Ways startups get screwed(rayhano.com)
rayhano.com
Ways startups get screwed
http://rayhano.com/post/27553501572/10-ways-startups-get-screwed
16 comments
The VERY SAME happens even when lawyers are involved. If you're naive, paying a lawyer doesn't protect you from that. But ASKING people who have been there and done this (and made mistakes) DOES protect. Far moreso than a lawyer who is just regurgitating template documents.
$15k?? Only in the US. It costs £15 to incorporate a company in the UK... maybe a little more if you want 'extras'.
You are RIGHT about making sure the incorporation is done properly, but that is not the same as hiring a lawyer to do it.
$15k?? Only in the US. It costs £15 to incorporate a company in the UK... maybe a little more if you want 'extras'.
You are RIGHT about making sure the incorporation is done properly, but that is not the same as hiring a lawyer to do it.
He didnt say it costs 15k but that sometime lawyers will defer the first 15k of billing in hopes of you getting bigger and helping you with other things.
It is humorous to me how critical reading skills have dropped here over the years. Two people somehow took away from my comment that it costs $15k to incorporate, even though I said it was cheap and the $15k is more than enough to get started.
I miss the old HN where every thread didn't get bogged down with stuff like that.
I miss the old HN where every thread didn't get bogged down with stuff like that.
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A good startup lawyer's template documents are based on the experiences of people who have been there and done that. And unlike an entrepreneur, who has started a very small number of companies, an attorney gets to see hundreds or maybe thousands and has a wealth of knowledge as to what can go wrong and how to prevent it.
And I didn't say it costs $15k, only that they'll defer up to $15k. You'll still have most of that $15k left.
And I didn't say it costs $15k, only that they'll defer up to $15k. You'll still have most of that $15k left.
15k for setting it up properly before raising funds. It is a great deal more than just incorporating, which was more like $1k for me even using my very expensive corporate lawyers.
Hiring a lawyer is like buying insurance for your legal needs. If you hire a lawyer, you get to sue the lawyer for malpractice if they mess up (which means your damages incurred as a result of the malpractice, plus legal fees paid, plus legal expenses paid to maintain the malpractice suit).
In the UK, incorporation is really very simple. Unless you're raising money (which you probably shouldn't), you don't need a lawyer to help you incorporate.
Now, if you want to do some kind of custom shareholder agreement or the like, then yes, getting a lawyer involved can definitely help - but if you stick to standard stuff, this is really not necessary in my opinion. Default terms and docs available online are good enough.
Now, if you want to do some kind of custom shareholder agreement or the like, then yes, getting a lawyer involved can definitely help - but if you stick to standard stuff, this is really not necessary in my opinion. Default terms and docs available online are good enough.
I fall right in the middle with the lawyer advice.
You should not incorporate without seeking very good legal advice from someone who knows what they are talking about in your industry. Yes, incorporating a business is easy and standardized, but as MattMarron pointed out, you can do it in a way that is bad for your type of business. For example, as a tech startup, you shouldn't structure yourself life a restaurant. You need founder shares to vest overtime, etc
On the other end, some people just blindly pay and trust lawyers to know your business for you. Lawyers should not be decision makers. Rule of thumb: Do not pay lawyers to tell you how to do things. Figure out how you want to do them, then pay lawyer to make sure that's actually represented in the fine print.
Find a lawyer who's worked with similar companies, seems trustworthy and doesn't charge you for every 15 min phone call
You should not incorporate without seeking very good legal advice from someone who knows what they are talking about in your industry. Yes, incorporating a business is easy and standardized, but as MattMarron pointed out, you can do it in a way that is bad for your type of business. For example, as a tech startup, you shouldn't structure yourself life a restaurant. You need founder shares to vest overtime, etc
On the other end, some people just blindly pay and trust lawyers to know your business for you. Lawyers should not be decision makers. Rule of thumb: Do not pay lawyers to tell you how to do things. Figure out how you want to do them, then pay lawyer to make sure that's actually represented in the fine print.
