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The Top Ten Ways To Grow Your Business

Following startup, many small businesses are so concentrated on daily business operations that they do not, or cannot, take the time to actively focus on business growth. While others are focused on growth but do not have a strategic plan to achieve it. The Top Ten Ways to Grow Your Business is provided to help your small business enterprise attain growth beyond startup on a continuous basis, and is based on my experience working with small businesses from startups to expansion.

Know Your Market Opportunity – When I work with small business executives and entrepreneurs, one of my first questions, if not the first, is-“Do you really know your market opportunity”, or more succinctly, “Do you know your strategic market opportunity?” And then, “How well do you know your strategic market opportunity?” These are your common how, where and what questions that a small business owner or entrepreneur must ask. For instance, how do you see your market?, where is your market”, and what is your market? Business growth is extricably linked with and to market opportunity, and how well you capture it. In my experience business growth is a function of envisioning your strategic market opportunity, planning how to acquire it, executing your plan, and then working your plan to attain it.

Know Your Customer – Your customer is the primary focus of your business enterprise. Identifying who your customer actually is, followed by knowing your customer needs, is essential in meeting growth objectives. Staying connected with your customers via email, web site, face-to-face conversations, and special customer appreciation programs, such as offering a monthly customer discount, strengthens your customer base and lets you know who your customer is. Think of it this way; a customer-centric organization gains a competitive advantage over competition, which typically results in a bigger share of the market.

Cultivate and Maximize Your Brand – Brand recognition has become critically vital to small business growth as much as knowing your market, customer development, product and service credibility, growth strategy, pricing, cash flow, and having the right executive team in place. Your brand is the ‘face’ of your small business enterprise and how well recognized it is well directly impact your business growth. Cultivating and maximizing brand recognition is crucial to your business success. The new marketing media approaches include social networking venues such as Twitter, Facebook, LinkedIn, MySpace, YouTube, etc, which need to be exploited. Global companies have realized the enormous marketing opportunity these venues provide and have established social networking as a primary business function. The small business enterprise can likewise take advantage of this expanded, nearly free, marketing approach to reach customers and increase brand recognition. Cultivating and maximizing your brand distinguishes you from competition and allows your customers to link your business with your brand.

Develop Your Growth Strategy – Developing a growth strategy is a best-management process which involves determining long-term growth objectives and developing a specific action plan for attaining these objectives. The process involves an assessment of your market environment from the perspective of having the relevant market experience after startup; performing a SWOT analysis; selecting a set of alternative growth strategies based on changing market conditions, and then implementing your strategy. Note that this is in reference to the ‘envision, plan, execute and attain’ model I mentioned previously. The strategic growth plan is developed from the viewpoint of your small business corporate entity, where the focus is on the accomplishment of your strategic business objectives based on four critical questions: Who are we? What do we do? Where do we want to go? How do we get there? The answers to these questions will give you the information necessary to create your strategic objectives for your growth strategy.

Get The Right People On The Bus – This is one of my favorite discussion points, concerning leadership and relates to the strength, character and capability of your executive team. Here we use ‘bus’ to refer to the small business enterprise or organization and comes from Jim Collins’ book, ‘Good To Great”, where he quotes Ken Kesey’s reference to a bus as being the company, organization or firm. Collins found”…if we get the right people on the bus [in the company], the right people in the right seats [in the right executive roles], and the wrong people off the bus, then we’ll figure out how to take it somewhere great [to attain the founder’s vision]…” As a small business owner, it is incumbent upon you to ensure you have the right executive team in place that will take your vision of where you want your company to go, and achieve it. Business growth at all levels is largely achieved with the right people on the corporate ‘bus’, driving it to success.

Listen To The Experts-Hire a Business Advisor, Coach – According to The National Federation of Independent Business [NFIB] Education Foundation, over the lifetime of any small business, 30 percent will lose money, 30 percent will break even, and just fewer than 40 percent will be profitable. The Small Business Administration [SBA] reports that 50 percent of all small business fail after their first year, 33 percent fail after two years, and nearly 60 percent fail after four years. A Business Coach and Advisor will work with you to help avoid becoming an SBA or NFIB statistic, help you to maintain focus on driving your business forward, work with you to develop and refine your objectives, help you to develop critical business growth strategies; and provide an honest assessment of where your business is in its life cycle.

