Entrepreneurs often forget about all the janitorial company stuff that goes into building a business. It’s not their fault; there’s far more exciting things to take care of, like tinkering with an Arduino or 3D-printing a preliminary case for their product. But when it comes to setting up a robust, money-generating startup, there are a number of things to consider and make decisions on before moving on to other aspects of your business.
This week’s lesson will cover the four important items that you should tackle before you focus all your energy on your product. These items will define the structure of your startup as well as ready you for upcoming challenges in marketing.
Forming a legal entity ensures that you are shielded from the liabilities and debts of your company. There are additional conveniences that come out of forming a legal entity, such as income control, potential tax deferral, and a level of credibility.
Obviously, incorporation works differently depending on which country you are operating in. It’s a topic that you should definitely do plenty of research on before acting. For practical reasons, we’ll just be covering how incorporation works in the US and provide some additional resources to get you started.
The different types of legal entities
1. Limited Liability Company
Much like a regular corporation, an LLC generally protects the owners from personal liability in the event of bankruptcy and debt. By default, it is a “pass-through” entity meaning that the startup’s profits and losses are passed through to the owners who are then taxed on an individual level. Owners also gain from flexibility in management and profit sharing.
S-Corps enjoy a special tax election which allows for “pass-through” taxation. All corporate income is passed through to the shareholders who include the income on their individual tax returns, therefore avoiding double taxation. In addition, the accounting for an S-corp is generally a lot easier than for a C-corp.
However, there are certain limitations to forming an S-corp: shareholders must be US citizens or legal residents. The number of shareholders for your business is also capped off at 100 members.
The main differentiating factor with forming a C-corp is that you are subject to double taxation. This means that your startup will be taxed at the entity level and shareholders will be taxed at the individual level. However, if you are planning to seek venture capital funding, most investors will require that you are a C-corp. Given that the state of Delaware holds a long and extensive history with corporate law, VCs also prefer that you form a Delaware C-corp. C-corps hold the flexibility to allow owners to participate in the management of the business or to act solely as passive investors.
If you don’t see your startup looking for venture capital in the first three years of operation, it might not make sense to form a C-corp given the cost and burden involved in maintaining the legal entity. Look to forming an LLC or S-corp for the early stages of your startup and then switching over to a C-corp tax treatment when you are ready to accept venture capital funding.
To help you out with the paperwork involved in forming a legal entity, check out Clerky, a spin-off from the law firm Orrick that helps you put together startup-focused documents. Similarly, visit Docracy, an open library of legal contracts that you can also fill out and sign online.
If you’re planning on being the sole founder of your startup—reconsider it. Why? Well there are the obvious reasons: two (or three or four) heads are better than one; bolster up your weaknesses with the strength of others; better time and resource management; a chance at actually having a social life. But the truth is, running a startup is tough. Much too tough for one person to handle on his or her own. There are going to be many mornings when you’ll want to just throw in the towel and VCs know this. If you’re a solo founder, you’ll face a lot of hesitancy and resistance from investors given that there are very little successful startups that were founded by one person.
Paul Graham has written a fantastic blog post on the 18 mistakes that kill startups where number one is the single founder:
The low points in a startup are so low that few could bear them alone. When you have multiple founders, esprit de corps binds them together in a way that seems to violate conservation laws. Each thinks, “I can’t let my friends down.” This is one of the most powerful forces in human nature, and it’s missing when there’s just one founder.
The Elevator Pitch
An elevator pitch is exactly what it sounds like: a short summary of your company and product that could be completed in a single elevator ride. As you start to network and meet other entrepreneurs (and potential investors) in the hardware space, you’re going to sometimes be caught off guard and in need of concisely describing your startup. Your elevator pitch is the thing you have in your back pocket for moments like this.
Crafting a good elevator pitch is deceptively tough. In one sentence, you need to encapsulate your product’s value prop in a way that clearly describes the problem you solve and the people that you help. It should communicate your unique selling proposition (USP)—the thing that you offer that your competitors can’t—and be expressed in a voice that your startup identifies with. Admittedly, these are many things to juggle and include in one sentence.
To give you a starting point, try to think of the thing you want your audience to remember the most about your product. This obviously should include what your device is and does, but try to highlight the thing that differentiates your product from the others to gain a bigger mind share in your market category. Keep your pitch exciting and relatable. Remember that it should be a referential center piece for the rest of your product’s messaging which you’ll eventually use to communicate every facet of your startup.
Landing Page + Mailing List
A landing page, in some ways, is a variation on your minimum viable product (MVP). Instead of offering a physical V01 of your prototype that people can play around with in their hands, you’re essentially illustrating the idea of your product with copy and a domain name. A landing page can help you gauge the general interest of the market in your hardware device and serve as a litmus test on whether or not the problem you are solving is one that actually resonates with customers.
Another incredibly huge gain from building a landing page is your mailing list. This is critical because when you eventually launch, you’re going to need to have a small subset of evangelists that can help you promote your message and product. The people on your mailing is your very first Kickstarter pledges, your first Tweeters, your first user group, and your first customers. You’ll be able to call on them when you need help with a final design decision, and gain insight from when you need to find that sweet spot with pricing.
It’s not necessary to spend weeks on your landing page. Decide on a clickable, shareable domain name, put together something on a website builder like Squarespace, and jam in your Elevator Pitch. Do use high-quality images. Do not use Comic Sans. Build it and ship it. When you get into conversation with people, point them to it and start collecting those valuable email addresses!
If you’re just joining us, spend some time going over our earlier lessons and be right on track for next week!