This is my favourite quote by Winston Churchill:
“Success is the ability to go from one failure to another with no loss of enthusiasm.”
Unless you’re the absolute except to the rule (like the one-in-one-hundred-thousand such as Zuck) as an entrepreneur you can expect to fail repeatedly. And especially with technical innovation you have to fail day to day, to perfect your product or service.
The last thing you need, then, while surrounding yourself with the inevitable problems you will encounter while attempting something new and different, is for a known issue to be the one that becomes a major problem in your business.
With this in mind, while comment and opinion certainly has its place in this column, the key to any entrepreneurial venture is execution. So today I would like to offer a blueprint process to getting your start-up off the ground. This guide is inspired by a blog post by Basil Peters - indeed some of it is lifted verbatim, and I’m indebted to Basil for his original list.
Procrastination is just a worthy an adversary as poor planning, so let’s get started:
1. Build your start-up team.
2. If it’s still just you, repeat step one.
- Statistically, start-ups with co-founders rather than single founders are over twice as likely to receive investment;
- Some will work evening and weekends until you can raise capital, but do ensure they are definitely ready to leave their jobs if you do;
3. Agree that you want to start a company together. The next several dozen steps will test this.
4. Agree on an idea.
- The idea is much less important than the team as the idea will likely change and evolve;
5. Agree on the time and money each of the founders will contribute.
6. Agree on areas of responsibility.
- Choose a co-founder who complements your skills, not one which duplicates them;
- Who will be on the board?
7. Agree on intellectual property ownership. This is essential.
- The IP must reside in the company;
- Create NDAs and employment contracts which you should ALL sign (even founders);
- Create these even if you’re not paying yourselves anything;
8. Agree on how you will handle personal guarantees, credit cards and other personal liabilities.
- Steer clear of personal credit card debt if you can;
- If you rack up directors’ loans against your start-up as long term liabilities, bear in mind you may be pressured by future investors to convert these to equity;
9. Agree on founder compensation and equity allocation.
- Allocate options to yourself and co-founder vesting (reverse vesting) over four years;
- Include favourable terms for you the co-founders (eg six months’ redundancy pay, three months’ notice) and a three or six month probation period for staff – they may not work out;
10. Agree on the exit strategy now.
- This does not necessarily mean running your company toward a quick sale – you should focus on creating a valuable, scalable business – and your aspirations may change, but being aligned monetarily and on life goals provides a foundation to build toward the same end game. Basil says “I know that’s not intuitive, but [not doing this] is one of the most common flaws”;
11. Agree on the capital structure at year three.
- Create your own cap table now: a spreadsheet of how the capital structure/share register might look after two or three investment rounds. It also allows you to see what the investment will do to everyone’s equity;
- Agree on the amount of equity for future employees and directors (create a share option pool – usually around 10 per cent but in the US it is often higher. I would recommend a minimum of 15 per cent);
- Allocate your employees or founding team options over four years;
- You can get away with a Options letter – include strike price, number of shares (not percentage), vesting schedule (when they have rights to each chunk of the shares);
- If you are doing equity, not a convertible debt round, consider creating a class of non-voting shares and giving those to your angel round (if they will accept). This means that your voting rights will be different to the total ownership. Useful if, for example, your Series A is not at the stratospheric valuation you hoped and you want to avoid getting close to owning less than 51 per cent between you and your co-founder;
12. Think hard about whether the first dozen steps 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;
- Write a letter of agreement outlining all these points. It will not be legally binding, but gets down in writing what has been agreed and makes people really think about what they are agreeing to;
13. Make sure your documents define the legal & corporate jurisdiction (choose which State if you are in the US).
14. Confirm the previous eight steps by signing:
- Employment agreements;
- IP assignment agreements;
- Share options letters;
- Non-disclosure agreements;
15. Agree on the company articles (the constitution of the business).
- Change the standard articles so a 51 per cent vote is required to sell the company;
- Provide for electronic communications for statutory shareholder requirements (one company I started had over 20 angel investors – chasing signed paperwork by post is a nightmare);
16. Check alignment among the founders for points 1-16.
- If alignment is not perfect, it may now be time for the first offsite strategic planning retreat with an excellent facilitator (perhaps your mentor – see below);
17. Find a least one very experienced advisor, mentor and/or coach who can review and confirm the previous five steps and can help to be a sounding board.