Follow Your SOLE – It has been my experience that the small business executive responsible for business growth almost always follows and prescribes to a framework that embodies the envision, plan, execute and plan strategy in achieving business growth. Often this resembles what I have developed for my clients as the SOLE Framework. The SOLE Framework provides the context for accomplishing business growth optimization where you: Solve a critical market problem or need; Optimize growth by meeting customer needs in solving a problem, Leverage your principle business core competency, and Establish a competitive baseline to achieve business growth.

Be A Hedge Hog – The Hedge Hog Concept was developed by Isaiah Berlin in his “The Hedge Hog and the Fox” Study which divided management, leadership and professional positions into two clusters: hedge hogs and foxes, based on Greek mythology, where the fox knows many things, however the hedge hog knows one big thing. The fox is a sleek, cunning, fleetly, crafty and beautiful animal. On the other hand, the hedge hog is a dowdier creature, more like a cross between a porcupine and a small armadillo who when faced with danger rolls up into a very prickly ball and spends his days looking for food. However, Berlin points out that this otherwise simple creature is certainly not stupid, or simpletons; they have a piercing insight that allows them to see through complexity and discern underlying patterns of behavior. The hedge hog sees what is essential, critical, and important, and ignores everything else. To be a Hedge Hog, the small business executive must see only what is essential and focus on it, exploiting the essential in a positive, productive manner and concentrate on three key dimensions: what you can be the best in the world at; what you are most passionate about; and what drives your economic engine.

Establish a Competitive Culture – A competitive culture concerns how your organization is structured for market competitiveness. In fact, corporate culture is a competitive advantage for a small business focused on growth by following a rather simplistic approach, based on organizational shared values, direction, mission and belief that the primary focus of a small business is to first meet customer needs, followed by employee empowerment to meet those needs, then community involvement, using common business sense approaches towards conservation, and then attention to investor interests. This hierarchical organization places the most important focus on meeting customer needs, followed by empowering employees to meet those needs creating a company structure that is positioned to be highly competitive.

Optimize Business Growth – What is Business Growth Optimization? I think a good way to initially answer this question, is to draw an analogy to a perfectly timed automobile engine running on all cylinders, smoothly, fully optimizing its capability to produce maximum power. Similarly, the small business growth company that is fully optimizing its core business competencies is structured to maximize competitive advantages and has a strategic business growth framework; running smoothly on all cylinders if it were, is attaining Business Growth Optimization. In my experience, attaining Business Growth Optimization is a three-tier process involving the SOLE Framework, achieved through the establishment of the Hedge Hog Model and implementation of the Cultural Competitiveness Organization structure.

Write a Bankable Business Plan – Ten Action Steps

Action Step # 1

Define Your Company: What will you accomplish for others?

Write down all the specific needs your company will satisfy. Potential investors need to know that your business will be meaningful and marketable to people who can use your product or service. So concentrate on the external needs your company will meet. What will your product or service enable people to do better, more cheaply, more safely, or more efficiently? Will your restaurant make people’s palates delirious with new taste sensations? Will your new mouse trap help people capture mice without feeling sick to their stomachs? Will your new bubble gum scented bubble bath revolutionize the way children agree to take nightly baths?

Think of all the positive benefits your company will provide. Write them down. Admire them. Absorb them into your consciousness. Believe in them. These are the primary motivators that readers of your business plan will respect and value.

Action Step # 2

Identify Your Company’s Initial Needs: What will you require to get started?

Whether you want to buy an existing company with 300 employees or you can start your business by only adding an extra phone line to your home office desk, you need to make a list of the materials you’ll need. Some may be tangible, such as five hundred file folders and a large cabinet in which to store them all. Other requirements may be intangible, such as time to create a product design or to do market research on potential customers. You may need to hire an assistant to develop a retrievable filing system for the five hundred folders, or hire a consultant to set up a computer system that’s beyond your technical skills.

