by Frank Gruber
Startup Weekend
Startup Weekend hosts 54-hour weekend events where people interested in entrepreneurship come together, form teams around ideas, and launch them. On Sunday night, the teams present to an audience and winners are crowned. Startup Weekend has more than 45,000 alumni and has hosted events in more than 400 cities and 110 countries. The company is based in Seattle.
So how do you find cofounders? First, look at your friends and contacts. If no one comes to mind, then expand your search and ask around. Use your network of friends, family, and colleagues to do this. Get out there and pound the pavement by attending different events. Our Tech Cocktail events, Startup Weekend, and local tech- and developer-focused meetups could be great places to meet potential cofounders. There are also organizations such as FounderDating and CoFoundersLab created for exactly this purpose.
It's important to not let the lack of a cofounder be an excuse for not starting up. If you start and do well, cofounders will find you; lots of great companies started this way. Automattic was founded in January 2003 when Matt Mullenweg wrote a blog post about starting a new project (which would become WordPress, the online publishing platform). Mike Little offered to contribute and eventually became cofounder. By showing that he was serious about the idea, Mullenweg attracted a cofounder and other volunteers around him.
The Harsh Reality
Starting up is hard and intimidating. A lot of people have ideas they want to work on someday, but someday never comes; they don't know where to start, so they never do.
Through the years, I've met too many people who are waiting for the stars to align. Today is the best day to start. Not tomorrow, when you have more time—today.
But finding a cofounder takes time. Entrepreneur Gerome Sapp is a former NFL athlete and had trouble getting people to take his idea for Fluencr seriously. But he didn't give up; he ended up traveling all around the United States, attending Ruby on Rails meetups, and learning to code in case he had to build the app himself. In the end, he found two technical cofounders in Austin after searching for about four months.
One of my startup attempts was called CampusJabber, a social network for college campuses that had social commerce built in for selling books, stereo equipment, furniture, or whatever. I shared the idea with a colleague who quickly joined as a cofounder in a more silent capacity, with the promise to support it along financially if it showed signs of growth.
I was in the process of completing my master's degree in computer science from Northwestern University and thought its campus might make for a good testing ground. So I also shared the idea with an undergraduate friend who found it interesting. I envisioned him helping to market it on campus while I developed it online. I pulled him in, along with his roommate, who also showed interest in helping with the endeavor. Now half of the team was actually part of the demographic the offering was geared toward.
At the time, Facebook didn't really exist except on some limited, elite college campuses. MySpace was still being used as well, but it was like a carnival to your senses. It seemed like we all agreed there was an opportunity to create a social network that connected and shared updates on campus and also enabled social commerce.
I later learned that we did not all agree on the vision. Because of their heavy involvement in student government on campus, the two undergrads felt that CampusJabber should focus heavily on student government. I did not. And aside from the initial vision, we didn't divide the labor equally. I was doing all the research, coding, writing, business development, and marketing while the rest of the team gave me feedback and went to class.
Needless to say, CampusJabber wasn't able to go anywhere, and after just a few months, I shut the site down. There were no hard feelings between the cofounders, but I learned that I would have been better off hiring them all as consultants or just asking them for advice rather than making them part of the business. So I cannot emphasize enough the importance of clearly communicating your vision with potential cofounders to ensure that you see eye to eye. If you don't, you're not getting started on the right foot. Take your time and think of it like dating because, with a successful company, you're going to be with this cofounding team for a while.
Celebrate: Enjoy the Journey
By taking those first few steps to turn your idea into action, you're braver than a lot of people out there. While you're just at the beginning of the adventure, make sure to pause to acknowledge your movement in the right direction. How? High fives, dinner out, a special reward—anything to help you honor the progress you've made. Honestly, it doesn't matter what the reward is—the acknowledgment is what matters.
.CO
.CO is the domain name for innovators and entrepreneurs, with more than 1.6 million domains registered. The company also offers resources at go.co/members and a website builder at POP.co. .CO was launched in 2010 after founder Juan Diego Calle and his team won a bid from the Colombian government to administer it. Tech Cocktail is thankful to have .CO as a partner and supporter. Neustar acquired .CO in March 2014.
For example, .CO Internet founder Juan Diego Calle took a moment to appreciate finding his first cofounder for .CO, Eduardo Santoyo. He recalls that they “celebrated that very moment together as the birth of a great partnership, although all we had at the time was an idea that had the chance to become a reality in the future.”
