Brought to you by Flatirons Development
Starting a new business is no easy matter. Many think all you need is a solid idea, and the rest will follow. But without execution, even the best ideas falter. There are numerous missteps to be avoided along the way to business success. One misstep can be costly, two or three can be fatal.
If you’re considering a business venture, research and sound investments are required – investments in time, money, marketing, and eventually, testing. None of this can be mitigated simply with the power of a good idea.
Sound decisions early in your venture can be the leg-up you need to make waves. This article covers how a few key early decisions around legal structure, execution, and marketing can save you money down the road.
How, Whether, and Where Should I Incorporate?
One of the first decisions that needs to be made when setting up your organization is how to incorporate, or even whether to incorporate. For example, if you’re working alone, sole proprietorship or a simple “Doing Business As” (DBA) filing might suffice. However, when you decide that the project is ready, or that you’ve taken it as far as you can on your own, then you’ll face the decision of what type of legal entity to be.
LLC vs C-Corp
Your incorporation type will depend on the company you’re starting and your long-term plans for the business. While there are formation options outside of an LLC and C-Corporation, for general purposes, this article sticks to those here. Small / lifestyle businesses have different legal needs than high-growth / startup companies.
Limited Liability Corporation
Below are some of the benefits of incorporating as an LLC:
- Limited Liability – One of the biggest reasons for selecting an LLC is inherent in the name: Limited Liability. At a minimum, you need to incorporate to protect yourself personally from claims and debts. Incorporating as an LLC separates you personally from your business.
- Pass-through Taxation – Owners pay personal income tax on income from the business. Because many companies operate at a loss in the early days, this can significantly reduce taxable net income.
- More Flexible – There are fewer restrictions on governance structure, voting rights, etc. Something to note is that this is less friendly to investors, forcing them to do a great deal more due diligence.
As you can see, the additional flexibility, personal protection, and the savings on personal taxable income can be fairly compelling reasons for a small to mid-size business to consider an LLC.
However, the lax requirements and lack of formal governance means that investors often prefer C-Corps over LLCs. Also, the savings on income tax during your initial growth period may be eliminated simply by the legal fees when attempting to later switch to a C-Corp, should your growth make it a necessity. In other words, when considering an LLC, you must decide whether you’re a small business with modest growth potential or a startup with bigger plans.
While it may seem expedient at the early stages of your organization’s development to save money, this approach can cost you in the long run. Any money saved in the short-term on income taxes may very well result in a large tax bite should your company achieve its potential of exponential growth – especially considering there may be ways to obtain some of the benefits of an LLC, even as a C-Corp. If you have large growth plans or are raising money from outside investors, here’s what to consider:
- Stricter requirements – There are numerous formalized requirements to registering as a C-Corp. These include ownership represented by stock, governance by a Board, and the day to day operations by officers. Because of these formal requirements, and easier discovery as a result, this is the option investors prefer.
- Corporate taxes – The corporation is taxed on its net income, rather than “passing through” to the individual. Shareholders are personally taxed on any dividends received and on capital gains when they sell their stock. Most startups reinvest revenue back into the company, meaning that for at least a few years, there are no profits to tax.
- Conditional Pass-through option – One of the key advantages of an LLC can be applied by selecting S Election (becoming an S-Corporation). This is usually best for initially founder-funded organizations.
- Tax Protection for Growth/Exit – In the event of an exit, eligible shareholders are not taxed on the first $10 million of capital gains, or 10 times the stockholder’s adjusted basis in the stock, whichever is greater. This perk is not available as an S-Corporation or LLC.
If you’re planning for large scale growth, looking to attract investors, and looking to protect as much of your gains on exit as possible, a C-Corp is the way to go.
Where to Incorporate?
Most business owners incorporate in the state they’re doing business in, which for a small business owner, is sufficient. However, if you’re starting a high-growth business, Delaware is typically the location of choice. Delaware has provided businesses a number of favorable tax and regulatory laws to attract corporations to their state. For instance:
- No state income tax on companies that do business outside of Delaware
- No sales tax on intangible personal property (such as royalties)
- Stock shares not owned by Delaware residents are not subject to Delaware taxes
- Courts are much more efficient, with the most up-to-date case law and courts presided over by judges rather than juries. This also means that there is much less litigation, and decreased liability.
- No need for a Delaware business license if operating outside of Delaware
- Increased privacy protections – no need to disclose the names of the owners
- Venture capitalists, angel investors, and other investors prefer incorporating in Delaware over other states
If you’re operating outside of Delaware, all that is needed is to file a foreign qualification form to operate in your own home state.
Hiring a Product Designer
There is a lot of pressure on a new business, whether a small business or a high-growth startup, to operate on a shoestring budget. This often requires a strategic application of resources, including personnel. One common mistake made is to spend a great deal on development without consideration of design. The problem with this approach is that the UI/UX is developed ad hoc, and as much as developers can be brilliant problem solvers, they’re not often well-versed in usability or design.
This is especially problematic if what you’re building is a web- or app-based product in and of itself (SaaS, marketplace, multi-user application, etc.) vs. simply relying on a marketing site to sell your product or service. What might be intuitive to someone who looks at code all day and is used to solving problems by typing a line of code is not intuitive to a user who would prefer to point and click or swipe right or left.