If you’re going to build a better mousetrap, you may have constructed a prototype out of used toothpaste tubes and bent paperclips at home, but you’ll need a sturdier, more attractive model to show potential investors. What exactly will your mousetrap look like? What materials will you need? Do you require money for research and development to improve on your original toothpaste tube and paper clip construction? Do you need to hire an engineer to draw up accurate manufacturing designs? Should you patent your invention? Will you need to investigate federal safety standards for mousetraps?

Next, do your homework. Call a real estate broker and look at actual retail spaces in the neighborhood where you’d like to open your restaurant. Make a chart of the most expensive and least expensive sites by location and square footage. Then estimate how much space you require and how much money you’ll need to allow for rent.

Make a list of all the tangible and intangible resources you need to get your business going. The total estimated price of all of these items will become your start-up cost whether you’re buying highly sophisticated computers or simply installing a new telephone line on your desk. If there’s any item in your estimates that seems unreasonably high, research other alternatives. But keep in mind that it’s better to include every element you truly need along with a reasonable estimate of the cost of each item, so you don’t run out of money or default on your loans. Be honest and conservative in your estimates, but also be optimistic.

Action Step # 3

Choose A Winning Strategy: How will you distinguish your product or service from others?

Although there are millions of types of businesses, there are actually only a few basic strategies that can be applied to make any enterprise successful. The first step in selecting an effective strategy is to identify a competitive advantage for your product or service. How will you establish that your product or service is better, cheaper, more delicious, or more convenient? How can you make your company more noticeable than your competitors? What restraints in your business or its industry might determine which strategy you choose?

Your competitive advantage may include designing special features not found in rival products. It may entail superior service characteristics such as speedier delivery, a lower price, or more attentive sales people. Perhaps you’re establishing an image or brand of exceptional quality or reputation. Does your product or service bestow a certain status on its users? Does it create more profits or other benefits for your customers’ own endeavors?

Perhaps you want to position your mousetrap for a primarily upscale market because the best design requires titanium and manufacturing costs will be so expensive only rich people will be able to afford your product. But maybe the mousetrap is so fantastically effective that wealthy people will want hundreds of them around their vast country homes and polo pony barns.

You must have a reason why your business will succeed. This is the competitive advantage your product or service will deliver. Once you’ve established the competitive advantage, you will be able to select the best strategy to reach your goal.

Action Step # 4

Analyze Your Potential Markets: Who will want your product or service?

To determine your targeted market, write down the demographics of the people who will use your product or service. How old are they? What do they do for a living? Will mostly women use your service? Is your product or service attractive to a particular ethnic or economic group of people? Will only wealthy people be able to afford it? Does your ideal customer live in a certain type of neighborhood, such as a suburb with grass lawns, in order to use your lawn mower? Answering these questions about the demographics of your prime market will help you establish the clear characteristics of the people you need to reach.

If you’re selling soap, you may believe that every dirty body needs your product, but you can’t start with the entire world as your initial market. Even if you’ve developed such a ubiquitous item as soap, you need to identify a smaller, more targeted customer group first, such as children under eight for the bubble gum scented bubble bath. If your soap only works with pumped well water without fluoride, you must acknowledge that your intended market has geographical limits as well.

Establishing the size of your potential market is important, too. This will be easier once you’ve completed the demographic analysis. Then you’ll be able to research the numbers: How many car mechanics, house painters or bathroom contractors are there in any given community? How many children in the United States are currently under the age of eight? How much soap will they use in a month or a year? How many other soap manufacturers already have a share of the market? How big are your potential competitors? And where do you find the answers to all of these questions?

Identifying your market is one of the great satisfactions of starting your own business. You’re thinking about the actual people who will use your product or service and how pleased they will be buying it as you are selling it.

Action Step # 5

Develop a Strong Marketing Campaign: How will you reach your customers and what will you say?

Entrepreneurs, especially inventors, often believe that their business concept is so spectacular that promoting their product or service won’t be necessary. Sort of a “build it and they will come” attitude, especially if what you’re building is the proverbial better mousetrap. One of the most common flaws I see in plans is the entrepreneur’s failure to describe exactly how customers will be reached and how products will be presented to them. Potential investors, staff, and partners won’t be convinced that your idea can succeed until you’ve established well-researched and effective methods of contacting your customers – and the assurance that once you’ve reached them, you can convince them to buy your product or service.

