You can’t worry too much about someone stealing your idea. The best thing to do is implement the idea and get a lot of traction for it.
If you think there is no competition for your idea, you are likely dead wrong. I’ve had multiple entrepreneurs over the years tell me they had no competitors, something I was able to quickly disprove with a simple Google search.
There is no one correct answer to this question. But you should discuss it with your co-founders and agree upon it up front to avoid any misunderstandings later on. If you are the original founder and the brains behind the idea, a good argument can be made for more than 50% ownership. The split should take into account the following:
If you are not a technology expert, and technology is going to be crucial to your startup, then it will be helpful to have a technical co-founder (or, at the very least, a senior-level hire who can handle the key technology functions). Investors and incubator programs like Y Combinator often like to see technology-oriented co-founders. But that doesn’t mean you have to give this co-founder 50% of the equity.
This can be difficult. First, brainstorm a bunch of different names, then do a Google search to see what is already taken—I’m betting this will eliminate 95% of your choices. Make it easy to spell. Make it interesting. Don’t pick a nonsensical name so people won’t have a clue as to what your business actually does (with all due respect to “Google” and “Yahoo”). Do a trademark/tradename search on the name, then make sure you can get the domain name (see 12 Tips for Naming Your Startup Business).
Every good “.com” domain name is already taken; however; I usually only recommend obtaining “.com” names. Ultimately, 99% of domain names are available to be bought—you just have to be prepared to pay for it. Do a “WHOIS Search” at networksolutions.com to find out the contact information for the owner of the domain name you’re interested in, and offer to buy the name. Don’t be naive and offer $500 for a premium domain name. You will be ignored. Be willing to pay a fair amount for a good name (see Key Steps in Obtaining a Great Domain Name).
To be honest, entire books are written on this topic. But, in brief, the key ways are as follows:
New entrepreneurs can make many mistakes, but here are some of the most common:
If you only have an idea and little or no progress in executing that idea, you likely won’t be able to obtain angel or seed financing from professional investors. So, in that situation, you will have to rely on family and friends, or perhaps consider crowdfunding sites such as Kickstarter or Indiegogo.
Most professional seed or angel investors want to see some traction in the business, such as:
The more traction you have obtained, the more likely you will be able to raise financing and get a desirable valuation.
How can you get investors interested in you? Investors get inundated with unsolicited executive summaries and pitch decks from startups. Most of the time, they ignore these solicitations. The way to capture their attention is to get a warm introduction from someone they know and trust: another entrepreneur, a lawyer, an investment banker, an angel investor, or another venture capitalist. Check to see if you have any LinkedIn connections to the investor.
See 15 Tips for Startups Seeking Angel or Seed Financing.
Yes, you do. Raising capital from investors is difficult and time consuming. Professional investors expect to see a concise and interesting summary of the business before they will even consider taking a meeting. Therefore, it’s crucial that a startup creates a great investor pitch deck that tells a compelling story.
You want your investor pitch deck to cover the following topics, roughly in the order set forth here and with titles along the lines of the following:
Here are some helpful pitch deck tips:
For additional guidance, as well as sample pitch decks, see How to Create a Great Investor Pitch Deck for Startups Seeking Financing and The 17 Biggest Mistakes Startups Make With Their Investor Pitch Decks.
Copyright © by Richard D. Harroch. All Rights Reserved.
This article was originally published on AllBusiness. See all articles by Richard Harroch.
About the Author
Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a large venture capital fund in the San Francisco area. His focus is on internet, digital media, and software companies, and he was the founder of several internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business. He is the co-author of the recently published 1,500-page book by Bloomberg, Mergers and Acquisitions of Privately Held Companies: Analysis, Forms and Agreements. He was also a corporate and M&A partner at the law firm of Orrick, Herrington & Sutcliffe, with experience in startups, mergers and acquisitions, and venture capital. He has been involved in over 200 M&A transactions and 250 startup financings. He can be reached through LinkedIn.