A startup is a company that derives from a passion project and transforms into a solution to a problem. It is a company that is in the early stages of development, and is designed to scale quickly and with great impact.
What’s the difference between a small business and a startup?
Podcast: Starting a Company
A small business entrepreneur
wants to be self-employed aims for profitability and stable, long-term value
A startup entrepreneur
wants to change the world aims for a scalable business model and is prepared to take risks
“Stay hungry. Stay foolish.”
A startup is different from a small business in that you’re not trying to secure a place in the market, you’re trying to disrupt, improve, or simplify the market.
This topic covers the basics of starting a startup. The order of operations can be subjective based on your own experience. Maybe you have a great partner and want to build something together, or maybe you have an amazing idea but don’t know where to go next. The rule is: there are no rules.
“Because the people who are crazy enough to think they can change the world, are the ones who do.”
Here are the basic components of starting a startup
The idea phase stems from one main question: What is the problem in the world that you want to solve? Your ideal solution to this problem should inspire the mission behind your startup.
Some examples for the types of solutions:
Disrupt: Change the landscape.
Airbnb and Hotel Tonight changed the hotel industry.
Uber and Lyft reinvented the taxi industry.
Improve: Create a new platform or provide a value that has not been previously realized.
Kickstarter and Indiegogo spearheaded the crowdfunding movement.
Udemy and Khan Academy introduced new ways to educate.
Simplify: Make something easier.
Postmates and Instacart created a new convenience.
Types of Business Models:
- Business to Business – Selling a product or service to other businesses. (Optimizely, Virool)
- Business to Consumer – Selling a product or service directly to the daily consumer. It’s about doing things quicker and better. (Pinterest, Yelp)
- SaaS (Software as a Service) – Subscription-based and centrally hosted. (Dropbox, LinkedIn)
- Peer-to-Peer – Enabling people to buy or rent directly from each other. (AirBnB, TaskRabbit)
- E-commerce – Online shopping. (Etsy, Shutterfly)
- Lifestyle – Combining passion and profession. (Zozi, HelloLovely)
- Non-Profit – Organizations working for social good. (Watsi, Moneythink)
Find people with skill sets that compliment yours and work together to create an MVP (minimum viable product).
Start with the core competencies: business, technical and creative. All other needs can be outsourced to start out with, and brought to the team at a later time.
Creating a prototype of your product is the ideal first step, but if you don’t have the means, you can start with a great pitch deck. A pitch deck in the concept phase should include creative design elements, as well as information on the following:
- a basic go-to market strategy
- knowledge of the industry and all competition
- identifiable revenue stream
- amount you want to raise and how you plan to allocate the money
What may seem like the most simple and straightforward part of a new company is picking the right name.
The Name Should Be:
- Memorable. Try not to have anything too difficult to say or spell.
- Expressive. It needs to represent your product and your brand.
- Available. You need to choose something that is not currently registered or trademarked. Check the U.S. Patent and Trademark website (www.uspto.gov) to be certain.
On that note, it’s the perfect segue to go from the product into the business/legal/financial components…
Having a great idea is just the beginning of starting a startup. You’ll need to protect yourself, your idea and your company with the right steps in execution.
While the rest are in no particular order, step number one is securing legal counsel. There are too many pieces of the legal puzzle for you to deal with on your own, and having a legal team is the best way to avoid mistakes. Recommendations from friends or Internet legal websites (www.legalzoom.com,www.lawyers.com) are viable options.
Here are some of the protective measures you’ll need to take:
Intellectual Property Protection
Copyrights cover original works of authorship, such as art, books, articles, music, movies, software, etc.
A trademark right protects the symbolic value of a sign, symbol or design. You may register a mark with the U.S. Patent and Trademark Office.
A patent protects a product, solution or process. You will need a patent lawyer to file any patents for you.