Marketing describes the way you will position your product or service within your target market and how you will let your potential customers know about your company. Positioning your company means concentrating on the competitive advantages you have identified: will your product or service distinguish itself by its superior quality, its revolutionary features or its ability to make your customers happier than they’ve ever been in their lives? Marketing helps you focus on identifying your competitive advantage so you can position your product or service. It also establishes the best ways to reach your potential customers and what to say to them.

When you have the right marketing campaign in place, you have an operating plan to gain market share, generate revenue, and bring your financial projections into reality.

Action Step # 6

Build A Dynamic Sales Effort: How will you attract customers?

The word “sales” covers all the issues related to making contact with your actual customers once you’ve established how to reach them through your marketing campaign. How will you train your sales staff to approach potential customers? Will you divide up your sales staff so some become experts in selling your bubble gum scented bubble bath to small, independent retail toy stores? Will other salespeople concentrate on developing relationships with major manufacturers so your product could be sold in tandem through their national distribution outlets? Will you have a sales force expert in buying television slots on Saturday morning cartoon shows or placing ads on the backs of kid-oriented cereal boxes?

What advertising and promotional efforts will you employ – two for the price of one specials or free coupons inside those same kid-oriented cereal boxes? Where can you locate lists of the greatest concentrations of children under the age of eight or whatever group constitutes your market?

In planning your sales activities, you will also need to answer questions such as: Is it ethical to contact your colleagues and clients from your former job as a door-to-door soap salesperson to tell them about your new business. Will you be the only salesperson in the beginning stages of your company? When will you know it’s time to hire more sales staff? How do you convince your clients that your sales staff will take care of them as well as you did? What will your basic sales philosophy be – building long-term relationships with a few major clients or developing a clientele of many short-term customers?

You will also need to consider how you will compensate your sales staff – with a base salary plus a commission? Will you hire full time staff with full benefits, or part time staff without benefits. How will you motivate your staff to do the best sales job possible?

Knowledge of your competitive advantage is just as important in designing a dynamic sales effort as it is in developing an effective marketing campaign. You’ll need to think about what product or service qualities will be the most compelling to your prospective customers. Then you’ll have to devise convincing language that clearly communicates this competitive advantage to your sales staff who will in turn use it when talking to your customers. In my experience, the most important element of an effective sales effort is having a sales staff that thoroughly understands your business and the needs or your potential customers. Therefore, your sales plan must address the issue of how you will create a sales staff that is as knowledgeable about your business as it is about your potential customers.

Action Step # 7

Design Your Company: How will you hire and organize your workforce?

By the time you’ve reached this stage of thinking about your potential business concept, you’ll probably have a good idea of the number of people you’ll need and the skills they’ll require to get your enterprise up and running. Keep in mind that your initial plans will undoubtedly change as your business grows. You may need to hire more managers to supervise your expanding staff or to set up new departments to meet new customer demands. Projected growth and expansion for your company should be mentioned in your business plan, but it’s not the primary focus. For now you want to secure help in getting started and convince your funding sources that you will become profitable.

Investors will want to know if you’re capable of running the business. Do you need to bring in experienced managers right away? Will you keep some of the existing employees or hire all new people? And where do you find these potential employees?

Funding sources will also want to know if any of your partners expect to work along side of you or if their obligations are only financial.

Your plan will need to specify the key management jobs and roles. Positions such as president, vice presidents, chief financial officer, and managers of departments will need to be defined along with stating who reports to whom. You may hope to run your company as one big happy family – and it may work out that way – but organizations require formal structure and investors will expect to see these issues addressed in your plan.

And as soon as you have employees, you need to consider how you will handle their salaries and wages, their insurance and retirement benefits, as well as analyzing the extent of your knowledge of tax related issues. As you think about hiring personnel and organizing your workforce, you must also confront your desire and ability to be a good boss. If you haven’t contemplated this aspect of your commitment to owning your own business, now is the time to give it serious consideration.