The end result is that without hiring a product designer early on, the efforts of developers can lack direction, resulting in a messy, disjointed product and a usability problem that is incredibly difficult to solve. Not to mention that developers will not be happy to have to cut features they worked hard on or now need to re-design to meet a latecomer designer’s vision. Far better to have design direction at the beginning, and avoid the tension that comes from telling your development team to overhaul a product they thought was near completion.
Launching an MVP
As stated above, execution is often just as, if not more important, than the idea itself. Without execution, it’s nearly impossible to validate or evaluate the idea in the real world. This is why it’s vital to build a minimum viable product, and make it available to the world at large in some capacity.
Take Canva for example. Melanie Perkins saw that the process of designing and printing posters and flyers was unwieldy in the age of the internet. There had to be a way to put the design and printing process in one place, without needing multiple application licenses, etc. The idea itself was to make the design process simple and accessible to all. This baseline idea certainly had plenty of corollaries, as evidenced by Canva today – resume templates, menus, video editing, and more. Those corollaries, however, would have completely derailed an MVP process.
However, she was rightly worried that with the power and simplicity of the idea, someone would get to market first. So she identified a steady and under-served market (yearbooks) and hired freelancers to create a minimum viable product geared toward that market.
Designing yearbooks was not Perkins goal, nor did it meet the scope of the idea itself. But the success of this small piece of her idea gave her a launch point and the capacity to chase after the rest of what she wanted to accomplish. The success of her partial solution gave her the freedom to do the necessary chasing of investors, as well as providing something tangible to show that she could deliver.
It’s not just getting the product to market faster than competitors that makes building an MVP invaluable. It’s the feedback. If your MVP is failing to gain traction, it doesn’t necessarily negate the idea, just the execution.
Without real-world feedback into what was not intuitive for the user, or whether the pain point you were trying to solve was inadequately met or perhaps less of a problem than you surmised, you need to know early. Your testers may inadvertently provide you the nugget of wisdom that makes or breaks the product simply by saying, “I wish I could do it this way instead of that,” or maybe, “if you could simplify this process, it would be far more useful to me.”
But how do you get to your MVP requirements? What is the minimum that should be delivered? This requires market research and validation of the idea itself, ideally before you start investing capital and effort. The following questions can help you determine what the minimum viable product should be:
- Who is the target audience/customer? – If you don’t know who will have the most interest in your product, you won’t know what is important to them. Also, there will be no one who can provide meaningful feedback.
- How much interest does the target audience/customer have in your proposed MVP? – If there is not adequate interest, then it becomes important to identify any related problems that are of importance to the customer. Without significant interest, it may not be worth pursuing, at least in the currently proposed configuration.
- Does the product stand out from others in the same space? – Here you need to determine what makes your product different and special. It’s important to have a clear differentiator or it will be difficult to break into a given space.
- Are there any rivals in your way? – You should know who the players are in your niche of the market, and what they’re offering or expecting to offer in the near future. This may affect the timeline of your MVP if you need to be first to market.
- How much will it cost? – Bearing in mind that development costs typically have a sizable margin for error, you still need to have a rough estimate to provide to any potential investors.
- How will it generate income, and how much? – The minimum viable product doesn’t have to and is not expected to generate vast income. But a realistic estimate of what it could generate given time, additional features and development, and a go-to-market strategy is important to think about. The decision of what should be in the MVP should be based on the features that will generate the bulk of this income or the bulk of the excitement that will sell the idea.
- Is it actually worth building? – If the cost to develop is exorbitant or if the interest shown does not bode well for the MVP, let alone the final product, it’s important to be able to walk away. This is one strong reason for the MVP in the first place – to prevent over-investing in a product without a strong future.
As you can see, the successful execution of an idea entails multiple rounds of feedback, sometimes even before development begins on the product.
Once you have a product to sell, a go-to-market strategy must be developed and tested. But finding the right marketing strategy and distribution channel(s) can be a challenge, and choosing the wrong one can be very expensive. To save money and find the right channel, it’s best to test early and often.
Consider using the Bullseye Framework. First, you need to brainstorm options based on your knowledge of the industry and the successes and failures of others in your space. Keep in mind that what worked for some and what failed for others may not eliminate them as options for you.
Second, rank the options considered. Ensure that all known factors are considered before coming up with a top three.
Third, test these options. Testing doesn’t need to be overly expensive, and shouldn’t be, in the initial rounds. You’ll want to design smaller scale tests without significant cost to determine the best results before investing heavily in any one channel/strategy. For example, with $250 worth of AdWords ads, you can determine how well the search engine marketing channel works for you. A small investment in Facebook ads can give you metrics on whether you’re driving any success with that method.
The key thing to remember is that at any given moment, you should spend half your energy and resources on product development and half on marketing. Without the growth in demand this generates, the chances of succeeding even with one of the best products on the market are minimal. There is no need to commit to a particular strategy unless gains are seen.
With the above guidance, you now know a few key ways to succeed without overextending yourself financially in pursuing your dream, whatever it may be. By choosing the right incorporation method, you can set yourself, and your organization, up for success. You can also make it easier for investors (if you have them) to feel secure in their investment by selecting the C-Corp entity type.
By investing in a designer early on, you can save significant amounts on a potential cycle of unnecessary rework. By focusing on the MVP, you can prove your idea has merit and avoid overextending yourself financially on a product that doesn’t deliver.
Finally, once the MVP is ready, and you’re looking to market your solution, low-cost testing and retesting channels can help you find the right approach to success. All that remains now is to go out and make it happen!