- If you are going to offer them equity, what remuneration, if any, they will have;
- Choose someone who you both respect enough – and is strong enough – to challenge you both;
- Sector expertise is useful as you don’t want to spend all your time explaining everything, but someone under the influence of the cool-aid can sometimes reinforce a bad decision, so get this balance right;
18. Incorporate the company.
19. Have the first board meeting to “hire” the officers and give them the authority to conduct business.
- Have the first shareholders meeting and the first Annual General Meeting to elect the board;
- If you do not do these things now by the book, expect a nightmare when it comes to due diligence on future funding. Admin is the last thing you want to do when you are starting a business – you want to build product! But this is not only good discipline, it is your legal responsibility as a company director;
20. Celebrate! You have have your own company!
21. Create a legal share register and issue share certificates.
- Pay for your shares (in the UK you need to place money in the company bank for the nominal value of the shares. US Delaware companies don’t have nominal share values so check your jurisdiction on this process);
- You must record the history of issuing shares in the company share register;
22. Have a board meeting to approve the capital structure and share register – another essential legal procedure.
23. Create an electronic minute book and an electronic Due Diligence folder.
- Place copies of all the paperwork, agreements, NDAs etc in the DD folder (you’ll thank yourself later);
- Have a folder for board meeting minutes AND record minutes for board meetings. These can initially summarise the main points, you don’t need to quote every word. This attention to process will give comfort to investors at DD time and help demonstrate you have some grip of how to run a business;
24. Create a 12 month budget and five year financial projections.
- Many people just ask for three, but some ask for five. The worst thing in the world is having to add two years to projections you have already spent way too long on. Just do five from the start;
- All the projections are complete rubbish. They will all be wrong. Give it your best shot anyway. It will help you understand short term capital requirements – and hopefully give your investors the big carrot of oodles of cash at the end of the rainbow;
- Assume you will spend more than you will. Easy things to forget (for a UK start-up) include: directors indemnity insurance, employee AND employers’ National Insurance, VAT on sales and the accountant’s and legal bills;
25. 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.
26. Check again that you still have team alignment on all the previous 25 points.
27. If you have not already, write a business plan.
- A PowerPoint (or Keynote!) deck is fine. The list of slide headings on Sequoia’s web site is as good as any;
- This is as much to clarify to you and your team plans and direction, as it is for investors;
- No more than three points on each slide, it is a sales tool, not an exhaustive biography of your product or market analysis;
28. Appoint an accountant.
- Early stage bootstrapping is all about saving money, but a rubbish accountant now will cost you money later;
- Appoint an accountancy firm which is large enough to know what they are doing but small enough to care. If you’re in Shoreditch, London, http://www.dands.co.uk is a great example of experience combined with boutique size;
29. Open a bank account.
- Agree on signing authorities for financial management;
- If co-founders, allow single signatory but only up to a sensible cap (eg £5,000 or $10,000) with dual signatures required above that;
- Make sure you have good online banking which ideally interfaces with your accountant’s software;
30. Check again the team is in alignment with last 29 items. Sometimes small disagreements can be a sign of a deeper disagreement.
- Schedule an offsite strategic planning retreat to perfect alignment if necessary. (Choose an excellent, experienced facilitator to maximise chances of success – perhaps you mentor if he or she is capable);
31. Celebrate achieving the last 30 items!
- It may not seem important, but it is for psychological reasons and bonding;
32. Get a simple subscription agreement for the founders’ investment.
- Pay for your start-up equity by transferring the par value cash into the bank;
33. 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 directors, pay for anything you can get away with as expenses – all your travel (provided it doesn’t say on the ticket it’s to Disneyland). It is the most efficient way to get money out of the business. Don’t be fraudulent, just be tax efficient;
- Use an electronic expenses tool (Xpenser, or Expensify) to collate your own and team accounts – all expenses are tax deductible;
34. Make sure none of your employees think they can be contractors outside of working on your start-up.
35. Understand the R&D tax credits program.
- This allows you to claim back a large percentage of PAYE tax (this is an excellent R&D tax rebate available in the UK, others are available in Canada and other countries);
36. Get insurance (the insurance you really need, not what the broker wants to sell you).
37. Get an alarm system or check security before you move the computers into your office (unless you all have laptops). Two of the offices I had (including a shared one) were burgled.
38. Start planning you investment round and reaching out to investors. Make sure you adhere to EIS for angel investors – Google it – or in the US any legalities for private securities investing.
39. Agree on a fair valuation.
- Get your 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);
- Don’t state your valuation in your first conversation with angel investors;
- Consider convertible debt (offering a discount on the valuation at the next round);
40. Celebrate completing all of the absolutely necessary steps in building a successful start-up!
And then, as soon as the hangover clears, start working on the product, marketing, sales, recruiting, strategic relationships and exit strategy. Good luck…!
Note: This post was previously written by me for publication as an article in The Kernel magazine, an excellent deep-dive blog on the start-up scene. Think The Economist for technology.