By Richard Harroch and Mike Sullivan
With our combined many years of experience in start-up law, entrepreneurship and venture capital, we are often asked the following questions by entrepreneurs seeking to start a technology company . Sometimes there is no easy answer to these questions, and as lawyers will often say, "It depends on the circumstances." But here are our brief answers to the most frequently asked questions about technical startup:
. Should I form my technical company as a C-company, an S-company, an LLC, a partnership or a sole proprietorship?
Start it as a C-company, unless you can really use the tax deductions you get from the loss of business in an S-company or LLC. General partnerships and sole proprietorships should be avoided due to the potential personal responsibility towards the owners of the business. C-companies are the only form of business that can qualify as "qualified small businesses", which can help you avoid capital gains along the way. Venture capital investors do not usually invest in an LLC and usually expect to invest in a C company.
2. Where should I incorporate my business?
The default response to this is Delaware due to its well-developed company law. Venture capitalists have a strong preference for Delaware, in part because they are familiar and comfortable with the road rules of Delaware companies. You will often save on legal costs with Delaware, because most technology company legal forms are set up for Delaware companies. Sometimes, however, the correct answer is that it should be the state where the business is located, as this will save you fees and filing complexities.
3. How much should I capitalize my business on in the beginning?
As much as you can reasonably afford, and in an amount that will keep you for at least 6-9 months without income. What you are likely to find is that it always takes you longer to earn an income, and that you will incur more expenses than you expected.
4. How likely is it that my technical start-up can get venture capital?
Very unlikely. Develop a viable product, gain some market share, hire a good management team, and then consider seeking venture funding. Your initial funding will likely need to come from family, friends or angel investors. Venture investors will often see meaningful traction in product development, sales and marketing before considering investing.
5. Should I require potential angel or venture capital investors to sign a non-disclosure agreement (NDA) so that they do not steal my idea?
No, do not waste your time. It will be counterproductive and reduce the collection. Most investors will either refuse, or assume that you are not sophisticated to ask. It is difficult enough to get a meeting with an investor – do not put another roadblock in the road. For the most part, it is not the idea that is important; it is the implementation of the idea, the progress in the implementation of the idea, and the expertise of the entrepreneurs behind it.
6. How much dilution in shareholding in my company should I give up to investors in my business?
No matter how much you get financed. Do not try to over-optimize ownership. Of course, you should try to minimize dilution as much as possible, but the most important thing is to make money to expand your business and make your investors happy too.
7. How large should a stock option stock for employees be?
Generally it should be 15-20% for early stage companies. Standard earnings for options are four years, with one year of "vesting" and monthly earnings thereafter. "Cliff vesting" in this context means that the employee must be employed by the company for at least one year before the employee exercises any of the options.
8. How can I get a venture capitalist to take my technical start-up into account?
Some of the following:
- Get lots of traction on the market.
- Be able to show a meaningful growth in income.
- Assemble an experienced management team.
- Develop truly innovative technology with great market opportunity.
- Get a personal introduction to one of the VC company's partners from a respected colleague.
RELATED: 65 Questions Venture Capitalists Want to Ask Startups and a Guide to Venture Capital for Startups
9. How can I come up with a great name for my technical startup?
This can be challenging. First, brainstorm a bunch of different names. Then do a Google search to see what has already been taken, which is likely to eliminate 95% of your choices. Makes the name easy to spell. Make it interesting, but do not choose a meaningless name that does not give people an idea of what your business is doing (with all due respect to Google and Yahoo). Make a trademark / trade name on the name, and make sure you can get the domain name. Do not choose a name that may be restrictive as your business purpose expands. Finally, make sure you and your employees will be happy to say the name. For more advice on this topic, see 12 Tips for Naming a Startup Business.
10. What are some of the challenges of starting a technology company?
- Coming up with a great and differentiated product or service
- Ensuring adequate financing and maintaining affordable cash reserves
- Having a great investor pitch deck
- Sticking to it
- Working harder than you expected
- Getting through the frustrations of being constantly rejected by customers
- Finding and hiring good employees
- Quitting bad employees in a way that does not result in legal liability
- 19659022] Having to wear so many different hats  Manage your time effectively
- Maintain a kind of work-life balance
- Know when to turn your strategy
11. What are the biggest mistakes that startup technology entrepreneurs have made?
- Not starting with enough capital
- Thinking that success will come quickly
- Not keeping an eye on the business's cash burn
- Not focusing on the quality of the product or service
- Not getting enough feedback from customers  Underestimates the importance of sales and marketing
- Does not adapt or repeat quickly enough
- Does not understand the competitive landscape
- Ignores legal and contract matters  Ignores intellectual property problems
- Hires the wrong employees
12. What should founders of technology companies do to develop a minimally viable product?
Many technological startups take too long to develop a minimally viable product (MVP), which refers to the most basic functional version of your product. The product must be well designed and something the customers really want. You need to perform usability testing and get feedback from customers, which will help you refine and improve the product. Decide who your target market is, and tailor the product to that market. This is what is referred to as the "product / market fit." Be prepared to swing if the MVP does not get traction.
