Young Entrepreneurs – Corporation or LLC, Lawyer or Website?

So you’ve been working on an idea and you are ready to become an official company. For your first time around this block, even with the self serve packages and web sites out there, it will be worth your time to talk with a good corporate attorney before signing on the dotted line.

Self-serve Legal Sites (LegalZoom.com, MyCorporation.com, etc.)

These sites offer a lot of good advice, education, questionnaires and ultimately kits and/or assistance filing the right papers with the state and federal government. If you’re doing this on your own or you have business partners, it will help to get a lot of questions asked and answers documented before you speak with a lawyer and/or sign up for an incorporation kit through one of these web service companies. Some of these questions I pointed out in a previous post (Young Entrepreneurs – Get it in writing) others will be pointed out going through some of the education and questionnaire links on either self-serve website.

What type of company should I become?

This question comes up a lot and often depends on what you expect your company to become. The more common and new form for entrepreneurs is the Limited Liability Company (LLC). The LLC offers a lot of flexibility and is less restrictive when it comes to distribution of profits/losses, who can be involved in your company and who is responsible for what within the organization. I’ve had C-Corps, S-Corps and LLCs over the years and find that the LLC has been the easiest thus far. Your long terms plans and initial financial backing are two critical components of the selection process.

Expecting huge success and ultimately a public offering (IPO)? If this is part of your business plan and the path you are getting on, I would (though I am no lawyer) suspect you will want a more restrictive corporate structure that will permit a lot of shareholders and provide shelter for founders and owners down the line. If you are on this path, you should seek legal guidance early and will most likely want to opt for a C Corporation structure.

Entrepreneurs, Life-Style Businesses, Consultants and Freelancers. This is the category I have always fallen into. My companies have always been smaller; self financed (with help from time to time) and have not been the type of company that I had ever planned to take public. The S-Corp and LLC offer protection to the owners and in my opinion the LLC offers the most efficient structure for young companies and new entrepreneurs trying to figure it out on their won. You will learn a lot, make mistakes, change your mind, switch directions, gain or exchange partners and adjust your membership as times change and the company evolves. Choosing a flexible structure from the get-go may prevent headaches and wasted money down the line.

There are some potential negatives of being an LLC or S-Corp as well, so I urge you to have that quick discussion with someone more qualified to answer your questions. One quick example of this is that members in an LLC (in NY anyway) do not get a paycheck per se, they receive ‘guaranteed payments’. Not that you can’t take money out or receive funds on a regular basis, but you are not considered an employee with a paycheck and your taxes are not automatically withdrawn. There are immediately some potential tax implications within an S-Corp or LLC that you should discuss in advance with both your lawyer and your accountant.

So answer the question Sayers!

I was asked today, by a freelancer as well as an organizer of a hockey team, what structure should I be and can I use LegalZoom.com or MyCorporation.com. I wrote this ditty for them and others in their shoes. More important than the site you choose is the time you take to prepare for your business venture. Ask yourself the tough questions and get the answers and ideas on paper. Do the research, review the educational links and then go for it. I personally liked the MyCorporation.com site better though the pricing is pretty similar. Once you’re setup, there is nothing to say you cannot change your mind, adjust the structure or amend the documents at anytime. For both of you, the LLC would be fine and either site would work. If you need the name of an attorney to talk to in advance, let me know and I’ll hook you up.

Two other things: First, with both sites/packages, get the Federal ID number (FEIN) upgrade as you will need the number. Second, when you are setup and moving along, get a D&B number and start establishing your corporate credit history. You’ll need that too. Good luck!

Young Entrepreneurs – Get it in writing

If you have a business partner or plan on working with someone to build a company, do yourselves a favor and get things in writing.

I was having a conversation with a budding entrepreneur this evening and the topic came up about partner percentages, when to form the Corporation or LLC and setting the tone for who makes the decisions. Having been in a business relationship where the owner equity was 50/50, I have some experience there to pass along to those getting involved in business for themselves and doing it with a partner. This conversation came up right after my 10 year old’s middle school orientation which all ties in nicely.

  1. The principal says, “Tell your child not to give out their locker combination. BFF in middle school lasts for 1-2 weeks.” Point noted, I’ll have that conversation with my son.
  2. The young entrepreneur was explaining issues already coming to the surface with their business partner and their company has not even been formally setup. Nothing yet in writing to define roles or “what ifs”.
  3. My previous business partner (referenced in a previous post A tribute to a good friend, father and husband.) and I were 50/50 and it worked out pretty well. In his next business, which I was not a part of, he had two other partners with percentages changing over time based on capital and effort contributed. Here’s the rub.