Action Step # 8

Target Your Funding Sources: Where will you find your financing?

As your business concept begins to take shape, you can begin to home in on the most likely financing sources. Issues such as the size of your business, the industry it is in, whether you are starting a new business or buying an existing one, and whether you can provide collateral to a lender are among the issues that must be considered in creating a target list of funding sources. Banks and other funding sources don’t lend money because people with interesting business ideas are nice. They follow specific guidelines, such as the RMA database, which are designed to insure that they will make money by investing in or lending to your business.

For the vast majority of entrepreneurs, the well-known, high profile means of raising money, such as through venture capital companies or by going public, are not viable options. Your own credit, credit rating, and business history are key factors in obtaining financing for your venture through Small Business Administration (SBA) guaranteed loans and other bank credit. Your ability to tap into your personal network of friends, family, and professional contacts is crucial to raising money beyond what your own personal funds or credit can provide. In all of these cases, there are important considerations such as the potential impact on relationships when family and friends become investors.

When you have completed this process of identifying the likely potential funding sources and writing a bankable business plan that addresses their needs and answers their questions (even before they ask them!), you will have greatly increased the likelihood of obtaining the financing you need.

Action Step # 9

Explain Your Financial Data: How will you convince others to invest in your endeavor?

The accuracy of your financial figures and projections is absolutely critical in convincing investors, loan sources and partners that your business concept is worthy of support. The data must also be scrupulously honest and extremely clear. Since banks and many other funding sources will compare your projections to industry averages in the Risk Management Association (RMA) data, I’ve stressed throughout my book how you can use the RMA figures to test your projections before the bank does. Your numbers will be more credible if they compare reasonably to the industry averages.

The actual number crunching portion of your business plan is the place to discuss how and why you need certain equipment, time or talent, how much these items will cost, when you expect to turn a profit, and how much return and other benefits your investors will receive.

More new businesses fail because they simply run out of cash reserves than for any other reason. Investors lose confidence in the entrepreneur and the business and become reluctant to invest more when projections are not met. Had the projections been less optimistic and the investors asked to invest more in the beginning, they probably would have done so. In most cases, proper planning and more accurate projections could have avoided this problem completely.

Your business plan should clearly state the amount of funds you need, how soon you require them, and how long before you start repaying investors. You should also explain what type of financing you hope to acquire, either equity (such as through the sale of ownership shares in your company) or debt (such as loans to the company).

If you’re planning to buy an existing business or already own a business you would like to improve or expand, you will also need to provide a detailed historical financial summary of how well – or poorly – the business has done in the past. This analysis should also include a comparison of this venture’s financial performance compared to the industry standards.

Action Step # 10

Present Yourself in the Best Light: What are your qualifications for bringing your plan to fruition?

The talents, experience and enthusiasm you bring to your enterprise are unique. They provide some of the most compelling reasons for others to finance your concept. Keep in mind that investors invest in people more than ideas. Even if your potential business has many competitors or is not on the cutting edge of an industry, the qualifications and commitment you demonstrate in your plan can convince others to proffer their support.

Your resume will be included in the separate appendix of exhibits at the end of the plan, so this is not the place to list every job you’ve ever had or the fact that you were an art history major in college, especially if these experiences have no direct bearing on your ability to start your own business. But it is the place to emphasize qualifying skills that may not be readily apparent from your resume.

But don’t overlook the impact being some part of your background that might even seem unrelated to your new venture. For example, having been a pilot may demonstrate that you know how to supervise a crew of people working together to make a group experience if not comfortable, at least safe. You have undoubtedly handled dissatisfied or enraged customers. Even that BA degree in art history may enable you to make your products or store more appealing to the eye.

Your unique qualifications will separate you from all the other people who have sought venture capital for similar ideas. Boasting about these skills is not hubris; it indicates that you have a highly honed business savvy.

Top Ten Business Management Apps

Efficiently managing your employees and keeping them focused and on task can be hard work. Several programs exist to increase productivity and maximise profit. They can automate the most time-costly processes involved in running a business. These applications are the best ten of the bunch in my opinion.

