Tuesday, February 16, 2010

Setting Up Your Startup: 5 Non-Obvious Things to Get Right Early On

When you first start working on your startup there will be 1001 things you need to focus on -building a product, getting users to use the product or your first sales, hiring the first employees, etc.

In this mad rush to build a company, there are certain foundational things that people often don't learn about until it is too late. Here is a list of some things I see entrepreneurs often miss:

  1. Get a *great* lawyer. Just as not all engineers are created equal, not all lawyers are created equal. Even within a great law firm, the individual partners vary in quality. Having a good lawyer impacts many things you do in the future e.g.:
    • Fundraising. A great lawyer will know on a per partner basis what each venture capitalist has/does not have in term sheets or legal docs. This increases your negotiating leverage significantly, since you know what really is "standard" for the firm (biggest argument people make is "oh, that is not standard - we do not do that here".)
    • Deals & other stuff. Deal hacks are the specialty of a great deal lawyer. What terms can screw you down the line in non-obvious ways? Lots of other key stuff will be driven by your lawyers - financings, acquisitions, etc.
    • Most lawyers will defer enough legal fees to cover incorporation and first financing event. Some lawyers will ask for a small amount of equity for this deferral. Do not give this to them, as this is currently non-standard.
    • Our lawyers from Mixer Labs were Daniel Friedland and Mitch Zucklie - I could not recommend them more highly.
  2. Get FF-Shares/Starter Stock. This is a class of stock that lets you sell some of your stock into future funding events provided that your board approves of the sale. This allows you to sell e.g. a few % of your holdings into a $100 million or $500 million round. So if you need to buy a house, fix a family medical problem, etc. you can do so easily without having to force an exit of the whole company. Typically, straight common stock can not be sold into a financing event given the impact it may have to common stock valuations. Starter stock is a way around this without impact the cap table or investors. See e.g. Ooga Labs post on this.
  3. Be aggressive on "legal" issues. Just as you want to be cutting edge on technology, you should take an aggressive stance as a startup on legal issue. By this I do not mean break the law, but rather, be willing to take on some legal risk early in the game that established players will not. A good example of this is YouTube, which allowed people to upload short snippets of copyrighted material, versus Google Video, which did not. YouTube was acquired by Google for >$1 billion, while Google Video was shut down. There will always be people on your team with legal opinions, particularly around copyright. These people are *not* lawyers and their opinion should not be treated as legal counsel. See "Get a *great* lawyer" above.
  4. Give equity gifts to loved ones. If there are people you want to benefit from the upside of your company, give them small equity gifts today so they will not get hit with big tax bills later. E.g. 0.5% of your company's common stock may be worth $2,000 today and $2 million in a few years. So give the gift of equity while the tax bill is small.
  5. Be smart when to be cheap. You should be as frugal as possible when setting up a startup. Some things just won't be worth the time, so remember that your time is precious! E.g. one friend of mine spent 2 weeks optimizing health insurance for his team, which he then realized saved him a few hundred dollars over the course of the week. You should think of your time as precious and make the conscious trade off of cash saved vs time saved.
Any other things one should do when setting up a startup? Let me know what I missed!