Entrepreneurship is very challenging and an extremely intimidating endeavor however, proper planning and successful execution can make it one of the most rewarding activities that a person can imagine. While planning to launch a new business venture it is important to first address your immediate needs, while also laying the foundation for the long term vision. The best way to do this is to ask these 4 Essential Questions before you launch. And the answers to these questions will help lay the foundation for your business legal strategy.
Who is Coming With You?
It is essential to determine who if anyone will be launching the business venture with you and what role that person or persons will be playing. If this is going to be a solo venture then in this respect, it is one less thing to concern yourself with. If there will be more than one founder, then there are many important decisions that need to be made, and they should be made prior to moving forward.
A partnership is an agreement with two or more persons to partake in a business venture with the intention to share that venture’s profits or losses. A legally binding partnership can be formed by a simple handshake. Yours should be formed by written agreement. For initial partners looking to start a company, this written agreement is commonly known as a Founders’ Agreement. Depending on the type of business entity that you decide to form, a Founder’s Agreements can be represented in a true Partnership Agreement, a Limited Liability Company’s Operating Agreement or even a Corporate Shareholders’ Agreement. There are also instances in which a founders’ agreement may stand alone as a type of memorandum of understanding prior to the formation of an entity. And it’s terms may help guide your entity formation decision. However this agreement is embodied, it should be in writing and at the very least address the following issues:
Each founder’s role in daily operations and management of the company.
Decision making powers of each founder.
Initial capital contributions of each founder.
Initial ownership splits.
Individual ventures and conflicts of interest.
Dispute resolution process.
Events of separation of a founder from the company.
How Will This Venture Be Financed?
Startup Capital is the bloodline of a new business venture and it is important that you determine the most advantageous financing strategy before you launch. Three common funding mechanisms are self- funding (also known as “bootstrapping”), debt financing and equity financing.
Self funding is when the founders finance the venture on their own without outside capital contributions. It is attractive option for those who have the means because it allows them to avoid either starting the business venture in debt or giving up equity in the company early on. If you are either not fortunate enough to have personal access to the initial funds needed or simply are a strong believer in other people’s money (OPM) then, one of the next two options may be favorable alternatives.
Debt financing is process of receiving an issuance of capital in the form of a loan. In this instance in respect to a standard non-convertible promissory note structure, you are borrowing a specific sum of money from a lender (institution or individual) in exchange for your promise to pay back that amount of money, usually with interest and within a specific and predetermined time period. The main advantage to debt financing is that you are not giving away any equity ownership in your company. Aside from showing outstanding debt on your financial statements, the main disadvantage to debt financing is that the success or failure of your venture will have no bearing on your obligation to perform under the terms and conditions of your loan. If you business is doing very well and is high in the black - great, “pay up”! But, if you business is struggling and is deep in the red- “too bad, pay up”!
Equity financing is a way in which your company can receive funds from investors, in exchange for granting them a specific percentage of equity ownership in your company. Equity financing protects a business from losing its shirt at the possible expense of losing control of its company. The value of the investor’s investment grows through the appreciation of the company’s value. They generally receive a return on their investment at the time of an exit, which is the sale of the company or sale of their equity ownership in your company. If the value of your company never increases or there is no exit, well then unless otherwise agreed to, you have no repayment obligation to this type of investor. Equity financing is converse to debt financing. The main advantage of equity financing is that under simple terms, you are under no obligation to repay the amounts given to you from the investor. The main disadvantage to equity financing is that you are giving up a percentage ownership “equity” in your company in exchange for the investment of capital.
Is There Intellectual Property That Needs to Be Protected?
Most businesses either provide a service or product to a customer. A product based business’ most valuable assets are the product and the company’s brand identity. Before you launch, you must make sure that they can both be properly protected moving forward. It is important that you consult with an Intellectual Property attorney about what you would need to do to protect your creations. If you are in the idea phase and nothing has been created, then ask for guidance on protecting your idea, the initial designs or whatever it is that has been drafted preceding the final product. Find out in advance what would require patents, copyrights or trademarks and also have an attorney perform the necessary research to determine whether or not you would be infringing on someone else’s intellectual property rights. These steps will also be very helpful so that before you launch you will have an idea of the required costs involved and economic viability of moving forward.
Do I Need Any Licenses or Authorizations?
I practice law. In order to do this, I went to law school, took and passed the bar exam, got sworn in and then licensed to practice. I am now licensed in both New York and Florida. Before you launch, you need to determine whether or not whatever your company plans on doing, requires any specific licensing or authorizations professional or otherwise. This applies to both the individual owners and the business entity itself. For example, a New Jersey domestic company needs a Certificate of Authority to do business in the State of New York. If that company is an engineering firm, their would be specific professional licensing requirements for the individual owners and employees separate from that company itself. Starting a bar would require a liquor license, a drone pilot my need airspace authorization and so on...
You need to know the rules before playing the game. If you are not educated on the pertinent laws and regulations then consult with a professional proficient in the specific area. Remember, the goal is to create an infrastructure that won’t be torn down as a result of an initial oversight. Before you launch, put yourself in a position that will do the most to protect you from being shut down midstream.