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.
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.
1. I’m Just Starting My Business. What Kind of Entity Should I Set Up?
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?
- Never form the company as a general partnership or sole proprietorship, as these have the huge disadvantage of potential liability to the owners for the debts and liabilities of the business.
- If properly structured and run, LLCs and corporations can protect the owners from personal liability if something goes wrong with the business.
- If the company will be getting outside investors, it will most likely need to be a C corporation.
- If it’s a simple company with one or two individual owners, an S corporation makes sense. You can always convert it later to a C corporation.
- If the owners want greater flexibility for types of owners and wish to avoid the restrictions of S corporations, then an LLC or C corporation can make sense, although LLCs tend to be a bit more complicated to set up and maintain (and more complicated for tax filing purposes).
For a comprehensive discussion of tax issues in startups, see Pay Attention to These 9 Essential Startup Tax Issues.
2. Where Should I Incorporate My Startup?
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.
3. I Have a Great Idea That Has No Competition. How Can I Protect It So Others Don’t Steal My Idea?
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.
4. How Should Equity Be Divided Among My Co-Founders?
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:
- The relative value of the contributions of the founders
- Who came up with the idea for the business
- Vesting dependent upon continued participation in the business (you don’t want to give away 25% of the company to someone who leaves after a few months)
- The amount of time to be committed to the business
- The cash compensation to be paid as an employee (or reduced salary that a founder is willing to take in exchange for equity)
- Whether someone will be contributing cash as investment in the business
- Whether one person wants to maintain control over decision making
- The fact that additional dilution will occur in the future as you bring in investors or grant options to new employees
5. Do I Need a Technical Co-Founder for My Business?
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.
6. How Can I Come Up with a Great Name for My Startup?
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).
7. I Have an E-Commerce Business. How Can I Drive Traffic to My Website?
To be honest, entire books are written on this topic. But, in brief, the key ways are as follows:
- Pay Google, Bing, Yahoo, Facebook, or other sites to send you traffic (such as through the Google Ads program). However, this is often expensive and not cost-effective, so you need to do testing/pilot programs to see what keywords work and at what price.
- Build a great site with lots of high-quality, original content that is search engine optimized as well as optimized for mobile traffic. Continue to add fresh content to the site.
- Have a smart social media plan to drive traffic from Facebook, YouTube, Twitter, LinkedIn, Instagram, Pinterest, and other free social media sites.
- Prepare well-written articles and try to have them posted to other quality sites such as AllBusiness.com or Medium.com, with links back to your site.
8. What Are the Biggest Mistakes Made by Startup Entrepreneurs?
New entrepreneurs can make many mistakes, but here are some of the most common:
- Not starting with enough capital
- Thinking that success will come quickly
- Not carefully budgeting and forecasting when money will run out
- Not focusing on the quality of the product or service
- Not understanding the “product/market fit”
- Underestimating the importance of sales and marketing
- Taking too long to build out a product—the pursuit of perfection can delay meaningful progress
- Not adapting or pivoting quickly enough
- Not understanding the competition
- Ignoring legal and contractual matters (especially intellectual property and employee issues)
- Hiring the wrong employees (and not firing them quickly enough)
- Mispricing the product or service
- Underestimating how hard it is and how long it takes to raise financing from angel or venture capital investors
9. How Can I Raise Angel or Seed Financing for My Startup?
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:
- Working prototype of the product
- Initial revenues
- A great management team (very few investors want to invest in a one-person company)
- Strategic partnerships
- Initial or pilot customers, especially brand-name customers
- Customer testimonials
- Admission into competitive programs such as Y Combinator or other technology accelerators or incubators
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.
10. Do I Need an Investor Pitch Deck to Get the Interest of Angel or Venture Capital Investors?
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:
- Company Overview (give a summary overview of the company)
- Mission/Vision of the Company (what is the mission and vision?)
- The Team (who are key team players? what is their relevant background?)
- The Problem (what big problem are you trying to solve?)
- The Solution (what is your proposed solution? why is it better than other solutions or products?)
- The Market Opportunity (how big is the addressable market?)
- The Product (give specifics on the product or service)
- The Customers (who are the target customers? why will there be a big demand from these customers?)
- The Technology (what is the underlying technology? how is it differentiated?)
- The Competition (who are the key competitors? how will you be better than the competition?)
- Traction (early customers, early adopters, revenues, press, partnerships)
- Business Model (what is the business model?)
- The Marketing Plan (how do you plan to market? what do you anticipate for customer acquisition costs vs. the lifetime value of the customer?)
- Financials (projected revenues, key assumptions, and EBITDA)
- The Ask (how much capital are you are trying to raise? what progress will you make with that capital?)
Here are some helpful pitch deck tips:
- Tell your story in 15 to 20 slides. (If you can’t tell the story with brevity, you can’t tell it well.)
- Explain why the market opportunity is large.
- Describe the talent on your team.
- Don’t provide excessive financial details. Hit the key indicators and save the rest for follow-up.
- Don’t try to cover everything in the pitch deck. Your in-person presentation will give you an opportunity to add and highlight key information.
- Use plain English—too much jargon or acronyms can distract from your story.
- Don’t underestimate or belittle the competition.
- Make sure your information and metrics are up-to-date.
- “Look and feel” matters. Think of it as your investor interface, and consider getting professional help from a graphic designer.
- Review other pitch decks for ideas on presentation. Do a Google search and you will find hundreds of pitch decks online.
- Be sure to include the following wording at the bottom left of the pitch deck cover page: “Confidential and Proprietary. Copyright (c) by [Name of Company]. All Rights Reserved.”
- Send the pitch deck in a PDF format to prospective investors in advance of a meeting. Relying on Google Drive, Dropbox, or some other online service just puts up a barrier to the investor actually reading it.
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.
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Copyright © by Richard D. Harroch. All Rights Reserved.
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