7 Startup Strategies To Gain From Your Limitations

As Clint Eastwood once said, “A man’s got to know his limitations.” Every new entrepreneur soon realizes he or she has some big ones, but very few figure out how to use these them to their advantage. I believe that the resourcefulness to turn constraints into competitive differentiators and new opportunities is a trait that separates the great entrepreneurs from the “wannabes.”

For example, the Facebook business model of offering a product free to customers while gaining revenue from advertising was born out of the need to survive as a business while offering a fun service. By contrast, as a startup investor, I still see too many entrepreneurs looking for another check to keep them going -- without any convincing plan to ever be self-sustaining.

Smart entrepreneurs understand that more funding often comes with onerous constraints on who is in control, what can be done by whom, and who gets to share in the returns. These founders follow alternative strategies, including the following, to push themselves and their team harder for innovative and less expensive approaches to a complete product, advertising and new markets.

1. Do it yourself with new tools rather than hire outside help. They look for creative solutions to problems that are inhibiting progress, rather than the conventional solution of outsourcing or hiring people. For example, many founders now use makerspaces such as TechShop to build prototypes without the costs and long lead times of manufacturers.

2. Focus on a top productivity bottleneck each week. Startups funded by large venture-capital investments rarely think about productivity. I can think of cases where executives actually created make-work activities to keep idle people on the payroll in case they might be needed later. It’s better to use creativity and tools to find better ways of doing things.

3. Use big constraints to drive innovation. Doing things the way they have always been done only works with unlimited resources. Constraints are great motivators to finding a better way, or maybe even deciding that something doesn’t really need to be done at all. Sometimes the quality of a result is inversely proportional to the amount of money spent.

4. Strategically reduce the budget on your most expensive projects. It always amazes me how work expands to exceed any deadline or budget, and, conversely, how the important work still gets done when budgets and staffing are cut. Apply the 80 to 20 rule for maximum value, and urge people to work more efficiently rather than longer hours.

5. Find partners to complement your strengths. If you have a great product and need customers, find a partner with many customers who needs a new product. If your strength is building businesses, find a partner who is a technologist. These are win-win situations requiring less resources and time for each side.

6. Look for disruptive solutions rather than linear innovations. Without constraints on pricing and size, computers would still look like mainframes rather than fit in your wristwatch. The most successful and innovative solutions come from understanding and honoring constraints -- rather than feeling like the victim of limitations.

7. Create new business models and new ways to measure value. Focus in recent years on social issues and saving the environment has created whole new industries, including solar power and the electric automobile. On the business side, we now have the subscription model, the freemium model and others. There is still room for many more.

Entrepreneurs need to celebrate the fact that constraints and limitations are sources of opportunity in the marketplace, and sources of profit and competitive advantage inside the business. Get past the victim mentality -- where every limitation is seen as an inhibitor to the realization of the vision.

The challenge of being an entrepreneur is in being able to turn constraints into advantages for fun and profit, and enjoy the journey as well as the destination. Are you having fun yet in your new venture, despite the limitations?

Marty Zwilling

*** First published on Entrepreneur.com on 02/19/2016 ***

7 Lessons They Don’t Teach You In Crowdfunding School

Crowdfunding is the hot new vehicle for raising money to support your entrepreneurial efforts, with over 1,250 website platforms around the world to help you, according to a 2015 industry report. In fact, the report suggests that the total amount raised annually (over $30 billion) now exceeds the funding from venture capitalists during the same period. How can you go wrong?

The most popular platform examples are still a couple of the earliest, Kickstarter and Indiegogo, but you can find a comparison of many others online. In addition to funding, the good news is that all of these provide aspiring entrepreneurs with an opportunity to perfect their marketing pitch, get some valuable target customer feedback and improve visibility to other funding sources.

While all this is definitely a boon to entrepreneurs, it does come with its own set of challenges. Here are seven lessons I’ve accumulated from real life experiences on how crowdfunding can lead you astray -- and guidance on how to offset these potential negatives:

1. Keep your attention on the business model as well as the solution. Crowdfunding interest, by definition, is primarily from non-professional investors who are more focused on features and value, rather than the financials of your business. Several crowdfunding successes have failed as a business. Project your costs as diligently as your revenues.

