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    Startups Startups – The Essential To Do List (2000 words)

    December 01, 2017

    Startups Startups – The Essential To Do List (2000 words)

    Startups – The Essential To Do List (2000 words)

    Posted: 30 Nov 2017 01:36 PM PST

    [ed. note: this comes from a blog post by Basil Peters. I did not write this, and I have no connection with the original author. But I thought it worth sharing here.]

    Startups – The Essential To Do List

    This post is dedicated to a team of promising young entrepreneurs who asked me recently if they could all just "put some money in a bank account" to launch their startup. I wanted to say 'yes' because I know how much other work they have to do to build a successful company. But instead I had to warn them that there were several essential elements of their corporate structure they had to get right now to maximize their probability of success.

    This question comes up frequently, so I started this list to help other entrepreneurs ensure they don't miss one of the essential structural components.

    Why it's not easy to structure a startup

    Structuring a startup correctly is a challenge. In the early days, companies don't have money to hire excellent lawyers and tax advisors. Startups can't usually attract experienced mentors or advisors. As a result, crucially important elements of the structure often get missed or are done the wrong way.

    Structuring builds the foundation and the corporate DNA

    Structuring errors often cause companies to fail. The most heartbreaking examples are when the company continues for several years, often showing great promise, and then the structuring flaws, built in during the startup phase, cause it to collapse.

    Here's a good analogy - rebar is the network of steel reinforcement bars inside structural concrete. Imagine someone constructing an apartment building. In the early days, there are no renters, so there is no revenue. The builder wants to save as much money as possible until the building is at least partially occupied, so he decides to save money on the foundation by leaving out the rebar - hoping he can come back and add it later. He finishes the building, and from the outside it looks just fine. Tenants start to move in and revenues increase. The builder now has the money to add the rebar to the foundation, but of course, it's no longer possible. But it still looks fine. More tenants move in. The additional weight causes the foundation to crumble and the building to collapse.

    The reason this is a good analogy is that many of the structural inadequacies in a company are also very difficult to fix after the company is launched - especially if there are external investors. The company will often still look just fine, often for years. But the flaws, like the missing rebar, are still there – genetic defects in the company's DNA. Invisible failure mechanisms that often cause the company to collapse.

    Structuring problems scare off investors

    As an angel investor, I do due diligence on every aspect of a company before I invest. In the majority of cases, I see serious structural flaws. Experienced angels know how difficult, and expensive, these are to fix.

    Most of the time, the investors will just go on to look at the next investment opportunity rather than try to help rectify serious structural flaws. In many situations, the investors won't even explain the flaws to the entrepreneurs because even the explanation can be a lot of work, and it's never enjoyable to explain to a group of aspiring entrepreneurs that their company has problems.

    It would be easy to write an entire book just on the situations I have seen where structuring errors caused companies to flounder or fail completely. But it would depressing to write and not much more fun to read.

    Instead, in the hopes of helping the next generation of startups avoid these problems, this is a list of the things that are essential for every startup to build into the structure of the company to ensure it has a strong, stable foundation.

    Startup Structuring To Do List

    In approximate chronological sequence:

    • Build a startup team (if it's still just you, repeat step 1).

    • Agree on an idea (the idea is much less important than the team).

    • Agree that you want to start a company together (the next several dozen steps will test this).

    • Start with the end goal – the founders need to agree on the exit strategy now. (I know that's not intuitive, but it's one of the most common flaws.)

    • Agree on intellectual property ownership. (This is essential to get right from day zero and it's not as easy as it looks.)

    • Agree on the time and money each of the founders will contribute.

    • Agree on how you will handle personal guarantees, credit cards and other personal liabilities. (Creates a lot of problems if not done now.)

    • Agree on founder compensation and equity allocation.

    • Agree on vesting. (It's actually reverse vesting, and if you don't know the difference please ask now.)

    • Agree on the capital structure at year three. In other words, project what the capital structure and share register will look like after three or four financings. (Again not intuitive, but the important thing is to not to agree on the startup structure, but what the structure will look like three to five years later.)

    • Think hard about whether steps 6 through 10 are fair and equitable. Try to imagine whether they will still seem fair and equitable in a year, or three years. If everyone in the founding team is not absolutely in agreement, stop and try to work it out. If you are not successful, go to step 12.