1. Tree.io

Tree.io is in my opinion the best new business management software out there. It combines a powerful project management tool with functional sales and CRM tools, plus a superb personalised support service that empowers your support staff. The project management section is incredibly easy to use. You can create milestones to give your employees something to work towards, move tasks between projects with a few clicks and your employees can log time worked on each specific task. I really cant recommend Tree.io highly enough. Its like Basecamp, Salesforce and Helpdeskpilot rolled into one!

Tree.io is free indefinitely for up to 3 users so it’s perfect for small businesses or startups. Their pro plan allows unlimited users and is £9 per user per month.

2. GoogleDocs

GoogleDocs is the perfect way to manage and share your business documents. All your documents, spreadsheets, presentations and reports can be uploaded from your desktop within minutes and viewed and edited by the members of your team. It even has support for mobile devices so you can access your documents on the move. GoogleDocs is invaluble for businesses who need to share their documents instantly between employees, clients and suppliers.

To use GoogleDocs you need to create a Google Account. This is completely free of charge and gives you access to all of Googles other services like Gmail, GoogleTalk etc.

3. Solar Accounts

Solar Accounts is a simple, easy to use accounting software for small businesses or self employed individuals. It features double-entry bookkeeping, transaction history, customisable invoices and instant access to your financial records.

You can get Solar Accounts for free for a 60 day trial period but after that you have to pay a one-time fee of £124.99 to continue using it.

4. agreeAdate

agreeAdate is a really useful program for organising meetings, conference calls, appointments, staff interviews and more. You can quickly and easily find when people are free and then schedule a meeting or appointment that is convenient for everyone.

Registering for agreeAdate is completely free. With the free membership you can plan events for up to 10 people. If you need to create events for more people you can upgrade to a premium account for $3.99 or $7.99.

5. Toggl

Toggl is a helpful time-tracking app that supports live tracking or the timesheet approach, depending on how you run your business. Designed for large or small teams, Toggl lets you assign different rates to each team member or each product or client. With support for mobiles and multiple languages, Toggl is invaluable for businesses that want to keep track of every minute.

However, you don’t get all this stuff for free; Toggl’s prices range from $5 a month for 1 user to $79 a month for max 40 users.

6. GoToMeeting

GoToMeeting is a tool that enables you to host an online conference for up to 15 people at a time. Using this app you can share your screen with all the attendees, hand over keyboard control to another attendee, and change who’s screen is being shared.

GoToMeeting is free for a 30 day trial period and after this it costs £29 a month.

7. SageOne Accounts

SageOne Accounts is online accounting software like Solar Accounts but you don’t have to download anything. With SageOne Accounts you can view an instant snapshot of your businesses performance, automatically keep on top of VAT and keep all your customers and suppliers in one place. SageOne also features a 24/7 telephone helpline in case you get stuck and you can access it anywhere with an internet connection.

SageOne is free for 30 days and costs £10 per month after that.

8. NetSuite

NetSuite is a business management software that’s been around for a while, hence some of its features are a little dated. With NetSuite you can manage your businesses finances, customer relations and ecommerce from one program. It’s designed for large businesses and corporations and has a price to match: $1,188.00!

9. Mozy

Mozy is an online backup service that allows you to keep all your files safe even if your office explodes. You can select the files you want backed up and Mozy will archive them either in bulk as you sleep, or in real-time as the files are modified. Your information is kept secure with military-grade encryption and strict security policies.

Mozy costs £3.99 per month for a desktop and £6.99 per month for a server.

10. Vyew

Vyew is an online collaboration program that lets you work together with colleagues all over the world in real time. Vyew gives you a simple whiteboard where you can share ideas, upload documents for discussion or even share your desktop.

Vyew is totally free for up to 10 live participants, but if you register for $9.95 a month you get rid of the adverts and you also get a host of additional features such as VoIP and multiple meetings.

Startup Law 101 Series – Ten Essential Legal Tips For Startups at Formation

Here are ten essential legal tips for startup founders.

1. Set up your legal structure early and use cheap stock to avoid tax problems.

No small venture wants to invest too heavily in legal infrastructure at an early stage. If you are a solo founder working out of the garage, save your dollars and focus on development.