2. Don’t underestimate the amount of funding actually required. An advantage of professional investors is their validation of required amounts for marketing, inventory and staffing. Understating or overstating your request will likely kill your credibility or your startup in lieu of follow-on requirements. Get funding sizing input from senior advisors.

3. Be prepared to manage a crowd of inexperienced investors. Every entrepreneur with multiple contributors will tell you how hard it is to communicate effectively with a couple of investors. With crowdfunding, the number may be hundreds, all expecting current status and results. You need a professional team and additional funding just for this effort.

4. Resist the temptation to skip the business plan. Many new entrepreneurs believe the myth that a business plan is only required to satisfy professional investors and can be skipped with crowdfunding. In reality, the value to you of a detailed plan is even greater when you won’t have investors challenging it. Get professional help to validate the plan.

5. Make sure the crowd response represents your target demographic. Crowdfunding is still an early adopter phenomenon, and these people may mislead you on requirements for the mass market or the size of the opportunity. On the other hand, if your solution is aimed at boomers or requires in-depth technical knowledge, crowdfunding may be futile.

6. Be extra careful with your intellectual property. Crowdfunding platforms don’t have the facilities to handle non-disclosure agreements that you might expect from every professional investor. With a large number of unknown investors demanding details, you are highly exposed to potential competitors. Keep all IP details close to the vest.

7. Don’t forget to account for the time and cost of crowdfunding campaigns. Naïve entrepreneurs believe crowdfunding is essentially free. They forget about the platform fee -- typically 5 percent -- taxes on pledges, preparation and social media commitment to prepare and execute the campaign, and the give-back required if you don’t meet your goal.

Overall, there is now no question that crowdfunding is here to stay, and it represents a major new source of funding for innovative new businesses, non-profits seeking donations and artists looking for some recognition for their creative efforts. However, like every opportunity, this one comes with huge risks and much hard work.

So far, the crowdfunding failure rate on all platforms to achieve funding has been well over 50 percent. Many more of the funded startups fail to achieve business success, even with the money. With odds like these, you can’t afford to make all the same mistakes that others have endured before you. A lesson learned from others is a mistake you don’t have to pay for.

Marty Zwilling

*** First published on Entrepreneur.com on 02/17/2016 ***

8 Ways To Survive And Prosper Around Negative People

To be an entrepreneur, you have to have a thick skin and not be defensive to customer feedback and constructive criticism. On the other hand, no entrepreneur should tolerate negative vibes and complainers on their own team. The challenge is to understand the difference between these two situations -- and to respond effectively to both. You can’t reinforce negative thinking and stay positive.

Even active listening to negative team members and partners, as you would with customers, will perpetuate the toxic habit. In addition, the other members of your team may become infected with the same negativity and will erode the passion and innovation that you need to compete and survive. In my experience, good entrepreneurs proactively minimize negativity as follows:

1. They stifle their own occasional negativity in front of the team. We all get frustrated when the economy turns against us, investors can’t be found or a customer turns into a nightmare. In these cases, you must keep your thoughts to yourself, and be the role model for positive creative solutions. Your team will practice what they see and hear.
   
   
2. Extract and highlight potential positives from every negative. If your team is struggling with quality problems before shipment, remind them that it’s great to have found these problems before customers could be impacted. The alternative is that everyone, including yourself, will eventually feel defeated and de-energized.
   
   
3. Turn responsibility back to the complainer and ask for solutions. Sometimes, team members are frustrated and just want to vent, so asking them to bring you solutions, not just problems, will set a more positive tone and may circumvent future negative outbursts. For those who don’t learn, it’s time for swift job reassignment and performance counseling.
   
   
4. Don’t accept excuses for any negative outcomes. Excuses are a way of not accepting full responsibility for actions, if there is a negative outcome. Even worse, some people believe negativity is a way of impressing everyone with their wisdom. Make sure that complainers understand from your reward system that excuses don’t mitigate failures.
   
   
5. Restrain from engaging complainers at their level. If none of these approaches work, it’s better to defer the discussion to another time and place with no emotion. Trying too hard to convert people to the positive view will likely result in you becoming the target, or permanently breaking the relationship. It’s better to listen in silence.
   