Find a lawyer who's worked with similar companies, seems trustworthy and doesn't charge you for every 15 min phone call
I totally agree with the "negative people" part. I once gave the groupon elevator pitch to a relative who knows nothing about what's going on in terms of start ups or anything internet. His response was it was the the stupidest idea ever and he thought I should focus my efforts on something more worth while. I then told him they started 4 years ago and it's a billion dollar company. His reaction was priceless.
I mention this story because everyone will always be negative if they have never heard of what you are doing. That's just human nature. As entrepreneurs we have to keep plugging forward amidst the criticism and build our dreams.
I mention this story because everyone will always be negative if they have never heard of what you are doing. That's just human nature. As entrepreneurs we have to keep plugging forward amidst the criticism and build our dreams.
I think that's the wrong lesson to take. The reality is that no company is going to appeal to everyone--and a relative who's disconnected from "anything internet" probably never would have used Groupon. You've learned something about your target market.
A good lesson for everyone is that our personal needs from a business aren't the same as everyone else's, even tech people. After all, I'm still a little in shock that Bingo Card Creator sells for $30.
A good lesson for everyone is that our personal needs from a business aren't the same as everyone else's, even tech people. After all, I'm still a little in shock that Bingo Card Creator sells for $30.
Nice answer! Crystallising WHO you are selling/targeting is a difficult art.
> As entrepreneurs we have to keep plugging forward amidst the criticism and build our dreams.
Feedback is an information source. Your job is to mine feedback for useful and relevant information. Whether the feedback is negative or positive is irrelevant. Criticism can contain a kernel of truth - it can point to a market weakness or an unfounded assumption. Praise can be very dangerous - socially, it's much easier to offer simple-minded positive re-enforcement to an entrepreneur and send them on their way.
I'd rather have 10 sneering, withering, and informative criticisms over a single fawning, ego-boosting, yet empty congratulation.
Feedback is an information source. Your job is to mine feedback for useful and relevant information. Whether the feedback is negative or positive is irrelevant. Criticism can contain a kernel of truth - it can point to a market weakness or an unfounded assumption. Praise can be very dangerous - socially, it's much easier to offer simple-minded positive re-enforcement to an entrepreneur and send them on their way.
I'd rather have 10 sneering, withering, and informative criticisms over a single fawning, ego-boosting, yet empty congratulation.
I think the trick is to distinguish between unhelpfully negative people and useful negative feedback. As an entrepreneur, you need both motivation (which positive feedback is good for) and information about your customers/business (which is ultimately negative, no matter what Edison-like spin you put on it, since the parts to improve are the parts you're currently doing wrong.)
It's not the quantity or proportion of negativity coming from people that's important; it's how accurate and actionable their feedback is in making your company better.
It's not the quantity or proportion of negativity coming from people that's important; it's how accurate and actionable their feedback is in making your company better.
#1 should always be medical insurance coverage. Large corporations get group plans at big discounts, and then offer it to their employees for free or hugely discounted rates that aren't taxed at all. Big corporations give health care coverage away for free as a perk.
Good luck getting the same plan at a start-up. Buying an individual plan is grossly expensive, especially if you're married with kids. Even if you're lucky enough to be at a startup with a group plan, you probably won't get it for free. And your company surely won't get the big discounts Dell, IBM, and HP get.
Good luck getting the same plan at a start-up. Buying an individual plan is grossly expensive, especially if you're married with kids. Even if you're lucky enough to be at a startup with a group plan, you probably won't get it for free. And your company surely won't get the big discounts Dell, IBM, and HP get.
UK startups all get medical insurance for free. It's called the NHS, and yes, it rocks. Not having to worry about that is definitely a plus while running a startup.