If you are a team of founders, though, setting up a legal structure early is important.

First, if members of your team are developing IP, the lack of a structure means that every participant will have individual rights to the IP he develops. A key founder can guard against this by getting everyone to sign “work-for-hire” agreements assigning such rights to that founder, who in turn will assign them over to the corporation once formed. How many founding teams do this. Almost none. Get the entity in place to capture the IP for the company as it is being developed.

Second, how do you get a founding team together without a structure? You can, of course, but it is awkward and you wind up with having to make promises that must be taken on faith about what will or will not be given to members of the team. On the flip side, many a startup has been sued by a founder who claimed that he was promised much more than was granted to him when the company was finally formed. As a team, don’t set yourselves up for this kind of lawsuit. Set the structure early and get things in writing.

If you wait too long to set your structure up, you run into tax traps. Founders normally work for sweat equity and sweat equity is a taxable commodity. If you wait until your first funding event before setting up the structure, you give the IRS a measure by which to put a comparatively large number on the value of your sweat equity and you subject the founders to needless tax risks. Avoid this by setting up early and using cheap stock to position things for the founding team.

Finally, get a competent startup business lawyer to help with or at least review your proposed setup. Do this early on to help flush out problems before they become serious. For example, many founders will moonlight while holding on to full-time jobs through the early startup phase. This often poses no special problems. Sometimes it does, however, and especially if the IP being developed overlaps with IP held by an employer of the moonlighting founder. Use a lawyer to identify and address such problems early on. It is much more costly to sort them out later.

2. Normally, go with a corporation instead of an LLC.

The LLC is a magnificent modern legal invention with a wild popularity that stems from its having become, for sole-member entities (including husband-wife), the modern equivalent of the sole proprietorship with a limited liability cap on it.

When you move beyond sole member LLCs, however, you essentially have a partnership-style structure with a limited liability cap on it.

The partnership-style structure does not lend itself well to common features of a startup. It is a clumsy vehicle for restricted stock and for preferred stock. It does not support the use of incentive stock options. It cannot be used as an investment vehicle for VCs. There are special cases where an LLC makes sense for a startup but these are comparatively few in number (e.g., where special tax allocations make sense, where a profits-only interest is important, where tax pass-through adds value). Work with a lawyer to see if special case applies. If not, go with a corporation.

3. Be cautious about Delaware.

Delaware offers few, if any advantages, for an early-stage startup. The many praises sung for Delaware by business lawyers are justified for large, public companies. For startups, Delaware offers mostly administrative inconvenience.

Some Delaware advantages from the standpoint of an insider group: (1) you can have a sole director constitute the entire board of directors no matter how large and complex the corporate setup, giving a dominant founder a vehicle for keeping everything close the vest (if this is deemed desirable); (2) you can dispense with cumulative voting, giving leverage to insiders who want to keep minority shareholders from having board representation; (3) you can stagger the election of directors if desired.

Delaware also is an efficient state for doing corporate filings, as anyone who has been frustrated by the delays and screw-ups of certain other state agencies can attest.

On the down side — and this is major — Delaware permits preferred shareholders who control the majority of the company’s voting stock to sell or merge the company without requiring the consent of the common stock holders. This can easily lead to downstream founder “wipe outs” via liquidation preferences held by such controlling shareholders.

Also on the down side, early-stage startups incur administrative hassles and extra costs with a Delaware setup. They still have to pay taxes on income derived from their home states. They have to qualify their Delaware corporation as a “foreign corporation” in their home states and pay the extra franchise fees associated with that process. They get franchise tax bills in the tens of thousands of dollars and have to apply for relief under Delaware’s alternative valuation method. None of these items constitutes a crushing problem. Every one is an administrative hassle.

My advice from years of experience working with founders: keep it simple and skip Delaware unless there is some compelling reason to choose it; if there is a good reason, go with Delaware but don’t fool yourself into believing that you have gotten yourself special prize for your early-stage startup.