When Bob (my former business partner) died unexpectedly, everything you should avoid came to the surface and continues to cause problems for the remaining business today. It turned out that being good friends with someone and working on words and handshakes vs. paper and legally filed documents only goes so far. When gone, you can no longer speak to your conversations, your handshake deals and your BFF relationships. There were conflicts and points of friction between these three but worked out in conversation and not necessary put into writing for future avoidance.

Stop and take time today to get things in order and done properly.

I hear this all a lot; “I don’t have time to get that stuff done, I’m too busy trying to get this business up and running” Look, things happen and more often than not the worst things are never planned for. It will be well worth it for you, your business associate(s) and your family or heirs if you take a day or two and get it all on paper. Work out your differences now and document the roles and responsibilities instead of glossing them over and saving that confrontation for another day.

Some things to agree upon and document whether your are legally incorporated or just planning on getting there.

  1. Get your ownership percentages documented. If you started it together and worked on it as a project, that doesn’t make you 50/50. The one who truly put in the extra effort and/or in some cases whomever put in the upfront capital or exposed themselves to risk, they are entitled to a different percentage in most cases. Be fair and avoid future resentment.
  2. Get your buy-sell agreement in line. Take the worst case scenario and document that actions to be taken. If your partner dies, do you want their spouse in the business with their share or do you want to buy them out and avoid that potential headache? If there are multiple partners and the spouse has to sell, how are the shares repurchased and how should they then be redistributed?
  3. Get your articles and corporate minutes up to date and current.
  4. Get your key-man insurance with the right beneficiaries. If your partner dies and the company is paying the insurance premium, should the spouse get the money or should the company be the beneficiary to pay for the spouse buyout? What is on the policy itself is all that matters and with no back up in your articles of incorporation or buy-sell agreement, you won’t have a leg to stand on.
  5. Document your responsibilities and primary functions. While it is easy to say, “I do a little of everything” and that may be true, but when there are multiple partners, each has their strengths and weaknesses and those should be documented early to avoid problems later.

Remember, just because you put it in writing doesn’t mean it has been carved in stone. You can always amend your business documents, but you can never create and execute them if a partner leaves or dies. Stop and document your future even though you don’t know what it holds.

Young Entrepreneurs – Great new ideas

Have a great idea?
Have a great idea?

So you have a great idea do you? How do you know if you’re right?

Many people have great ideas and don’t know where to go with them and others think they have a great idea but are not correct. Very few have a good idea, know they are right and go after it with the drive and passion to see it through. How to know if your idea is worth pursuing? Here is how I go about it.

Assumptions: With any idea, it helps to start with some assumptions to highlight the type of industry, business, technology, marketplace and potential customer base. Most of the ideas I explore and evaluate are high tech, web enabled, business to business services, ecommerce or the like.

The idea: For sake of this example, here is the idea, a web based service that monitors our ecommerce competitors for pricing and content changes, new products, discontinued products as well as to create awareness to any new competitor as they sprout up quite often. It is also used for intraday evaluation to highlight marketing trends and activities and find the soft underbelly. We have a version of this we use in-house but have not made it customer facing nor publicly available to other customers. Maybe we should… let’s see.

First and foremost, if this idea is great AND you can get it up and running AND it is successful, where do you want to end up with it? While the answer is always subject to change, what is your exit plan should all of the stars line up?

Exit plan: In our case, because the volume of ideas is constant and large, our exit plan with a software as a service (SaaS) like this is to prove its worth, build up revenue and an initial customer base and make the platform an attractive target for acquisition. The monies received by selling this service fuel the incubation and acceleration of multiple pending projects that have also run through our “Idea Scorecard” and passed with a high rating. Hypothetically speaking.

The Idea Scorecard:

Now that we have established what the idea is and what we want to do with it, we can now evaluate it and determine if it is worth proceeding with project management and personnel/financial resources. There are a lot of variables to look at, some financial and some subjective. The subjective questions all carry a different weight as a fraction of 100% as do the financial questions and answers. The end result is a score for each idea, ranging from 0-100. Anything over 90 is worth looking at and when evaluating multiple ideas, usually the highest overall will get first priority with some exceptions. Keep in mind that this is NOT a business plan and not intended to take a significant amount of time to complete. Many of the subjective questions are to immediately negate the idea and save your the time and expense of completing not only this scorecard but any business plan development beyond this basic analysis.

Subjective Components:

There are a lot of questions you can ask of an idea to highlight potential hurdles within your existing business infrastructure, financial resources, personnel resources and the existing marketplace. Here are a few that we run through that have been successful in helping us allocate resources to a worthy project as well as prevent us from pursuing projects that look and sound great in concept but have one or more flaws that will ultimately doom it from the very beginning. I’m not going to expand on any of these or apply their unique weights, but you’ll get the idea.