Deals and Contracts
You need to establish important details with your co-founders and contractors. Some of these include:
- Roles and responsibilities
- Percentage ownership in the company (equity)
- Non-Disclosure Agreements (NDAs)
Calculator: Who wants to be a millionaire?
Raising money for your startup can be tricky, and there are many ways to approach it. Dollar amounts and sources of your funding are dependent on which stage the startup is in, and will vary throughout the process.
To help understand more about these sources and stages, see
Napkin Finance’s “How to Finance a Startup.”
Before you can fund your company, you need to put a legal structure in place. The structure you choose will determine how you operate your business.
These are the three main types of startup legal forms:
Limited Liability Company (LLC): One of the most common and cost-effective legal structures, an LLC is designed to limit your liability by protecting personal assets.
Limited Liability Company (LLC)
|Easy to set up||Costly requirements to publish information in business journals|
|Offers tax efficiencies and flexibilities||May need to switch to a corporation if company grows significantly|
|Can be set up as a sole proprietor or partnership|
S Corporation (S corp): The middle-of-the-road option, an S Corporation is more aggressive than an LLC, but less stringent than a C Corporation. An S corp typically calls for a corporate charter and bylaws, setting up a board of directors and filing annual reports.
|Shareholders are held to a strict criteria to keep the company compliant||Limited to <100 shareholders|
|Business itself is not subject to Income tax||More work than an LLC, less perks than a C Corp|
|Financial liability is limited||Allowable shareholders may only be individuals, not partnerships|
C Corporation (C corp): The complexity deepens with this classification, as there is a great deal of overhead, taxation, and public involvement. It is run like a typical corporation with its business structure and limited liability.
|Taxation at the corporate level allows for special deductions||Advance knowledge of business/money trajectory is required|
|Profits are distributed directly to shareholders||Stringent regulatory requirements, such as bylaws and stock agreements, require time-consuming and costly documentation|
Why do I keep hearing that Delaware is the go-to state for incorporation?
- Delaware offers the best franchise tax rules.
- It is known to be the most pro-management and investor friendly.
- It offers the best protection for board members against lawsuits initiated by shareholders.
- Corporate filings are processed quickly and efficiently in Delaware.
- It is lenient with size requirements of the boards of directors.
Some investors are so familiar with Delaware corporate law, they will require that a company be structured as a Delaware corporation before they invest.
For more details on any of these legal structures, more information is provided at www.sba.gov/tools/local-assistance.
With your name and idea, you can find out what licensing and registration forms and regulations are required for your business type. You can also utilize online resources to help figure out your specific requirements: www.sba.gov/licenses-and-permits
Your startup will go through phases, and you may have to go back and revisit one or all of the steps above. It’s all part of the process, unless you have to change direction and…
Be prepared and willing to ditch the original idea or pivot if your product isn’t quite cutting it. Pinterest, Twitter and Groupon are examples of successful pivots when the initial premise wasn’t meeting expectations. Your audience is the most important part of the equation, so if they aren’t responding, you need to be open to altering your vision and starting back at square one.
- “Choose Your Business Structure.” U.S. Small Business Administration. U.S. Small Business Administration, n.d. Web. 20 Jan. 2015. Dalke, Jim.
- “The Funny Stories Behind Your Favorite Startup Names, and What They Could Have Been Called.” Chicago Inno. Chicagolnno, 15 Sept. 2014. Web. 20 Jan. 2015. Harroch, Richard.
- “10 Big Legal Mistakes Made By Startups.” Forbes. Forbes Magazine, 3 Oct. 2013. Web. 20 Jan. 2015. How to Start a Startup. Dir. Same Altman. Perf. Sam Altman. Standford, 2013. Lecture Video.
- “Kauffman Index of Entrepreneurial Activity Interactive.” Kauffman Foundation, 9 Apr. 2014. Web. 20 Jan. 2015. Annan, Scott.
- “The 3 Most Important Legal Structures For Startup Success.” The AIMbitious Startup. Business Insider, 7 March 2014.