It leads to weird ethical dilemmas as well. If the startup does offer insurance, their risk pool is small enough that hiring an employee with a preexisting condition can make a huge difference to the average employee's risk/health status, and therefore the cost of their group plan. So there are financial incentives not to hire anyone who has a medical history, though it's of course illegal to decide on that basis. And on the applicants' side, you could inadvertently sink a company, or force them to drop health coverage, by accepting an offer from a small company!
(May not apply in some states that have functioning small-business risk-pooling arrangements. And, if it gets implemented, there will be a "Small Business Health Options Program" from 2014 as part of PPACA that will do that kind of risk-pooling.)
(May not apply in some states that have functioning small-business risk-pooling arrangements. And, if it gets implemented, there will be a "Small Business Health Options Program" from 2014 as part of PPACA that will do that kind of risk-pooling.)
I can only speak from personal, anecdotal experience. The cost of a small group insurance plan (which I believe requires at least 3 people) with pretty decent coverage actually wasn't that expensive. (I mean, the whole system is way too expensive, but AFAIK it isn't much more per-person than it costs for a company 20x the size.)
Agree that it's really important, though. Not offering any sort of medical coverage is going to make recruitment very challenging.
Agree that it's really important, though. Not offering any sort of medical coverage is going to make recruitment very challenging.
I really don't understand the obsession with insurance, especially medical insurance. Does NOBODY understand that the casino/insurance company DOES NOT LOSE. i.e. YOU pay them more money than they will EVER pay for your treatment...
The mind boggles at how brainwashed people are about insurance. In the UK motor insurance and buildings insurance is mandated by law or mortgage agreements. So those are unavoidable. By life insurance, medical insurance, etc are scams.
Self-insure.
The mind boggles at how brainwashed people are about insurance. In the UK motor insurance and buildings insurance is mandated by law or mortgage agreements. So those are unavoidable. By life insurance, medical insurance, etc are scams.
Self-insure.
This is absolutely moronic advice. You need insurance against situations that have no top end cost. Health care cost potential is near unlimited. As a result, other insurable events, like car accidents, are also potentially unlimited because you could be paying someone's hospital bills.
In this instance, people aren't brainwashed. Some people are just stupid...
In this instance, people aren't brainwashed. Some people are just stupid...
I had a back injury that required surgery. Total cost: $150k.
My wife recently had a child. Minor complications ensued at delivery. Total cost: $40k.
My cost for insurance? $3,120 a year, plus about $400/year in copays. The gamble has worked out for me.
My wife recently had a child. Minor complications ensued at delivery. Total cost: $40k.
My cost for insurance? $3,120 a year, plus about $400/year in copays. The gamble has worked out for me.
Incredible! Obviously my comment has no credibility in the US. It's incomprehensible in Europe to incur such costs.
Have you guys thought that you have such high costs because the massive US insurance industry is taking a cut?
Have you guys thought that you have such high costs because the massive US insurance industry is taking a cut?
Yeah, it's insane here. Note that my employer pay 75% of my insurance premium as well.
I don't think the insurance industry per se is the cause. There are many issues that books have been written on.
Fundamentally though, because we lack any basic "safety net", yet require hospitals to provide emergency care without regard to payment hospitals are forced to recover massive losses by raising rates for everyone. That's why a cesarean childbirth can cost $40k -- if a woman in labor who didn't get prenatal care shows up, they need to care for her and don't get paid.
So we end up in this false debate where opponents to "socializing" insurance/medicine don't understand what is wrong, because they have middle-class jobs with paid insurance as a benefit. It doesn't compute for some reason that they are already paying for it!
I don't think the insurance industry per se is the cause. There are many issues that books have been written on.
Fundamentally though, because we lack any basic "safety net", yet require hospitals to provide emergency care without regard to payment hospitals are forced to recover massive losses by raising rates for everyone. That's why a cesarean childbirth can cost $40k -- if a woman in labor who didn't get prenatal care shows up, they need to care for her and don't get paid.
So we end up in this false debate where opponents to "socializing" insurance/medicine don't understand what is wrong, because they have middle-class jobs with paid insurance as a benefit. It doesn't compute for some reason that they are already paying for it!