   
6. Remove yourself physically from a toxic environment. Presence without engagement may be taken as tacit concurrence, so it’s best to exit the situation to somewhere neutral and quiet. The last thing you need is to be brought down to the same level, and lose your ability to provide positive leadership to the team.
   
   
7. Overlook occasional lapses in yourself and others. Even the best professionals and leaders find themselves being negative occasionally. It’s human nature, in times of stress, when people are physically or mentally exhausted, or multiple deadlines loom. The challenge is to make lapses less frequent as a habit rather than more frequent.
   
   
8. Build a personal negativity shield from your confidence and passion. All business leaders as well as innovative thinkers learn to deflect negative energy with an invisible cloak that allows them to move forward despite negative feedback from the crowd. They continually remind themselves of their vision to make the world a better place.
   

When negativity is positioned by team members as constructive criticism, be sure to ask for the constructive positive part of the message, offered in a friendly manner. Living with complainers in any business is a burden you don’t need, and it impacts everyone’s performance and mindset. Just as a positive mindset is infectious and brings the whole team up, a few negative ones will sicken your whole team and jeopardize your business. You can’t afford that kind of help.

Marty Zwilling

*** First published on Entrepreneur.com on 02/12/2016 ***

8 Big Business Tenets That Don't Work For Startups

As an advisor to many startups, I often see business principles espoused that may make sense for a large and established business trying to foster innovation but won’t work for a new startup. I’m a strong proponent of new entrepreneurs starting with a big vision, and believing anything is possible -- but I’m also a pragmatist who believes in factoring some realism into any plan.

The fact that entrepreneurs tend to think outside the box with passion and persistence is a big positive, and it's clearly the reason many large companies now fund or buy successful startups for new innovations rather than depend on internal projects. On the other hand, large companies with existing resources and qualified people have different rules for innovative efforts.

1. Great ideas will have no trouble getting funded. Big businesses fund internal ideas with the money and people they already have. Startups don’t typically find any funding from investors until they prove they can execute, have a proven model and are ready to scale. Entrepreneurs who expect funding at the idea stage are usually disappointed.
   
   
2. First-to-market is a key competitive advantage. Too many startups are proud of being the first-mover in a new market -- only to be overrun by big gorillas with more resources who see the startup traction. First-to-market is only a sustainable advantage for a large company, like Apple or Google, with the resources to back up their first move.
   
   
3. Always start with a Big Hairy Audacious Goal (BHAG). This approach works for big companies who struggle to think outside the box and need a long-term goal for evolving their business. Startups are better served by attacking an existing painful problem or unmet need with near-term as well as long-term potential, placing smaller bets faster.
   
   
4. Don’t start until you know the risks are minimized. Large companies have lawyers and executives who get paid to reduce risk to near zero. Entrepreneurs have learned that there are no rewards without risk. If they want growth and sustainability, they often increase the smart risks, meaning more risk for growth or competitive advantage.
   
   
5. Successful projects are well-staffed and methodically executed. This is a business axiom that works well when the scope of a project is well known. For a startup, nothing is well-known, and staffing is non-existent. Entrepreneurs must assume that initial iterations will require several pivots, and money and people will always be a struggle.
   
   
6. Hire or train a specialist for each of the key elements. Big companies depend on specialists and experts, while startups need more generalists. Startups can only afford a few people, so each is expected to do several or almost any role. An entrepreneur founder may be a technology expert, but successful ones are also good businessmen.
   
   
7. If we build a great product, customers will find it and us. Great companies, like Apple or IBM, have a large customer base and quality products, so new technology along the same lines will be found. A startup has no brand, so new products, no matter how great, need real marketing, social-media advocates and education efforts to attract customers.
   
   
8. Keep innovations in stealth mode until ready to ship. Hiding new solutions makes sense for large companies who can be sued for “pre-announcing” a new product to stall the market or kill a competitor. Smart startups make their intentions visible at the idea stage to test customer interest and make corrections before spending real money.
   

As an entrepreneur, if you are a recent graduate from the corporate world, or have just acquired a prestigious master of business administration degree, be careful when applying the tenets from the business world textbooks to your first startup. The principles of business are critical to both, but startups are more of an adventure into the unknown. It’s a fun journey -- but don’t blindly follow all big company tenets.

