I was training to run my 12th marathon. Then the pandemic happened and, as we all know, everything changed.
Getting ready for a marathon parallels creating a startup business. When you prepare for a marathon, you typically create a plan for 16 or more weeks leading up to the race. This plan outlines different distances you plan to run each day. It can help specify when you run, cross-train, or rest. You might include nutrition or workout types.
Your plan includes significant milestones. For example, you might plan to run a 5K in three or four weeks, then run a 10K a couple weeks after that. Then you work up to 1/2 marathon and, eventually, run a couple 20-24 milers about a month before your marathon.
Not everyone uses a training plan. And not everyone who uses a training plan uses the same one. But everyone, at some point, must build up endurance through the same basic milestones before they can finish a marathon race.
Similarly, different startup founders and teams might use different approaches to building their businesses. But every business, at some point, must go through essentially the same legal steps to build up to a successful, operating business.
What are the major legal steps you should watch out for as you’re building a startup? Here’s a list of ten legal milestones that almost every startup will go through at some point. These are arranged in a chronological order that is typical for many startups. However, like runners and marathons, every plan might vary a little from one startup to another.
Every great business begins with a founder or a small team dedicated to bringing the business to life. The founder stage is critical to establishing a successful foundation for every other aspect of the business.
When done right, founders jumpstart the business toward success. When done poorly, issues among founders will divert attention and resources away from the business and, in some cases, completely thwart the entire concept and team.
Make sure you establish roles and expectations up front. The focus should be on talking about how the founders will build the business together, who will complete specific functions within the business, and how each founder will be recognized, compensated, or rewarded.
Also address what the team will look like going forward. The roles and functions must be defined both clearly and fluidly because the business will shift and transform significantly as the team learns to work together and the business model begins to be established.
It’s important to put all this in writing. Working through disputes later because everyone remembers a slightly different verbal agreement is awful, ruins friendships (sometimes families), and in serious cases can cost millions to resolve.
One of the first advisors you should find is a lawyer (in the US, an attorney is the same thing). The other is a tax advisor (discussed below).
Your lawyer will help you get everything in order for your business. Often, the most critical areas for legal support are business (or startup) and intellectual property (IP). Before too long, you’ll also need help with labor and employment as you build a team.
Lots of lawyers have skills to help you in niche areas. A smaller number of attorneys have the skills to help you across several areas within your budding business. An even smaller number of attorneys have expertise in business strategy.
Your best bet is to find a transactional attorney who has worked in a law firm (to get lots of legal expertise) and has also served as general counsel (to get lots of executive business expertise).
Managing your documents might be the most boring part of building a business. However, it might be surprising to learn this can be one of the easiest areas to create value and save expenses for the business.
Creating standardized documentation for quotes and sales agreements, employees, and intellectual property is critical to keeping your business organized.
If you have any potential for attracting investors or reaching an exit with your business in the future, you’ll have to get your “due diligence” documentation in order to attract the highest valuations, because every documentation gap can be used to devalue your business.
Your customers pay you to deliver some type of product or service. Whatever that product or service is, you have the opportunity to protect its value based on what it is and/or how you deliver it to your customers.
If you’re creating a new product, whether it’s a consumer product, software app, manufacturing technology, chemical process, or something else, then you need to watch out for two things.
First, can you protect what you are creating—this is usually prime territory for utility patents, design patents, and trade secrets.
Second, does creating your new product infringe on the rights of anyone else? If so, then they might have legal rights to stop your product.
You also might be able to lock up certain advantages around the suppliers that help you create or obtain your product. Similarly, you might be able to protect valuable relationships established around the distribution of your product to customers and end users.
A good tax advisor is often the second critical service provider for your business. The government goes to great lengths to define all the ways they can tax you and your business.
Unless you’re intimately familiar with all these rules and want to spend your time just doing financial planning, then you need a good accountant, bookkeeper, and/or payroll provider.
Also, keep in mind that taxes are jurisdictional. This means every country (and state and local municipality) thinks they have a claim on a portion of your income.
When you start doing business across different jurisdictions, especially across country lines, you’ll have more complex tax burdens, and managing those correctly and efficiently requires an expert.
Somewhere in the process of building your business, you’ll need to register a business entity. This might be simple.
Maybe all you need is a limited liability company (LLC) registered in your home state. Or you might register a C-corporation in Delaware or another jurisdiction that’s friendly to future investors.
Sometimes your business model requires much more complex corporate structure combining multiple entities to accomplish different ownership, management, investment, and operating objectives.
The structure you choose should account for both ownership and governance. Ownership refers to the founders and other stakeholders who own a piece of your company. While the owners ultimately govern the business, many companies establish formal governance structures made up of directors, management, and advisors.
Data and privacy might be the fastest growing category for both legal compliance and entity valuations.
As companies collect data for internal use, how you store and manage your data will determine whether your data is a liability or an asset for your business. You might find a way to use your data to provide better services to your customers. You also might find opportunities to monetize the data you’re collecting.
When that data includes personal information of customers or others, you have additional exposure to expanding liability if you don’t comply with the broad-reaching and expanding rules that have been put in place by different states, countries, and regions around the world.
Building a team in your startup is exciting. You have this opportunity to build a culture that will drive the success of your business.
It is also one of the most difficult areas to manage from a legal perspective. Putting in place the right hiring and firing processes and documentation should be a top priority. Not only are there strict federal and state compliance issues at stake, at this stage of your business the culture you’re building can easily be jeopardized by a misstep with a high-value employee.
Whether you sell a product (new or existing) or you’re providing a service, you need to protect the brand you’ve created around how you deliver your product or service to customers. Brand value can grow to dominate the eventual valuation of your business.
Trademarks, trade dress, and copyrights are critical tools for protecting your brand against infringers who would be glad to ride the wave you’ve built through hard work. This means it’s important to build a unique brand that stands on its own, so you aren’t accused of riding another company’s wave.
It also means you should formally protect your brand and monitor for potential infringers. Lastly, you should create internal processes that consistently build a coherent brand for your business.
You might find investors at any stage of your business who want to provide financial support and participate in the ownership of your business. Outside investment can give your company a boost towards success by creating opportunities for expansion that aren’t possible even with consistent, stable growth.
Of course, you need to play by the rules with investors because you become accountable to them, whether they are friends and family, angels, venture capitalists, private equity, or institutional investors. The government is also watching to make sure you’re being fair, so you need to be careful to comply with applicable securities laws.
The best approach with your business is to be “investment ready” at all times. This means doing the things you need to so investors will be attracted to your business and not turned off by any disorganization with your due diligence documentation.
As we all know, you should be ready to get financial help before you need it, because by the time you need it you might be too late.
Use these legal milestones as your startup training plan to build a successful business, just like you would use a training plan to successfully run a marathon. It won’t eliminate all the work and persistence you’ll need to get there, but it will help guide you along your way to the successful accomplishment you’re working toward.
Whether it’s a dream vacation or a dream business venture, doing your due diligence is one of the most important steps you can take to ensure your success.
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