Save equity, headaches, and friendships
Spend money wisely now to save it later.
Cut through the clutter
There are many articles about what it takes to succeed in the world of startups. These articles can be split into two categories. The best ones talk about business practices and ways of differentiating your business from others. The ones not worth reading, let alone the time wasted writing them, are listicles of supposed characteristics shared by so-called great founders, and arbitrary anecdotal information associated with success. Take the first class of articles with a grain of salt and don’t blow your time reading those of the second class.
Maybe you’re a student with the dreams of running your own company, or you believe that you can do the business your current employer does better. Maybe you have the money to start a business yourself and be your own boss. Maybe you and your friends want to change the world. Or perhaps you have an investor who believes in your dream and ability to get things done.
I’ve been a founding partner in four businesses. In the past ten years, I’ve learned a great deal, but my three most valuable lessons have been that you need a lawyer, an accountant and qualified service providers and employees. Getting these people right will save you countless headaches, time, money and friendships.
You need employees not partners
The idea of hiring professionals might sound counter-intuitive when you’re trying to bootstrap it, but trust me, you want them. If you haven’t started your company yet, you might be thinking: “I’ll skip that. I’ll get business partners with different competencies onboard. They’ll put in sweat equity for shares.” That’s a great thought, but what is five, ten, or even fifteen percent of zero? That’s right, it’s nothing, which is what you’re essentially offering. You’ll spend your valuable time trying to convince them of your dream and the potential of your idea. Pay a service provider (graphic designer, copywriter, carpenter, lawyer, accountant, etc.) because when they don’t deliver, you can hold them accountable for it. You can’t do that with friends doing you a solid. Business partners also add other challenges. They want to have a voice, and you’ll quickly find yourself having to negotiate and compromise on your vision. There are many people starting businesses every day. Many are competing for your potential customers/clients and their attention. You can’t afford a halfhearted execution. Get professional work done. It’ll be cheaper in the long run, it presents your brand better and saves you from having to give up a piece of your company. You also want to budget for employees. Like with other professional service providers, employees are easier to hold accountable than business partners and they don’t have the power to highjack your vision. In the end, it’s easier to layoff or fire an employee than it is to get rid of a business partner.
OK, don’t hire a professional
Chances are you won’t listen to this first piece of advice because you and your friends are going to be different — friends forever and one shared vision. Since you’re not going to get real, get a lawyer.
Starting a business is creating a new legal entity. That should be reason enough to get a lawyer. If you’re just becoming a freelancer, you might be able to skip the lawyer, but in our judicious world, get some legal insurance and make sure you have a lawyer you can call on. If you’re starting any other business, have a lawyer do it, so it’s done correctly. There’s a good chance that you’ll start a business with friends or colleagues. Even if one of them has a legal background, get another neutral attorney. Your company needs a lawyer — someone who will look out for the good of the business and not the individual members. Of course, each founding member is also welcome to get a lawyer. If you’re serious about your business and its success, you need a neutral person whose sole purpose is to ensure the wellbeing of the firm. A lawyer will plan for worst and best case scenarios. Those include the breaking up of partnerships and dissolution of the company as well as what happens when someone or an other company wants to buy your enterprise.
Your business prenuptial
When you start a business, like when you start a relationship, you don’t want to think about what happens when it falls apart. The truth is that there’s a better chance of your business relations coming undone than staying together. Who gets what when it does? Who will try and leverage what to get more? A good lawyer will help you create a document that plans for the worst case so that when opinions diverge, and someone wants to leave, the exit is brightly lit and the way there is as clear as day and free of obstacles. You’re going to pay the lawyer’s fees one way or another, and they’re cheaper when everyone is friendly. You’ll also save yourself a headache and potentially your friendships when expectations and responsibilities are managed and clearly defined from the start.
Essential for the success of a business is taking the ego out of it. A neutral third-party lawyer will treat the company as his client and not the partners. By doing this, the company will be better set up to withstand the exit of any founding partner.
Your company’s look-out
In business as in many other relationships, the most probable cause for dispute will be money. That is why it’s important to have a neutral accountant. Someone to have an oversight of your finances until you’re big enough to have an accounting department. Your accountant is your checks and balance on the finances. If your company were a ship, the accountant would be your look-out. He makes sure that your venture is on smooth fiscal waters and keeps an eye open for potential dangers like taxes, fees, and regulations. Tax laws are always changing, and if you’re an entrepreneur, you want to focus on growing your business not staying on top of the tax code. A hefty and unexpected tax bill can ruin your company or leave you personally vulnerable. Neither are pleasant. Pay the accountant and keep your finances in order.
Spend money to save money
Everyone’s heard that you need to spend money to make money. When it comes to your startup, don’t try and save money now by sacrificing future gains. If you’re willing to give away huge shares of your company now, you don’t believe in it enough to actually build it to the success you imagine. Lawyers, accountants and other service professionals can be held accountable for their work and have it in their best interest to deliver good work, because when they do that, they keep you as a client. So spend the money now and save yourself the headaches, money and equity later.
If you’re a startup or thinking of starting your own business and need an advisor, coach or sounding board, contact me via LinkedIn. I wrote the above article based on my learnings from my life in startups. [Medium]