Marty Zwilling

*** First published on Entrepreneur.com on 02/10/2016 ***

7 Keys To The Right Decision The First Time, Every Time

Every entrepreneur has to be a decision-maker, even with information overload, emotional employees, angry customers and competitors hovering from every direction. Making a decision without thinking or over-thinking things to the point of no decision are both deadly in business. The challenge is to find the right balance and make good and timely decisions every time.

It’s a tough challenge. According to Ohio State researcher Paul Nutt, business decision-makers today fail about half the time on initial decisions for their organizations. Examples often cited include decisions which led to the demise of Pets.com, Excite, and WebVan. Although these cases involved strategic thinking, operational decision mistakes are even more frequent.

Much has been written about the thinking process of more successful decision-makers, including Warren Buffett and Elon Musk. Some reserve time daily for reflective thinking despite a busy and hectic schedule, while others use regular sabbaticals away from the office for a mental refresh. Yet they all seem to have similar thinking habits in their day-to-day decision making process.

1. Stop to think before jumping to a decision. Especially in a crisis or under stress, it’s tempting to make a snap decision based on a gut feeling or prior similar experiences. As leaders, the approach you take to asserting control and making decisions sets the tone for others to follow. Set the model for always thinking first and acting with deliberation.
   
   
2. Focus fully but selectively on issues of consequence. Trying to spread your attention across many issues concurrently does not work. First select only those issues which are important to you, and delegate the remainder. Then give the selected matters your full attention for a timely and thoughtful decision. Don’t over-think any issue to no decision.
   
   
3. Use person-to-person interaction to confirm your thinking. Most business decision issues are complex enough to suggest the need for direct input from a key constituent or to test your understanding. While text messaging and email may seem more expedient, these do not convey the tone or body language you need to make the right decision.
   
   
4. Allocate contiguous time and process for critical decisions. Many short dialogs in chaotic environments separated by other activities do not facilitate deep thinking or lasting decisions. The cost of recovery from a bad decision can far outweigh the effort of managing the thinking process with the right people, the right place and the right time.
   
   
5. Think past a potential decision to a plan for execution. Planning the next steps, before finalizing a decision, will validate your thinking or perhaps clarify that more work is required. Decisions made without proper consideration for execution consequences often lead to more serious and continuing issues. Extrapolate your thinking far into the future.
   
   
6. Communicate your thinking as you deliver a decision. Decisions delivered as edicts are never satisfying and may actually cause a backlash that negates a good decision. Respected leaders have no qualms about summarizing their thought process on issues and take the time to effectively communicate the key points to relevant constituents.
   
   
7. Manage and monitor the actual resulting implementation. Even the best thinking and a good decision can be undermined by unforeseen events or people misunderstandings. Small course corrections made quickly and follow-up communication can forestall major new issues and make your decision the right one the first time.
   

The ability to make the right decisions on a timely basis is what defines you as an entrepreneur. It’s not a skill that anyone is born with, and it is one that you can definitely learn and improve your habits over time. For new entrepreneurs, I recommend that you seek the assistance of a mentor that you trust and not be afraid to ask for assistance from your peers and senior advisors.

While new technology allows you to act and react more quickly than ever before, none of these tools are a substitute for thinking, deliberating and making your own decisions. Ultimately, every business is about people interacting with other people. Your challenge is to convince them that they are at the center of your thinking.

Marty Zwilling

*** First published on Entrepreneur.com on 02/05/2016 ***

10 Answers That Make Your Startup Plan Investable

Entrepreneurs who are looking to attract investors need to develop and pitch a plan -- preferably written -- that answers every potential investor question about your startup before it is asked. You may be quick on your feet with answers, but if investors have to ask any of these questions, you raise the specter of hiding something, or of not being astute enough to know what’s important.

Either of these qualms can ultimately sidetrack your startup as not worthy of investment, so it pays to do your homework on what you say and how to communicate effectively. As a startup advisor and investor, I recommend a pitch deck with about 10 slides backed up with a written business plan of approximately 20 pages, both containing quantified answers to the following key questions.

1. What is the business problem you are solving? This may seem obvious, but I still hear too many “solutions looking for a problem.” Just because your technology is exciting and potentially disruptive doesn’t mean you are ready to build a business. Investors want to hear about customers with money who have a painful problem that you can solve now.
   
