Starting a new company is hard. To be successful, you need to come up with a good idea, get others excited enough to join you, get it funded, build a product, find a revenue stream, grow a business, etc. Definitely not trivial details, and I’ll be sure to cover them all at some point. But at the very earliest stages, there are just a ton of details that need to get handled in order to get the company off the ground. As I’m going through the process again, I’ve been noting some of the things that have come up in the hopes that mentioning them here might be helpful to others. In the interest of time, I’ll just cover the basics vs. go into a ton of depth, but if something is missing, feel free to comment or contact me about any of this. In no particular order, here are some things to be aware of as you get your new company going:
1. A good lawyer. Lots of people think lawyers are evil, expensive, etc. The best startup lawyers are certainly expensive, but I think of them as great startup advisors who happen to have J.D. degrees. The advantage of startup lawyers is they’ve seen hundreds of times more term sheets than you, they’ve negotiated hundreds of times more business deals than you, and because of this volume, they know what’s “market” and what is not. This is true for convertible notes, equity financings, leases, etc. The best firms will defer some amount of their fees until you get funded if you convince them you are credible and/or working on a good idea, so in a sense, they are willing to take a risk on you. I suggest getting someone on board right away to get you incorporated, get your founder agreements setup, etc. I’m a big fan of Scott Dettmer and Mike Irvine at Gunderson Dettmer, Mitch Zuklie at Orrick, and Mike Sullivan at Pillsbury.
2. Incorporation. I recommend incorporating as a Delaware “C” corporation. Delaware is much more startup-friendly than California from a logistics perspective, believe it or not. For example, if you need to modify corporate documents, the turnaround time for California can be days or weeks, whereas with Delaware, it’s typically hours. And if you’re ever going to raise venture capital, LLCs and “S” corporations are most typically converted into “C” corporations at that point. Once you get going, you’ll need a Federal EIN (employer identification number) for most things like lease applications, payroll, etc. and all of this can be taken care of by your lawyers.
3. Founder agreements. One of the biggest mistakes made by founders is to fail to have the hard conversations about how to split the equity and what happens if things don’t work out. This most likely happens because a) the founders are friends and don’t expect hard times to test their relationship, and b) these conversations are awkward and difficult. I can tell you that even experienced entrepreneurs don’t like to have these conversations, and it can lead to ugly situations. Bite the bullet, be an adult, and have these hard conversations. I call it the “Founder Pre-Nup.” You both (or all) owe it to yourselves to think through how you’re going to split the equity up front vs. down the road. Sometimes it’s an equal split, but I would say that more often than not, it is not an equal split because of someone’s experience level, IP contribution, reputation contribution, cash contribution, etc. There are no hard and fast rules of thumb here. You should also think about vesting schedules, vesting cliffs, what happens if one of the founders leaves, etc. It might be tough, but you’ll be surprised how relieved you are when it’s over and everything is understood between founders.
4. Salaries and benefits. This varies by situation, but I’d suggest making some progress on the product or fundraising before putting this into place. If founders aren’t willing to bootstrap and invest a month or two of time in getting something off the ground, imagine what happens down the road when times get tough. Some people who have a paying job will need to keep it while getting the new company going nights and weekends. Most people can continue to keep their COBRA coverage from a previous job, and once you get funded, it may even make sense to just reimburse people for their COBRA vs. the time/expense of setting up benefits right away. Of course, by the time you get to 5-10 people, you’ll need to set this up, but defer it as long as you can.
5. Banking. I recommend getting setup with Silicon Valley Bank right after incorporating. While you can choose to work with any bank, SVB is setup to work with startups, and knows the issues that come up all of the time.
6. Office space. Some people think that getting an office is a waste of time, that everyone can work virtually from home and be as productive as they would be sitting in a room together. While that approach might work for some, I am not a fan. I am all for being lean and frugal, but I think there is something special that happens when a team is getting together daily in their own “place” to solve tough problems together. It’s a bonding experience that forges them together. They’re working together in groups and individually, and eating lunch together. I’m not saying that this can’t happen if you meet over Skype or in a Starbucks every day, but I think it’s more difficult. For me, some of my fondest memories of the startups I’ve been involved in are the earliest days of the company with just the founders in the first office. I think back to S3 and Bunker Hill Lane in Santa Clara. When.com and Broadway Street in Redwood City. Presto and Sand Hill Road. Those of you who were there with me know what I’m talking about. I think it’s worth the $1000/month to get a small office and get people together almost daily. Try to get a month-to-month or 3 month lease, and be sure to put the lease in the name of the corporation and not your own name. Buy some cheap desks at IKEA, and spend your real money on decent chairs since you’ll be sitting a lot (there are great deals on used Steelcase Think and Herman Miller Aeron chairs) and nice computers/monitors for the development team. Being located in downtown Palo Alto is great because the Apple Store is nearby, and if you use Apple equipment, be sure to sign up for their business account since you get a variable discount depending upon the volume of purchases. Craigslist is your friend for both office sublets as well as used office furniture. LoopNet.com also has good commercial listings. I can tell you anything you want to know about the sublet market in downtown Palo Alto, so just ask! Don’t forget some whiteboards/markers (or this clever whiteboard wall idea that’s cheap and easy), a fridge, a microwave, a decent color printer, maybe a fax machine, some garbage/recycling cans, snacks and drinks (I recommend either Safeway or Costco delivery service if you’re ordering drinks by the case). Skip the phone system and use your cell phones. If you’re reading this, you probably know how to do domains and emails…get a temporary company domain (like startupseven.com!) and start using it with people–it makes you look more credible. Setup with AT&T DSL or Comcast Internet, or you can even go with the Verizon or Sprint Mi-Fi devices if time is critical. If you do get an office, you will need to get an insurance policy as well (more details to follow as I’m setting this up now).
I’m probably missing a few things (let me know if I am), but this is a good place to start. All of this can be accomplished in under a month part-time while you’re working on the product and meeting with potential customers. With legal fees deferred, and the founders using their current computers, all of this can be accomplished for about $1500-3000 up front. Not a steep price to pay for the next Google! Don’t let it take a ton of time. Meet a few lawyers and pick the one you like best who has good references. Look at some offices, and go with the one that’s most flexible on terms with the best price and location. Keep a few balls moving every day and you’ll be setup in no time!