    • Ensure the startup team is still in alignment. (Get someone outside the team to do a Phase 1 alignment check. If the alignment is not perfect, consider having the first offsite strategic planning retreat with a really great facilitator.)

    • Confirm the previous eight steps by signing employment agreements and Protection of Corporate Interest Agreements.

    • Agree on company Articles. (Change the standard articles so a 51% vote is required to sell the company. Also be sure you provide for electronic communications for statutory shareholder requirements. I very nearly lost everything in my first company after ten years of hard work because I was not paying attention when the Articles were finalized. It's not fun, but you must read and understand your articles now. The next time you read them it may be too late.)

    • Select a corporate jurisdiction.

    • Agree on the company officers and directors.

    • Check Phase 2 alignment among the founders.

    • Find a least one very experienced advisor, mentor and/or coach who can review and confirm the previous five steps.

    • If alignment is not perfect, it may now be time for the first offsite strategic planning retreat with an excellent facilitator.

    • Celebrate the success of confirming Phase 2 alignment. (It looks like you really do have the ingredients of a promising company.)

    • Select the year end to be December 31. (There is a dangerous conspiracy in the accounting profession where they try and talk entrepreneurs into any other date except the right one.)

    • Incorporate the company - it really can't be finalized before the previous 20 steps.

    • Have the first shareholders meeting and the first Annual General Meeting to elect the board.

    • Have the first board meeting to 'hire' the officers and give them the authority to conduct business. (I've seen companies that got this wrong and ended up having to re-sign every documents in the company's history before they could close on a financing.)

    • Agree on the amount of equity for future employees and directors.

    • Set up the equity trusts for future employees and directors. (This has to be done at the startup, before money goes in to avoid tax problems later.) Using Options is far, far less desirable now.

    • Create a legal share register (strict legal requirement).

    • Have a board meeting to approve the capital structure and share register - another essential legal procedure.

    • Create an electronic minute book. (For a number of reasons this really should be a folder on a hard drive, not a physical binder. (There is a conspiracy in the legal profession to try and talk you out of doing this electronically.)

    • Create a 12 month budget and three year financial projections. (It can be extremely simple at this stage; it will be way off, but it's another essential alignment check.)

    • Check that your projected capital structure still makes sense now that you have thought more about the numbers - update if necessary - at this stage you still can.

    • Check again that you still have team alignment on the exit strategy.

    • Write a business plan. (Not to raise money, but to check founder alignment. May only need one page of text, 12 month budget, three year projections and capital structure.)

    • Think carefully about whether there is anything else you need in a founding shareholders agreement. (There usually isn't, but now is the time to check, before your money goes into the company. Get someone outside the founding team to do a check.)

    • Agree on signing authorities for treasury management, checks and other important documents. (I once lost my entire investment because this wasn't done right.)

    • Phase 3 alignment check. Get someone external to test the alignment with all of the team members. In one of my startups we could not quite agree on whether there should be an 's' in the company name (to make it plural). I forced a decision without perfect alignment. It turned out to be an indication of a very, very serious alignment failure that festered for years. Be very sensitive to any misalignment at the early stages. Get help if necessary to reach perfect alignment now. (It will never again be as easy to do.)

    • Schedule an offsite strategic planning retreat to perfect alignment if necessary. (Choose an excellent, experienced facilitator to maximize chances of success.)

    • Celebrate Phase 3 alignment. (May not seem important, but it is for psychological reasons.)

    • Open a bank account at a bank with good online access and an interface to pay your taxes online.

    • Get a simple subscription agreement for the founders' investment.

    • Now the founders can write the checks to contribute their startup capital.

    • Set up your accounting system if you haven't already. (Get someone with lots of gray hair and tax experience to check your chart of accounts. This can be fixed later, but getting it right now saves a lot of time at your year end.)

    • Learn about all of the taxes your company will have to pay. Do not rely on your accountant to make the decisions; they cannot understand your business well enough to do this entirely themselves. You must understand taxes well enough to ensure you are paying all of the taxes the company owes and that you are not creating personal liability for your directors. As your business changes in the early days, recheck your tax assumptions regularly. In Canada, all startups need corporate tax, payroll tax and GST tax accounts on Day One. Many will also need PST – this one is most often overlooked.