   
2. What is your specific solution and value proposition? Investors are looking for a concise description of your product or service without technical jargon or fuzzy marketing terms with value quantified in customer terms. This is also the place to first mention patents and any other differentiators that put you ahead of competition.
   
   
3. How big and growing is the total market and your target segment? Investors will be looking for a sizing validated by industry analysts large enough for good investment returns. They like billion-dollar markets with double-digit growth rates. They expect to see focus, and evidence that your data is based on market experience and expertise.
   
   
4. How does your business model make money? Good causes such as feeding the world’s hungry may help your marketing but may not sustain a business. The business model has to clearly define who is your customer, market penetration expected, how much customers pay versus total costs and the investment required to sustain cash flow.
   
   
5. Who are your competitors, and how do you win? Every new offering has competition and alternatives, so it’s not credible to claim no competitors. Name the three top ones, and present your sustainable advantage as well as barriers to entry for new startups. Don’t degrade competitors, but use their specifics to highlight your advantages.
   
   
6. What are your specific marketing and sales plans? Here I would expect to see a timeline for rollout, with specific milestones and partnerships. You need to identify pricing details, sales channels, strategic partners and a customized marketing plan consistent with your industry and target segment. Highlight elements of traction you already have.
   
   
7. How is your team uniquely qualified for this venture? A highly investable team has prior experience in the same business domain as well as credentials and skills in their roles. Investors invest in people more than the idea. As a team, they cover all key skills required. Include advisory board member qualifications and key industry connections.
   
   
8. How big is the funding request, and how much equity will you give? Since investors are buying a part of your company (not your product), this is the most important question, and is one often not answered. Justify funding requirements, use of funds and specify a current valuation estimate. Quantify founder investments, both cash and sweat-equity.
   
   
9. What are your forecasts for revenue, expenses and cash flow? Forecasts are evaluated as a level of commitment and a measure of your business savvy. Numbers should be aggressive, but not irrational, based on market size and conditions. I ask for five-year projections, since that’s the average time before investors can cash out.
   
   
10. How much and when do you foresee investors getting a payout? Technically, this is your exit strategy, usually a merger and acquisition (M&A) or initial public stock offering (IPO). If you don’t plan a liquidity event, you won’t find many investors interested. Find a comparable company to show potential sale value and return on investment (ROI).
    

The best answers are not the longest ones or the ones with the most graphics. Serious investors who have heard a 1,000 pitches and read hundreds of plans are most impressed with founders who make the right points in the shortest amount of time with the least prompting. The only question you want to hear is -- “How soon can I sign up?” It’s really not that difficult.

Marty Zwilling

*** First published on Entrepreneur.com on 02/03/2016 ***

Entrepreneurs Need More Relationships And Fewer Friends

Successful entrepreneurs understand the difference between a good business relationship with more people and having more friends. In fact, the focus on social networking platforms, starting with Facebook, has destroyed the meaning of the word friend and even changed it from a noun to a verb. It’s now common to have hundreds or thousands of friends online -- but no relationships.

In the world of entrepreneurs and startups, professional relationships are critical. You can’t start a business with friends alone. You need business partners, investors and customers. Of course, we all need friend relationships in our private lives, and some of these may evolve from or lead to business relationships. Here is my summary of how business relationships relate to friends.

1. Everyone needs private friend relationships. Most psychologists agree that starting from a very young age, friend relationships are critical to building social skills and lead to a balanced view of morality, integrity and right versus wrong. These should never be confused with social-media friends that you have never met or hardly know.

2. All business relationships need not be friends. The best professional relationships may also involve friendship, but entrepreneurs need to be able to manage relationships with competitors, partners and customers who have no interest in being friends. Friends are motivated to help you, while business people want to help their business.

3. With friends, quality is more important than quantity. With maturity, most people actually shrink their circle of friends to focus on a few trusted ones who become confidants. There is some evidence that the average circle has grown smaller over the years, as the level of trust in other people has dropped from 77 percent to 37 percent.