4. Use restricted stock for founders in most cases.

If a founder gets stock without strings on it, and then walks away from the company, that founder will get a windfall equity grant. There are special exceptions, but the rule for most founders should be to grant them restricted stock, i.e., stock that can be repurchased by the company at cost in the event the founder leaves the company. Restricted stock lies at the heart of the concept of sweat equity for founders. Use it to make sure founders earn their keep.

5. Make timely 83(b) elections.

When restricted stock grants are made, they should almost always be accompanied by 83(b) elections to prevent potentially horrific tax problems from arising downstream for the founders. This special tax election applies to cases where stock is owned but can be forfeited. It must be made within 30 days of the date of grant, signed by the stock recipient and spouse, and filed with the recipient’s tax return for that year.

6. Get technology assignments from everyone who helped develop IP.

When the startup is formed, stock grants should not be made just for cash contributions from founders but also for technology assignments, as applicable to any founder who worked on IP-related matters prior to formation. Don’t leave these hangning loose or allow stock to be issued to founders without capturing all IP rights for the company.

Founders sometimes think they can keep IP in their own hands and license it to the startup. This does not work. At least the company will not normally be fundable in such cases. Exceptions to this are rare.

The IP roundup should include not only founders but all consultants who worked on IP-related matters prior to company formation. Modern startups will sometimes use development companies in places like India to help speed product development prior to company formation. If such companies were paid for this work, and if they did it under work-for-hire contracts, then whoever had the contract with them can assign to the startup the rights already captured under the work-for-hire contracts. If no work-for-hire arrangements were in place, a stock, stock option, or warrant grant should be made, or other legal consideration paid, to the outside company in exchange for the IP rights it holds.

The same is true for every contractor or friend who helped with development locally. Small option grants will ensure that IP rights are rounded up from all relevant parties. These grants should be vested in whole or in part to ensure that proper consideration exists for the IP assignment made by the consultants.

7. Protect the IP going forward.

When the startup is formed, all employees and contractors who continue to work for it should sign confidentiality and invention assignment agreements or work-for-hire contracts as appropriate to ensure that all IP remains with the company.

Such persons should also be paid valid consideration for their efforts. If this is in the form of equity compensation, it should be accompanied by some form of cash compensation as well to avoid tax problems arising from the IRS placing a high value on the stock by using the reasonable value of services as a measure of its value. If cash is a problem, salaries may be deferred as appropriate until first funding.

8. Consider provisional patent filings.

Many startups have IP whose value will largely be lost or compromised once it is disclosed to the others. In such cases, see a good patent lawyer to determine a patent strategy for protecting such IP. If appropriate, file provisional patents. Do this before making key disclosures to investors, etc.

If early disclosures must be made, do this incrementally and only under the terms of non-disclosure agreements. In cases where investors refuse to sign an nda (e.g., with VC firms), don’t reveal your core confidential items until you have the provisional patents on file.

9. Set up equity incentives.

With any true startup, equity incentives are the fuel that keeps a team going. At formation, adopt an equity incentive plan. These plans will give the board of directors a range of incentives, unsually including restricted stock, incentive stock options (ISOs), and non-qualified options (NQOs).

Restricted stock is usually used for founders and very key people. ISOs are used for employees only. NQOs can be used with any employee, consultant, board member, advisory director, or other key person. Each of these tools has differing tax treatment. Use a good professional to advise you on this.

Of course, with all forms of stock and options, federal and state securities laws must be satisfied. Use a good lawyer to do this.

10. Fund the company incrementally.

Resourceful startups will use funding strategies by which they don’t necessarily go for large VC funding right out the gate. Of course, some of the very best startups have needed major VC funding at inception and have achieved tremendous success. Most, however, will get into trouble if they need massive capital infusions right up front and thereby find themselves with few options if such funding is not available or if it is available only on oppressive terms.

The best results for founders come when they have built significant value in the startup before needing to seek major funding. The dilutive hit is much less and they often get much better general terms for their funding.

Conclusion

These tips suggest important legal elements that founders should factor into their broader strategic planning.

As a founder, you should work closely with a good startup business lawyer to implement the steps correctly. Self-help has its place in small companies, but it almost invariably falls short when it comes to the complex setup issues associated with a startup. In this area, get a good startup business lawyer and do it right.