    • Make sure none of your employees think they can be contractors.

    • (Canada only:) Understand the SRED program well enough to capture the information to make your first claim. I often see startups losing lots of money by missing this. (This is an excellent R&D tax rebate available in Canada.)

    • Get insurance (that you really need, not what the broker wants to sell you).

    • Get an alarm system before you move the computers into the office. (The stories I could tell would break your heart.)

    • Start planning your friends and family financing round.

    • Be sure you are complying with all of the securities regulations for a friends and family financing.

    • Agree on a fair valuation for friends and family. Get an external advisor to check and correct the capital structure and share register if necessary. (It's still easy to fix this but that window is closing fast).

    • Celebrate completing all of the absolutely necessary steps in building a successful startup.

    • As soon as the hangover clears, start working on the product, marketing, sales, recruiting, strategic relationships and exit strategy - the fun part.

    Please help complete this list

    When I started this list, I didn't think it would be this long. If you can think of a step I've missed, please send me an email or post a comment, to help out that next generation of entrepreneurs. Thanks.

    Source: http://www.angelblog.net/Startups_The_Essential_To_Do_List.html

    submitted by /u/gsylvie
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    Anyone here tried building an A+ team based on Ray Dalio's Principles?

    Posted: 30 Nov 2017 05:45 AM PST

    I've been reading Ray Dalio's book Principles: Life and Work of late. It's really inspiring to know how he built a meritocratic culture at Bridgewater Associates by following core principles with a backbone of radical truth and transparency. I'm also reading more about the tools they used to groom a culture of excellence (psychometric tests to understand each member better, baseball cards for each member etc). Has anyone tried similar approaches with your team/startup? Would love to know how it went.

    submitted by /u/tmatthewj
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    What to do if you google and find 35+ published apps with your idea or even better?

    Posted: 30 Nov 2017 11:04 AM PST

    Often you have an idea, you talk and search and find there is no popular solution.

    But then you search deeper and at app store. You find that there are at least 30+ apps that are either exactly what you wanted or sometimes even better. In fact, there are variations that you'd have come to naturally after some progression in your idea. All have some users, but despite being everything that you wanted it to be they're relatively a failure. As nobody really knows about them.

    At that point how do you determine

    did the team fail in marketing very badly

    is user traction inherit problem of the idea

    does the user base do not have good word of mouth

    or simply the idea sucks despite how well it has been executed in terms of app.

    submitted by /u/techsin101
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    Just entering the startup world and i have some burning questions i could't find answers to.

    Posted: 30 Nov 2017 08:39 AM PST

    First of all i am 23 and from Greece. I am web developer with some experience, and my team consists of 3 people. One has a bachelor on management and the other one is currently a CEO of a profitable company. We came up with an idea and have extensively thought pretty much everything (i know we haven't thought really everything but we have been discussing the idea for a long time and we have some experience on the subject). We are thinking of creating an online platform of sorts. We have pretty much zero capital and i would like to avoid resorting to FFF since i don't believe that starting a company with our own money is the way to go, plus it's a sizeable amount we need. We are thinking about talking with VC and angels, but i don't know which one to pick. Which are some common pitfalls people can fall, what's your experience and the problems you came up with. I am using this thread as a way to drain information and experience from people who are currently in the market. I also downloaded some books, like The Lean Startup, The Hard Thing About Hard Things, are there any better suggestions for what i am experiencing? Also any information to deal with the massive amount of information surrounding us? I am in complete chaos as to what i should do first, who to approach, pretty much everything apart from the direction and concept of my platform, any help appreciated

    EDIT: Is it safe to talk with many investors since my idea is kind of innovative, i am really being secretive about it, even though i read i should not be. What's the right way to approach it?

    submitted by /u/MonoshiroIlia
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    thinking of a separate company for patents

    Posted: 30 Nov 2017 04:16 AM PST

    I have a potential investor that is interested in the process patents for an idea that I'm getting off the ground. I'm considering this investor since they would be able to (potentially) front the high cost of filing for said patents.

    I'm curious if anyone else out there has split off a separate company for holding patents in this manner? The obvious risk I see is that my own startup is ensnared and dependent upon the patents held by this holding corp but perhaps there is a legitimate way to structure the two companies legally so that there isn't any issue?

    submitted by /u/alazi
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