13. What financial calculations should technical founders focus on?
Even if a CEO or founder has no financial or accounting background, it is important that he or she constantly monitors and analyzes the company's most important financial calculations. Failure to do so can have serious negative consequences for the business. Depending on the nature of the business, the following monthly important calculations will be important:
- Cash incineration (or monthly positive cash flow)
- Gross income (and key components thereof)
- Gross costs (and key components thereof)
- Gross margins and the difference between costs for goods sold divided by revenue, expressed as a percentage)
- Lifetime value for a customer
- Customer acquisition cost
- EBITDA (profit before interest, tax, depreciation and amortization)
- Customer curve
14. How can I protect my great technical idea?
Ideas are a penny a dozen. It is the actual implementation of an idea that is more important. If it is truly unique and patentable, you can obtain a patent for it (see www.uspto.gov). If the idea can not be patented, you can get some protection through copyright, trade secret programs or NDA.
15. How can I get the domain name I want?
Every good ".com" domain name is already taken, and we usually only recommend that a company use a ".com" name on the site. Finally, 99% of domain names are available for purchase – you just have to be prepared to pay for the name you want. Do a “WHOIS search” on www.networksolutions.com to find out the contact information of the owner of the domain name you are interested in and the offer to purchase the name. Do not be naive and offer $ 500 for a premium domain name. You will be ignored. Be willing to pay a good deal for a good name. Be prepared to pay a lot for a common word domain name such as "administrator.com", "recuperate.com" or "resemble.com."
RELATED: Important Steps to Achieve a Great Domain Name  16. I have an inventive idea for a new technological product. How can I verify that someone has not already invented this idea?
Important steps to take:
- Do a Google search for the keywords related to your invention.
- Do an online search for the US patent and trademark. Office at uspto.gov.
- If it works and you want to explore getting a patent on the idea, hire a patent attorney.
17. Do I need a business plan?
Probably not. We prefer to start with a 15-20 page PowerPoint card that presents the business. For more information, see How to make a big investor space for startups seeking funding and not wasting time on a startup business plan – do these 5 things instead.
18. What marketing steps should I take for my technological startup?
To succeed in business, you must continually attract, build and sometimes even educate your target market. Make sure your marketing strategy includes the following:
- Learn the basics of SEO (search engine optimization) so that people who search for your products and services online can find you near the top of search results.
- Use social media to promote your business (LinkedIn, Facebook, Twitter, Instagram, Pinterest, etc.).
- Participate in content marketing by writing guest articles for relevant websites.
- Send press releases for all important events.
- Network continuously with others in your industry.
19. What do I have to worry about for my customer contracts?
Business contracts are legally binding written agreements between two or more parties. They are an important part of the business and must be created and / or negotiated carefully.
While smaller businesses will often operate based on informal handshake agreements or unspoken understanding, the more at stake, the more important it is to have a signed contract. A contract acts as the rules that must be followed by both parties. It gives each party the opportunity to:
- Describe all the obligations they are expected to fulfill.
- Describe all the obligations they expect the other party (or parties) to fulfill.
- Limit any obligations.
- Set parameters, such as a time frame in which the terms of the contract will be met.
- Establish payment and other terms.
- Clearly establish all parties' risks and responsibilities.
A contract is, essentially, a written mental meeting. Although it is usually drawn by a party and favors the needs and requirements of that party, it should in principle be considered an ongoing work that changes and grows when each party contributes to it before signing, when it becomes binding on all parties. "Consideration", whether it is money or a promise to perform work or provide a service within a specified date, forms the basis of a contract.
20. What should I know when applying for angel investors for my technical startup?
When reviewing a potential investment, angel investors care in particular about:
- The quality, passion, commitment and experience of the founders
- The market opportunity to be addressed and the potential for the company to grow to be very large
- Proof for early business operations
- Interesting intellectual property or technology
- A reasonable valuation for the company
- The probability that the company can increase additional financing in the future if progress is made
Angel investors will only see the following from a start-up:
- clearly articulated heistone for the business
- A summary or investor pitch deck
- Possibly a prototype or working model of the company's product or service
- Any early adopters, customers or partners
There are a number of ways to find angel investors, incl. . uding:
The best way to find an angel investor is through a personal introduction from a colleague or friend of an angel. Using LinkedIn to establish reciprocal links can be helpful.