Aside from celebrating your first milestones yourself or with a cofounder, consider sharing your progress with someone who has mentored or supported you up to this point. This not only helps you feel the progress but also communicates to your mentors that their time was well spent. Sapp of Fluencr used to talk about business with Baltimore Ravens majority owner Steve Bisciotti (a self-made billionaire), who often said that the hardest thing is just doing it. So Sapp made sure to phone Bisciotti to share the news after he took the first steps with Fluencr. “It felt good to call him up and say ‘I took that first step, Mr. Bisciotti, and though I'm nowhere near my goals and dream, I at least took a step of faith in that direction,’” he recalls.
Final Thoughts
Early on, in brainstorming what she hoped BabbaCo would become, Kim knew that it was all about building relationships with customers, a lifestyle brand people would feel loyalty toward.
So it was a natural extension to develop the BabbaBox, a monthly shipment of activities for parents or caregivers to do with their kids. They solved a problem that many parents have: not knowing how to spend quality time with young children. They raised $1.25 million in funding in July, went through demo day at their accelerator in August, and shipped out their first boxes in September 2008.
Kim's company also built celebration into their weekly routine, making Wednesdays into Winsdays, where each team member shared their weekly progress. The Winsdays sessions focused the team on their small wins from week to week, helping everything from morale to company culture. In January 2014, BabbaCo was acquired by Barefoot Books. Kim says, “It's really this story of raw passion and following through with it” that made all the difference.
An idea that is developed and put into action is more important than an idea that exists only as an idea.
—Buddha
Chapter 4
Formation
I have so much paperwork. I'm afraid my paperwork has paperwork.
—Gabrielle Zevin
You've taken the big step and started to turn your idea into a reality. There are a few things to consider as you embark on this journey. Eventually you'll need to make sure you actually create a company as a legal entity, understand what books you need to keep and forms you need to file, and have your tax details in order. These are probably not the first things you want to think of as you begin this exciting new chapter of life—and definitely not the most awe-inspiring tasks—but in my experience, the following items are very important not to gloss over in your formative months and years:
Company formation
Employee agreements
Legal advice
Bookkeeping and accounting
Taxes
Why? Because no matter how great your company is, if your legal, financial, and tax affairs are out of control, they can have an enormously negative effect on your time, your sanity, and ultimately, the success of your company.
Let's dig into a few of these areas.
Forming a Company
A study by the entrepreneurship-focused Kauffman Foundation found that 60 percent of entrepreneurs worked on their idea for more than six months before actually forming an entity. Although forming an entity is not necessarily the first thing you need to do, when you finally do sit down to do it—with a lawyer or not—it makes sense to know your options. If you choose the wrong type, you'll have to spend more time and money reorganizing it later.
Kauffman Foundation
The Kauffman Foundation is a private foundation that was established in the 1960s by entrepreneur and philanthropist Ewing Marion Kauffman. The foundation focuses its efforts on education and entrepreneurship to encourage people to be economically independent and engaged citizens. Kauffman supports startups through its reports and research on entrepreneurship, resources at Entrepreneurship.org, and work with organizations such as UP Global. The foundation is based in Kansas City, Missouri.
To start, here are some guidelines about entity types and which to choose. This information is readily available online, so I'm going to keep it concise here:
Sole proprietorship: The setup is cheap and simple and includes registering for a business license and tax ID number. The downside is that you are personally liable for business debts.
Partnership: Partnerships are similarly cheap and easy to set up; the only difference is that they include two or more people. You still have personal liability.
LLC (limited liability corporation): An LLC is a pass-through entity: it doesn't pay corporate taxes, with the profits ending up on personal income tax returns. (This avoids double taxation, where the same amount gets taxed twice on business and personal returns.) You usually aren't personally liable (hence “limited liability”). An LLC is best if you don't plan to raise outside funding. Venture capitalists (VCs) typically won't touch an LLC because it exposes them to UBTI (unrelated business tax income) taxes and it's hard to work with the preferred membership units (the equivalent of shares) in LLCs.
S-Corp: An S-Corp is also a pass-through entity. If you don't plan to raise VC money soon, you might choose an S-Corp because you avoid double taxation, there's no preferred stock, and it's easy to change to a C-Corp when the time comes. S-Corps come with regulations such as having a board of directors, issuing annual reports, and conducting shareholder meetings. Shareholders have to be U.S. citizens or permanent residents, and the profits (income) have to be divided among owners according to their share.
C-Corp: A C-Corp is best if you're looking to raise outside funding in the near future. It's the most expensive option because of double taxation, but you do avoid the phantom income of LLCs and S-Corps, a phenomenon that occurs when you get personally taxed for your share of profits even if they were reinvested back into the business. C-Corps allow for preferred stock. Most startups choose to create Delaware corporations because of the friendly laws there.
B-Corp: The B-Corp (benefit corporation) is available in a growing number of states and could be an option for your conscious company. It's really designed for for-profit companies that, in addition to driving profits, have a strong social good purpose and want to ensure they remain accountable and transparent in their actions.