  1. How much software development time is required?
  2. What is the competition like? Are there any/many out there?
  3. Is this a new concept overall or does the idea already exist?
  4. How strong or weak is the existing competition?
  5. How large is the potential customer base?
  6. Is the revenue one-time or recurring?
  7. Is the product/service managed or self-serve?
  8. How simple is the concept as a whole? Can it be explained in 30 seconds without visual aid?
  9. Does it produce a tangible good or is the product itself tangible?
  10. Is the product returnable or disputable?
  11. Can the service / product(s) be marketed to our existing customer base of 75,000+?
  12. Is this a consumer or business product/service?
  13. Is it a broad marketplace or niche market?
  14. Is the idea dependent on continued content creation?
  15. Is it likely that this service will be found through search marketing or only through push marketing?
  16. Will the customer recognize the need and value without education?
  17. At or prior to launch, do we need to hire more than three additional people to support live services?
  18. Would the idea cause any credibility issues within our existing customer base, marketplace or partner relationships?
  19. Are there any significant barriers to entry into this marketplace?
  20. Is the advertising and marketing online, offline or both?
  21. How extensive of a marketing program is necessary?
  22. Can the engineering and marketing departments work in parallel successfully?
  23. What factors outside of our control could derail the development and customer acquisition?
  24. Is this valuable enough to be deemed a necessity or merely a luxury?
  25. Does this require a proactive tele-sales team or reactive customer service department?
  26. Once launched, how quickly could a significant competitor arise?
  27. Can you self-fund the R&D or does it require external financing?
  28. If the service requires local personnel, is the talent pool deep enough?
  29. Can any manual components be outsourced or completed by remote workers?
  30. Who are your potential business/idea acquisition targets and do you have report with them?

Financial Components:

Rather than spend a significant amount of time on an extensive business plan that you might present to an investor or business partner, we have built a mini-plan of sorts to gather some general financial figures and help guide the decision making process without expending resources unnecessarily. Many of these figures tie in with the subjective questions and are altered by their answers. My feeling on this is that it is best to answer the subjective first and build the financial mini-plan using the answers therein.

  1. Initial R&D Expense (multiple of S1)
  2. Post launch monthly expense and personnel headcount per customer
  3. Conservative monthly revenue per customer
  4. Length of sales cycle
  5. Break even projections and analysis
  6. Twelve month division/company valuation
  7. Twenty four month projections (post R&D)
  8. Acquisition cost per customer
  9. CapEx and OpEx (pre and post launch)
  10. Target valuation

Summary:

While there are many other factors to look at and significantly different factors to include for varying industries and technologies, the idea of basic idea template and scoring system for those with a steady stream of “next great things” is key. Constantly evaluating this scoring tool and automating the tool to make the processes more efficient and more accessible to others is equally important. Expanding the number of subjective questions can further isolate the good ideas as can additional financial analysis. The point is to take time to evaluate and have a method of doing so prior to investing your time and money in an idea that ultimately isn’t going to be the winner you think it is. This tool, for me anyway, is to highlight the losers more so than the winners.

Is the idea a winner?

Sure it is. High margin, recurring revenue with a large enough potential customer base and an obvious value proposition with limited competition and barriers to entry. Were the resources available, expanding on this internal application and making it customer facing would be worthwhile in my opinion. In the interim, we’ll use it and refine it for future project based expansion. Should someone else take the idea and run with it, great, let me know when you launch and we can compare notes.

Young Entrepreneurs – Outsourcing

Amazon Web Services
Amazon Web Services

Outsourcing… I’m not talking about sending your customer service calls overseas either.

Things have changed a lot since I started building businesses and that really wasn’t that long ago. When it comes to building a company that is technology related or is leveraging the internet to build and drive business, it is a lot easier and a lot less expensive than it used to be. Instant access to anyone and anything, the drive of the American consumer and entrepreneur and the constant re-doubling of computing speed and power has really opened it up for anyone with a great idea and the passion to see it to its end. Outsourcing used to be a bad term and generally referred to companies using foreign workers to answer their telephones and provide 24/7 customer service for less than they were paying to have business hours coverage.

It isn’t a bad thing and here is just one example covering a lot of small business needs; Amazon Web Services (AWS)

With minimal time and effort, using AWS you can build hosted applications (like Twitter), obtain remote storage, setup billing and payment services, provide content, leverage hosted keyword and optimization tools and even push manual labor tasks out as projects for jobs that cannot be automated and require substantial short term headcount. Below are some of these various services and brief descriptions of what they do. This is a great place to build a prototype, test it, optimize it and even push it live before needing to get any financing, hire any employees, lease any office space or even setup a legal business entity. I truly wish this was around and its benefits explained back in ’95 when I got going with my own companies. The service is free to set going. Any ‘go-live’ fees are minimal and usage based.