4. In business, you can’t have too many relationships. More professional connections means more credibility, more insight into the market and more customer clout. This fact is the basis for the business axiom -- “It’s not what you know, it’s who you know.” Many entrepreneurs will admit that they get almost all of their business through relationships.

5. True friendship requires a personal emotional connection. Friendship is a person-to-person relationship involving mutual affection, the ability to be oneself, express feelings and make mistakes without fear of judgment from the friend. Many entrepreneurs find their role lonely due to the fear that business and friendships simply don’t mix well.

6. Business relationships depend on accentuating the positive. The first rule of business is that spilling your troubles won’t help your business, your leverage or your relationship. Some entrepreneurs assume that they can make everyone their friend by exposing shortcomings -- only to find out that these are often used against them.

7. Social networking friends have real business value. Free mobile and online technologies will find friends at no cost, with no emotional investment required, so they have very little personal value. Ironically, these friends have real business value since they may become advocates and write testimonials or influence their real friends.

8. Online networking alone does not build business relationships. Networking may identify an opportunity, but personal contact is normally required to build a real relationship. It’s too easy to create a false persona online, compared to the authenticity of connecting face-to-face, comparing beliefs, goals, point of view and personality.

Friendship with emotion is the glue that makes personal relationships work, but these same emotions often get in the way of decisions in a rapidly changing business requirement. Business relationships, on the other hand, are more logically tuned to expediting business transactions. If your business seems harder than it should be, maybe it’s time to stop focusing on friends.

Marty Zwilling

*** First published on Entrepreneur.com on 01/29/2016 ***

7 Steps to Master the Art of Persuasion

Many entrepreneurs are so passionate about their new startup idea that they can’t believe any intelligent being, investor or customer wouldn’t react just as excitedly after a quick introduction. They don’t realize that they can often kill their credibility -- and future opportunities -- by communicating only with passion, responding with a cynical comment or giving up too soon.

The art of getting others to see things as you see them -- usually called persuasion -- is a key one for entrepreneurs, and it needs to be honed from the first day that you formulate your new idea. You have to persuade the right partners to join and build the solution, the right investors to fund it and the right customers to buy it. Great marketing is just a subset of these efforts and skills.

The psychology involved in winning over others has been studied and preached for generations and continues to evolve as our culture changes, as documented on the website Psychology Today, and many others. Aspiring entrepreneurs need to study all of these but also need to learn from the pragmatic practices and tactics of successful peers and business advisors.

1. Repetition is the key to getting people’s attention. Many entrepreneurs mistakenly assume that their passion will cause their message to immediately stand out above the din of today’s information overload. In fact, most people today have developed filters to ignore unsolicited inputs until they have heard it several times in both written and verbal form.
   
   
2. Postulate the message in a context important to the receiver. Tune your message to each receiver’s situation or context. Avoid abstract or technical declarations that may sound like an effort to impress or mislead your audience with your intelligence. Use specific value propositions rather than fuzzy terms like easier to use, better and faster.
   
   
3. Use contrasting story scenarios to illustrate the impact. Stories are often more convincing than simple statements of fact. If you can integrate the receiver directly into the story, the potential impact is even greater. The power of contrast, or side-by-side comparison of outcomes, is an effective mover of people from old beliefs to new ones.
   
   
4. Personalize your message to match receiver background. Whether approaching investors, partners or customers, you need to listen first to find a personal intersection of interest with your idea. If the person is creative and intuitive, don’t hit them with a logical and analytical message. Establish a relationship or do some homework first if you can.
   
   
5. Use friends and advisors as sources of warm introductions. Everyone is more prone to listen and believe new people brought to them by someone they know in common, especially if that connection has strong relevant experience or expertise. Even if it takes longer to arrange such a meeting, your credibility gain and impact may be well worth it.
   
   
6. Materialize your idea into a prototype or demo. People always put more credibility into something they can touch and feel, versus mere words and arm waving. What you are visualizing in your mind’s eye is not so obvious to others, especially investors who will likely not have your depth of expertise in the product domain you represent.
   
   
7. Present evidence of interest and excitement from others. Social media is a powerful tool for testing your idea with minimal cost and risk with a huge potential for spreading and amplifying your message to the right people. The evidence of 1,000 people responding positively to your message is much more effective than you alone pitching.
   