Nonprofit: For some startups with a social good mission, a nonprofit is the best choice. Nonprofits come with their own complex set of qualifying regulations and profit allocation rules, but they also have different benefits and opportunities. Not all social good startups are nonprofits, however.
I've found there are lots of opinions out there, even among the experts. So do your homework—read more about the various options, and talk to other startup owners, lawyers, and accountants. In the end, you're the one who will make the decision.
Also take the opportunity to register your trade name at the local city hall and get your business license.
Location
Where you base your company matters. I'm not talking about forming a Delaware corporation. I mean, literally, where are you going to live and set up shop? Realistically, most people start their company wherever they live. But it's still worth asking yourself the question—particularly if you live on a border of another area where setting up shop could have meaningful benefits such as lower taxes.
Seven states don't have state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire have a limited income tax on individuals, taxing only dividend and interest income. So this is something to keep in mind.
Even if you work from home, just you and a laptop, you may need a home occupancy permit. It's easy, but you have to apply in person. You may need this to get your business license.
The strength of the startup community is another important factor to weigh as you look for funding, mentoring, events, and service providers to help you on your path. Silicon Valley has a drawn a lot of attention, but these days you can form a startup anywhere.
Employee Agreements
It's important to have a legal agreement between you and your cofounders. You, like many others, may think, “There's plenty of time to do that later. We don't even know if this startup will amount to anything yet.” I've done it, and trust me when I say: it only gets harder. It's much easier to have all the difficult conversations early on. Equity, operational decisions, what happens if the company fails—make those decisions before everyone gets attached and emotional. There are not only personal challenges in waiting but legal and tax implications as well.
Company agreements may also include stipulations about duties, job descriptions, hours, how decisions are made, who pays for which expenses, what happens if you disagree about raising money or selling the company, whether you can launch other startups at the same time, and what happens if someone is injured or dies.
Your agreement should also specify what happens if cofounders or employees leave. If they own stock, can they sell it? Do other founders get first dibs? How is price determined?
Equity
You also have to decide how to split equity, either 50/50 or otherwise. Splitting 50/50 avoids arguments now, but uneven splits usually reflect the reality of each party's contributions.
Vesting
Vesting is a useful tool that helps ensure cofounders are in it for the long haul. When equity has a vesting schedule, team members earn the full rights to that equity over time instead of all at once. If equity is completely vested, it means it's completely owned by the team members. If they leave before a portion is vested, they don't receive it.
Steve Kaplan, counsel at Pillsbury Law in Washington, DC, advises startup founders to divide equity sooner rather than later. The tax implications of equity grants depend on the value of the company when equity is allocated, which is lower the earlier you do it.
Besides allocating stock to cofounders, you can also use stock as an incentive for employees. You can also award additional stock along the way at your discretion—for example, if a team member scores a huge deal or makes an outstanding contribution. This makes it a motivational tool as well as a reward for a job well done.
Intellectual Property
The most crucial thing you can do as you begin working with others is have them sign contracts stipulating that the company owns their work, says Daliah Saper of Saper Law in Chicago. Her firm focuses on intellectual property, social media, and business law, and they've seen what happens when founders forget to do this. For example, the following story is based on an actual client Saper had:
Marianne needed a website to start her business, and she hired Brad. Marianne paid Brad $60,000, because he's worth it, and Brad developed the entire site for her. There's no agreement in writing. Who o
wns the website?
Brad owns it. Just because a business pays for the work doesn't mean they own it; that's not how U.S. copyright laws work. You have to have a work-for-hire or assignment agreement in place that spells out whom the work belongs to. This applies to any freelancer—a videographer, photographer, Web developer, designer, and so on. Even independent subcontractors could end up being joint owners of the code because of copyright law.
Legal Advice
When choosing a lawyer, you're going to want someone whom you connect with and who can explain things in language you understand. Also remember that not every lawyer is right for every situation. You may have one lawyer who helps you with simple organization and business contracts, licensing technology, and writing your terms of service, but you may eventually need someone else if you get involved in complex patent situations, funding, or an acquisition. It's okay to use different attorneys for specific purposes, and typically your day-to-day lawyer can help make recommendations.
Bookkeeping and Accounting
Are you a numbers person? If so, you might like the accounting side of starting up a business. I don't. Either way, eventually you'll need to collect and spend money. One of the number one rules when starting a business is to keep your personal and business financials separate. Seriously. We've all done it…used a personal credit card to buy a domain name and hosting space or used a personal check to pay a contractor. In the earliest days, it might be unavoidable, but as soon as you really get serious about being a company, you need to get serious about your division of finances. This means you'll need to set up a bank account after forming your entity.