Startup Law 101 Series – Tips from a business lawyer to becoming a founder

introduction

Why become a founder? What can you do to get one successful Founder?

As a lawyer for startup companies in Silicon Valley, I have worked extensively with founders for many years and have also built my own company, so I have a few tips on these points.

Tips on why you should become a founder

Why become a founder?

1. If you are successful as a founder, you will earn far more than as an employee. Obvious, but worth repeating.

Founders want the big advantage that comes from running a successful business. The goal is very difficult to achieve, but the rewards can be great.

2. When you’re a successful founder, you keep more of what you earn.

As an employee, you are burdened with ever-increasing taxes on your remuneration.

Forget the rich. It’s the average employee who gets soaked. For example, you pay up to one-third of your income in federal, state, and local income taxes. Add another nearly 10% for payroll taxes. Now suppose inflation pushes you into higher tax brackets. Prices are then raised for these brackets. Then the income tax rate increases. And the social security cap has been removed. And new taxes were added to fund future health care benefits. You are left with an ever-decreasing net amount of your salary. Welcome to the employee of the future.

However, as a founder, your greatest reward by far does not come from salary, but from a liquidity event where you cash in your chips. At this point, you pay a one-time capital gains tax on most of the economic rewards you derive from your business. You pay less income tax because the capital gains rate is lower. And you don’t pay any income tax at all. With capital gains you also have some control over timing and this can further help to minimize your costs.

It all comes from the same effort. You sweat for what you deserve. You can take your reward as regular income or, as a founder, convert a large chunk of it into far more beneficial stock gains. With success, you not only earn more, you also keep more.

3. Being a founder can be rewarding not only financially but also psychologically.

By embarking on this journey, you will have the chance to realize a vision for your company and benefit not only yourself, but also your co-founders, your investors, your employees, your customers and the general public. You can watch your business grow and prosper. You can see how it positively affects others.

The satisfaction you can derive from success is a great intangible reward.

4. Finally, as a founder, you have the independence to be your own boss. You will rise or fall by your own merits. This is a great opportunity and a great challenge. This is the one benefit that most entrepreneurs will ultimately value the most.

Tips to become a successful founder

What does it take to be successful as a founder? Here are a few thoughts.

1. Build on strength above all else.

Be prepared before you head out. Get a strong education. Partner with the best to receive excellent education in your field. Master your craft. build relationships. Take what you do best and improve it. This is the key to innovation. And that’s the best way for most founders.

Or you build solely on the strength of exceptional entrepreneurial talent. Or a specialized skill that allows you to team up with others who will provide what you may be lacking. Nothing formulaic here. But you have to build on that some form of strength.

That also means you do it Not set out based on a mere idea. Try this one from the bubble era: “I worked in manufacturing for a year and I know how I can revolutionize this area with an idea for a website.” Sorry, but abstract ideas won’t get you anywhere.

It also means you do it Not Do something just because you’re tired of something else. Think twice about this romantic little tea shop. That is, unless you know the business of tea shops. Others do it and they will make you pay for it. Know what you’re doing before you commit to anything.

No one will carry you when you go out alone. So be ready to build on something you’re exceptionally good at. This is your most important key to success as a founder.

2. Count the expenses before you set off.

You need the right temperament to start your own business. If you long for security and certainty, the entrepreneurial profession is not for you.

Don’t romanticize the process either. Business is tough. You lose the security of a regular paycheck. You have bills to pay whether you make money or not. You will face an uninterrupted series of challenges, from staffing issues to financial pressures to competitor challenges, litigation, tremendous psychological stress and all sorts of other obstacles. When you’ve overcome all of this, or at least most of it, you’ve built “goodwill” — that is, a corporate value for your business. Goodwill is really nothing more than the benefits you derive from the blood you have shed. It’s a huge plus that makes your business better than others. But you will must pour blood over it. Understand this in advance and be prepared to bear the necessary expenses.

It follows, of course, that unless you are willing to bear the expense, you should stick with the permanent job.

3. When you start, try to do this with a multi-talented team.

There is no hard and fast rule here. However, experience confirms that a team will be far more successful than a single founder. This might just be another way of saying that if something is really good, others will be attracted to it. More likely it’s another way of saying that starting and growing a successful business is difficult and you need a multi-talented team to make it happen. Where you cannot supply everything, others will supply what you lack.

4. Make sure you have a solid business model.

Technological innovations are great, but they usually don’t sustain a company on their own. Sometimes they can be sold or licensed to a large corporation. Nothing wrong with that. In most cases, however, the technology will not be enough.

With or without key technology, if a company is supposed to be successful, then yes got to have a solid business model that enables it to build and maintain a significant competitive advantage that makes it consistently profitable.

Without it, you will go nowhere, no matter how innovative this or that element of your business may be.

5. Watch your spending.

Wasteful spending is perhaps the single biggest mistake made by early-stage companies.

Small entrepreneurs have significantly fewer difficulties than start-up founders. Why? Because they usually deal with their own money. If you know what it took to earn it in the first place, the chances of you being wasteful with it are significantly less.

One aspect of lavish spending is simply extravagance. You get money and you go out and get the best money can buy. expensive offices. Unusual salaries. Lush parties. And on and on. In fledgling businesses, you will regret such spending when you hit the bumps in the road where you wish you had that money. Inevitably, you will encounter such bumps. Plan accordingly.

However, another side of wasteful spending comes from not properly focusing your efforts in the early stages. You have ten great things you want to do as a company. You’re not making good judgments about which of these to focus on. They spend for everyone. In a short period of time, your funds will be scattered before you can build a decent income stream.

Use good judgment about where to best invest your limited funds, and use them wisely.

6. Plan your legal rollout carefully.

Do not charge unnecessary legal costs in advance. However, when you’re ready to get off to a meaningful start, get your setup right.

If you have a founding team, seriously consider using restricted stock as opposed to direct stock awards when providing founder grants. In other words, unless you have an extraordinary reason not to, hold onto the stock until it’s earned. Use cheap stocks to avoid tax problems. Get the IP in the company. Enter into employment and consulting agreements and ensure that all intellectual property from such agreements goes to the company. Review your branding issues related to each branding you will undertake. Submit provisional patents, if applicable. When you’re ready to hire a broader team, set up a stock incentive plan.

Work closely with a good business lawyer to take the legal steps properly.

7. If possible, fund your business gradually.

The worst pitfall an early-stage company can fall into is overextension. Plan smart to avoid this trap.

Partner with early-stage investors or have a reserve of your own funds to carry you through the stages before generating significant revenue.

Don’t put yourself in a position where you have no options other than buying your chance at VCs. You will either not be funded (the most likely outcome) or you will be slaughtered in terms of funding.

Conclusion

Think carefully before setting out as a founder. The rewards can be great, but you must be willing to face the challenges. If you think you are, a large open world full of possibilities awaits.