  • Amazon Elastic Compute Cloud (Amazon EC2) is a web service that provides resizable compute capacity in the cloud. It is designed to make web-scale computing easier for developers. In more simple terms: You can setup your own application server, create your application, take it live and watch it grow without buying any hardware, no network integration, no expensive commercial grade broadband and reactionary scaling where your servers capacity grows automatically as external demand requires. In terms of a web application, like Twitter, the servers that hosts the application, the connectivity to the internet, the storage of information and scalability of it as more and more people use that application grows.
  • Amazon Simple Storage Service (Amazon S3) provides a simple web services interface that can be used to store and retrieve any amount of data, at any time, from anywhere on the web. It gives any developer access to the same highly scalable, reliable, fast, inexpensive data storage infrastructure that Amazon uses to run its own global network of web sites. The service aims to maximize benefits of scale and to pass those benefits on to developers. No simplification needed here: S3 is low cost data storage with high availability to anyone around the globe.
  • Amazon DevPay is a simple-to-use online billing and account management service that makes it easy for businesses to sell applications that are built in, or run on top of, Amazon Web Services. It is designed to make running applications in the cloud and on demand easier for developers. Simplified: DevPay is used to sign up and bill customers using your applications and collect their payments. This billing can be subscription/recurring based or based on usage of the application. This takes a lot of pain away from new business owners and even established ones stepping up to AWS.
  • Amazon Mechanical Turk is a marketplace for work that requires human intelligence. The Mechanical Turk web service enables companies to programmatically access this marketplace and a diverse, on-demand workforce. Developers can leverage this service to build human intelligence directly into their applications. While computing technology continues to improve, there are still many things that human beings can do much more effectively than computers, such as identifying objects in a photo or video, performing data de-duplication, transcribing audio recordings or researching data details. Traditionally, tasks like this have been accomplished by hiring a large temporary workforce (which is time consuming, expensive and difficult to scale) or have gone undone. A simple example use: We need UPC codes for all of the products listed in our online store – (VoIP Supply). With my current staff busy handling day to day work and unable to dedicate the days needed to track down UPC codes for 2,000+ products, this task is always going to sit on the back burner. With Amazon Mechanical Turks and access to thousands of people able to work together on this project, we can get this project completed in less than a day for a fraction of the cost, without disrupting my staff and their work.
  • Amazon CloudFront works by distributing your web content (i.e. images, video, etc) using a network of edge locations around the world. Your content is then served from the edge location that is geographically closest to the user who requests it. This is best explained visually (HERE) but basically permits distribution of your content globally with the less latency and greater reliability by finding the closest point of storage/access for the person or system requesting your data.

This is a very remarkable bundle of services for anyone looking to take their idea from a napkin to the Inc. 500 without many of the traditional hurdles and roadblocks that have plagued past entrepreneurs.

Young Entrepreneurs – Mind your focus

Focus
Focus

I hope to write a series of these for those getting started with a new venture of their own or those thinking about getting into business for themselves. All ‘Young Entrepreneur’ topics shall be general lessons learned and mistakes made that compensate for my lack of tuition and college education expense. This is the first one and one of the most important; Mind your Focus.

Sure, you have great ideas. You’re smart, young, driven, fresh out of school with your MBA and about to change the way everyone does everything. Me too, except that MBA thing!

This is one chunk of advice that I have read all about, was mentored on and frankly knew it was true from the get go, yet rarely chose to make it part of my mindset.

Too many great ideas, not enough focus.

I’ve long been terrible at this (or awesome at it, depending on how you look at it) as are most people with ambition and creativity combined. Putting all of your effort towards one project at a time and enduring the good and bad until completed will always yield better and more profitable results than spreading your focus over many great ideas, completing none and exhausting yourself in the process. If you have ever worked with me, you are probably laughing hysterically right now since you would know how counter this logic is to my historical patterns. Hindsight is 20/20 and I can only change the future by learning from the past.

One major initiative at a time.

I remind myself of this all of the time and currently believe that I and we are doing very well at this within the company. While we have plenty of minor initiatives going on at the same time, our only focus is on our core business of online retail. We sell high tech emerging market hardware, including VoIP, IP Surveillance and Network related products. It isn’t the sexiest work, but we do it very well and it generates the profits needed by the company. I have a lot of service ideas that can easily be built, launched and they will generate higher margin revenue, but during times like these it is more important to care for what I have, my customers, my employees and the business as a whole. There is always time for the next great thing.

If you have the courage to start something on your own, have the sense to focus on one thing and do it better than anyone else.

Note: If you fail at this and spread yourself too thin or try working too many angles, remember to learn from it and move on. Get back up and try again, at least you tried and no one ever gets anywhere without that. Less than 1% of the population starts and runs a business, the fact that you tried makes you special.