21. What permits, licenses or registrations do I need for my technical start-up?
Depending on the nature of the business, you may need the following permits, licenses or regulations:
- Permit requirements for regulated businesses (aviation, agriculture, alcohol, etc.)
- Sales tax or permit
- City and county business permits or licenses
- Regulatory Permit
- Federal and State Tax / Employer IDs
22. What do I need to worry about when hiring an employee?
- Do you ensure that the employee is not subject to competitive competition from their previous company?
- Have you done a reference check?
- Does the employee have relevant experience for the job?
- Will the employee fit into the corporate culture?
- Do you have a good form of employment letter "on request" for the employee to sign (so you can fire the employee? For some reason if it does not work)?
- Do you ensure that the employee does not transfer and use confidential information from a previous employer?
- Do you stay away from asking illegal questions in the job interview (for example, how old are you, what is your religion, etc.)?
RELATED: 15 Major Legal Mistakes Made by Startups
23. What agreement should I have with my start-up founders?
If you start your business with co-founders, you should agree early on the details of your business relationship. Failure to do so could cause significant legal problems along the way (a good example of this is the infamous Zuckerberg / Winklevoss Facebook trial). Think of the founding agreement as a form of "pre-marital agreement." Here are the most important terms and conditions that your written founding agreement must address:
- How are the shares distributed among the founders?
- Is the ownership interest subject to earnings based on continued participation in the business?
- What are the roles and responsibilities of the founders?
- If one founder quits, does the company or the other founder have the right to repurchase the founder's shares? If so, at what price?
- How much time commitment to the business is expected of each founder?
- What salary (if any) are the founders entitled to? How can this be changed?
- Which founders become members of the company's board? (the board will have important powers, including the power to dismiss employees, including the CEO)
- Under what circumstances can a founder be removed as an employee of the company? (usually this will be a board decision)
- What assets or cash does each founder contribute or invest in the business?
- How will a sale of the business be determined?
- What is the overall goal and vision for the business?
24. What important legal issues should I be concerned about for my technical startup?
Ignoring important legal issues can slow down a startup. CEOs and founders should ensure that the company takes steps to comply with all applicable laws. Here are some important legal points that startup technology companies should focus on:
- Has the company been properly organized?
- Has the company complied with all applicable securities laws when issuing shares or options?
- Are appropriate steps being taken to protect the company's intellectual property (for example, through trademarks, copyrights, patents, confidentiality agreements, etc.)?
- Is every employee and contractor required to sign a comprehensive confidentiality and invention contract (ensuring that any intellectual property developed by an employee or contractor related to the company's business is considered to be owned by the company)?
- Is the agreement with any co-founders clearly documented, and in case of resignation it is clear that there will be no dispute about the company's equity ownership?
- Does the company have a good form of customer contract, which protects the company and reduces liability exposure?
- H when the company obtained all necessary documentation from employees (eg "on request" employment letters, benefit forms, IRS form W-4, USCIS form I-9, etc.)?
- If the company has issued shares subject to vesting, shareholders have filed 83 (b) elections to the IRS?
About the Authors
Richard D Harroch is CEO and Global Head of M&A at VantagePoint Capital Partners, a major venture capital fund in the San Francisco area. His focus is on the internet, digital media and software companies, and he was the founder of several internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship, as well as co-author of Poker for Dummies and a best-selling book on small business in the Wall Street Journal. He is the co-author of a 1,500-page book by Bloomberg, Mergers and Acquisitions of Privately Held Companies: Analysis, Forms and Agreements. He was also a corporate and M&A partner in the Orrick law firm, with experience in start-ups, mergers and acquisitions, and venture capital. He has been involved in over 250 M&A transactions and 250 start-up financing. He can be reached via LinkedIn.
Mike Sullivan is a partner and head of the Corporate Group in the San Francisco office of Orrick, Herrington & Sutcliffe. He focuses on representing new companies, entrepreneurs and angels / venture capital funds. Mike has led hundreds of financing and M&A transactions for new companies in a wide range of industries, especially in software, satellite / space, mobile, digital media, cleantech and food / wine / spirits. Mike is a contributor to Venture Capital and Public Offering Negotiation (Aspen Law & Business). He can be reached via the www.orrick.com website.
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