Three Things To Put Off As Long As Possible For Your Startup

http://blog.meatinthesky.com/three-things-to-put-off-as-long-as-possible-f

by sachinag • 16 years ago

47 19 16 years ago

blog.meatinthesky.com

grellas• 16 years ago

Nice piece and my only quibble would be with the idea of automatically deferring incorporation until you get outside funding.

On this point, the advice given is great is you are a sole founder but even then may create tax risks if you time your entity setup to match the time of your first funding (e.g., Founder A gets 90% for IP assignment + Investor X gets 10% for $100K = Risk of $900K taxable income to Founder). This tax risk is normally manageable but it also is most easily avoided or minimized if even a sole founder sets up an early shell (even an online instacorp) to give himself a buffer between first founder grant and first investment.

With a founding team, it is normally a mistake, in my judgment, to defer entity setup too long as people invest time and effort and develop IP for the project. It can and often does all work fine as long as the co-founders in such a case continue to cooperate right up to the point where they chose to document their relationship but they are at risk of, e.g., "I was promised 25% of the company" type of claims or "I developed key IP that belongs to me" type assertions if they have not defined stock grants with strings on them (restricted stock) and have not entered into work-for-hire contracts should they have a bust-up or serious disagreement of some kind prior to documenting things.

The practical risks of a disagreement may be low but my point is that, when you have a founding team especially, it is a mistake to have an axiomatic rule along the lines of "don't incorporate until you are working with Other People's Money." The issue should be consciously thought through by any founding team and the cost/benefit considered before deciding this one way or the other.

A more detailed analysis is found here: "When should I set up an entity for my startup business" (http://grellas.com/faq_business_startup_007.html).

petewarden• 16 years ago

I strongly agree that you should incorporate early. The author claims nobody in their right mind would sue a company without any money? They may if they think the founders have any cash, or they may just threaten a suit to scare off potential competition, which can be more effective if you're personally liable!

tptacek• 16 years ago

The other benefit of incorporation is that it may allow you to invoice and be invoiced by other businesses. If you're not incorporated and you, for instance, need to pick up a quick consulting gig, you may find yourself trapped into having taxes withheld.

fnid22• 16 years ago

More support for incorporating early is that the date of incorporation is important to some organizations and if you aren't incorporated, they'll simply pass on you.

Having been incorporated for the 5 years prior has value. Of course it depends on what you are selling.

additionally, it protects your personal assets, like your home, if you get sued.

contagionhealth• 16 years ago

Additional support for incorporating (at least with simple Delaware based LLC) early; if you build something and can pick up a partner they are far more likely to 'take' any IP generated as a result of products built during the partnership if you are a single, lone wolf contractor. If you get an EIN (employer identification number) and put that on your W9s you can negotiate from a company position for shared IP (as we have - 2 patent applications and the legal work is being paid by our partner...we'd never have been able to close that as two people working together to build a large corporation something).

megaduck• 16 years ago

There's another good reason to incorporate early: It permits you to set up your financial infrastructure. In order to set up corporate bank accounts and merchant accounts, you'll need to be incorporated. This is critical if you're planning on charging from day one.

If you're not incorporated, you can hack together something using your personal accounts, but this is usually a Very Bad Idea. It's far better to keep things clean by separating out your business and personal finances.

The piece seems to be targeted at startups that are both venture-backed and deferring revenue. Delaying incorporation is probably good advice for those folks. For those of us that are bootstrapping and charging money from the outset, it's far easier to incorporate as soon as is practical.

charlesju• 16 years ago

This is also the main I'd go with incorporating first.

epi0Bauqu• 16 years ago

You should incorporate immediately if only to start the clock on your stock. If you sell within a year (for stock), you'll get hit with short term capital gains instead of long term (at least in the US). And if you can hold on for five years, you often get another host of tax benefits when you sell.

mattmaroon4• 16 years ago

"Don't do any paid user acquisition until you can calculate your CAC and LTV.

It's very, very tempting to "experiment" and "test" various paid customer acquisition channels. You start with AdWords, then do some cheapo banner ads on a couple of ad networks, and soon you're hooked on some hard affiliate stuff and paying thousands of dollars a month to an Outsourced Program Manager"

Humorously worded, but I can tell you from loads of experience, this is flat wrong. Your LTV for customers you acquire from ads can be vastly different (in either direction) from ones you gain organically. I've had apps where it started out 3x CPA, then ended up 1/3x as the law of big numbers came into play and we had reached everyone we could target well.

Experimentation is how you grow and find your place in the market. From the start you should be throwing small chunks in different places, testing the signup flows of the people who come through them, looking for your highest ROI and most scalable method of customer acquisition.

If you don't have the self-discipline to wait until you're showing sustainable profits to throw the big budget in, and carefully monitor it throughout, then you shouldn't be running a startup. You should be waiting tables at Applebee's.

dasil0033• 16 years ago

Right because the only two types of people are brilliant business visionaries and talentless chain-restaurant-working schlubs.

Other than that last comment you are pretty much right on though.

mattmaroon4• 16 years ago

It was a joke. Forgot what site I was on.

patio11• 16 years ago

I concur with Matt. In addition, it is going to take you a long time after you turn AdWords on to the point where a) your account has built enough history to get decent pricing and b) you have gotten good at writing copy/landing pages for your niche. Start learning early for cheap. After you find the magic, pour money at it.

I think I was on AdWords for, crikey, over a year (at $1 ~ $3 a day) before I figured out that if I took advantage of Conversion Optimizer I could profitably exploit remnant inventory on the Content Network. Since that is widely held to be total drek (and priced to match), I do pretty decently.

Mc_Big_G• 16 years ago

How does anyone even find your site if you don't do at least some advertising? You could spend the rest of your life trying to get traffic from twitter and the like. It's obviously significantly easier if you have a network of people willing to broadcast it, which a lot of introverted dev types, or family types or whatever, don't have.

petercooper• 16 years ago

4. Hiring people. It costs a ton of money, takes a lot of management, and there's plenty of red tape/employment laws/unemployment insurance/etc.

fnid22• 16 years ago

I second this, everyone should be contractors and you should structure it so that they are all, including yourself, are paid on 1099. This requires some special configuration. They should only be in an office a certain percentage of the week and they have to be competent enough to be their own boss, you can't tell them what to do and when, only what you want them to deliver and by when. It's up to them to figure out how to complete all the steps in between.

There are other issues as well, consult an accountant or tax attorney if you want to go this path, because the IRS wants everyone who works with you to be an employee and they could fight you so make sure you have all your ducks in a row.

Three Things To Put Off As Long As Possible For Your Startup

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