In the end, the most convincing evidence of a great idea to investors and partners is business execution traction. They want to fund and work with people who are willing and able to move an idea into the execution phase. Ideally, that means a solution has been built, with a proven business model, and real customers who have paid full price with high customer satisfaction.

Indeed, all entrepreneurs have to start at the beginning with passion for an idea. Then comes the hard part of convincing others that the idea has the same merit you see, persuading others to join and support your effort and persuading customers to buy. According to some experts, persuasion is the most important skill you need to succeed in business.

Are you convinced?

Marty Zwilling

*** First published on Entrepreneur.com on 01/27/2016 ***

8 Reasons To Incorporate Your New Company Early

Many entrepreneurs are so focused on finalizing their innovative product or service that they procrastinate on the formalities of forming the requisite new company until later. Unfortunately, waiting until later will dramatically increase the risk of losing ownership of the solution they worked so hard to complete in addition to personal and family assets.

Although the specifics vary in all parts of the world, the common parameters I have experienced here in the U.S. for incorporation should provide you at least the key startup entity considerations you need to address in any business environment around the world.

1. Isolate your new startup business from your personal accounts. By default, these domains are totally intermingled, which will lead you to manage both poorly. It’s very easy and inexpensive to set up online a Limited Liability Company (LLC) for the startup, which will allow you to track business costs, cash and taxes correctly -- no matter what happens.
   
   
2. Liability for initial setbacks or lawsuits needs to business versus personal. If there is no legal business entity, early vendor or partner failures will jeopardize existing personal assets and any future personal income streams. The business entity has to be in place before a problem appears and is not recoverable by starting the business later.
   
   
3. Focus on structuring the business brings priority to building a plan early. Building a business plan is a discipline every entrepreneur needs to learn early, required or not. Founders generally need more focus on the market sizing, volume projections, cost details and margin expectations to balance the optimism of their passion for the idea.
   
   
4. Define a business entity early to manage taxes and intellectual property. An LLC will work just fine for this, but if you know enough to anticipate more than 100 investors or special classes of stock, I recommend incorporating as a Delaware or Nevada C-Corp or S-Corp. Tax status can be assigned separately to match your preferences.
   
   
5. Founder’s stock may be taxed at time of incorporation. If you wait to incorporate the business until you have a product and customers, which normally has no taxable value until liquidity, it will be taxed at issuance at the current value. This could well mean a large tax bill due from you at the worst possible moment in your business rollout.
   
   
6. New intellectual property should always be assigned to a business. Patents issued to you before you incorporate the business will not be considered part of the business valuation by investors. Until you have a business, you shouldn’t get a web domain name or social media accounts, since these all should match and are hard to change later.
   
   
7. Co-founder and equity negotiations work best if you own all the equity. If several co-founders are involved before any company is set up, all will assume they get an equal share later, no matter how little they contribute. Negotiation and equity ownership needs to happen when they join you, and you need the leverage of being the business owner.
   
   
8. You need a business entity to attract any investor or bank support. In my experience, any startup without a formal business entity defined will be viewed as a hobby, and would never interest investors or potential partners. Also, trends change rapidly these days, so you need to be ready move quickly from idea to a business.
   

Overall, the formalities of setting up the right business entity in the right timeframe for your new idea are just as critical to your ultimate success as building the right product. The work for both can be done in parallel, or the business setup work should be done first. Successful startups are all about being able to move to success before the market changes or new competitors appear.

For U.S. startups, sole proprietorships and simple partnerships are never recommended. LLCs are the easiest, quickest and least expensive ways to get started. S-Corps (Subchapter S corporations) work best for services solutions, and C-Corps (C-corporation) are the best long-term solutions for product organizations. Upgrading later from one type to the other is not difficult.

If you need help, there are many places you can go online, like BizFilings with state-specific information. If information online only confuses you, make an appointment with your local community SCORE free mentoring office, or your nearest Small Business Development Center (SBDC). For more detailed requirements, it’s always appropriate to hire an attorney to guide you.

The opportunities and the joys of creating your own business are great, but there are many risks as well. Don’t let your dream be derailed by failing to focus early on the design of the business, as much as you are focusing on the design of your product.

Marty Zwilling

*** First published on Entrepreneur.com on 01/22/2016 ***