You don't pay for insurance to "make money" - you pay for insurance to minimize risk.
i.e. I'm happy to pay for health insurance to make sure that a sudden illness doesn't bankrupt me.
i.e. I'm happy to pay for health insurance to make sure that a sudden illness doesn't bankrupt me.
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The other element you're missing is that medical services aren't transacted at a single standard price list for all patients. Instead, a huge range of pricing systems are used depending on the context. Some are mandated by government regulation (Medicare reimbursement rates), many are governed by negotiations between providers (hospitals, HMOs, doctors' groups, pharmaceutical providers, medical device/service providers), and an insurer, payment provider, or other group.
Guess who gets the short end of the stick in those negotiations? It's the individual health care care consumer. Who has no bargaining leverage and is often incurring services at a time when there's no other option (accident, injury, illness).
Guess who gets the short end of the stick in those negotiations? It's the individual health care care consumer. Who has no bargaining leverage and is often incurring services at a time when there's no other option (accident, injury, illness).
It's pretty obvious that you are talking from a UK perspective here. The situation is radically different in the US, where the OP is based.
minimax - the art of minimizing your maximal possible loss.
also, insurance companies pay less for the same services that you would pay for at the same place of care because they bulk-negotiate with providers.
also, insurance companies pay less for the same services that you would pay for at the same place of care because they bulk-negotiate with providers.
He's right about some of those but others are just ridiculous. Sure, being home with your family or socializing with other people at an event might not contribute much to your startup, but you need to relax sometimes. It's dangerous to confuse that with work but if you don't want to burn out, it's also dangerous to work all the time without any break.
" I was socializing" is one of the most common excuse people use when they procrastinate, be it socializing with family, friends or like-minded people. As Ray says:
>> WHY THE HELL AREN’T YOU BUILDING YOUR PRODUCT AND TALKING TO CUSTOMERS?
When you have a startup in it's initial phase, it's like a baby. It requires your sole undivided attention. I've seen way too many startups die because the founders spent more time trying to make their product popular rather than work on a good product first.
As a hacker, I completely understand what Ray means in pt #10. There are times when all I want is to code straight out, no distractions, no relaxation, heck, no contact with the outside world. It's just a hacker thing. :)
Work-Life balance is important, but sometimes(esp. when you are a core member of a startup team), my work is my life! :)
Well written Ray, and best of luck with Wigwamm! :)
>> WHY THE HELL AREN’T YOU BUILDING YOUR PRODUCT AND TALKING TO CUSTOMERS?
When you have a startup in it's initial phase, it's like a baby. It requires your sole undivided attention. I've seen way too many startups die because the founders spent more time trying to make their product popular rather than work on a good product first.
As a hacker, I completely understand what Ray means in pt #10. There are times when all I want is to code straight out, no distractions, no relaxation, heck, no contact with the outside world. It's just a hacker thing. :)
Work-Life balance is important, but sometimes(esp. when you are a core member of a startup team), my work is my life! :)
Well written Ray, and best of luck with Wigwamm! :)
Relax? I don't understand... :)
> 8. Agencies - This ranges from people who want to build your product to those who want to file your R&D tax credits. You can spend a lot of time talking to agencies, as there are a LOT of them around. Some are genuinely useful partners. You’ll often have speakers at Hacker News London espousing the benefits of using an agency that worked wonders and had aligned incentives. And that is the key, make sure your incentives and those of people you work with are aligned. Bonus structures do not work. If people fail, there’s got to be pain. There will be for you, after all, if your startup fails.
Well, I hope GrantTree falls into the "genuinely useful partners" category! I'm not a fan of development agencies for startups, but for tax and grants getting a specialist firm involved makes sense, imho.
Not sure about the title, btw... are those really ways startups get screwed, or just aspects of running a startup?
Well, I hope GrantTree falls into the "genuinely useful partners" category! I'm not a fan of development agencies for startups, but for tax and grants getting a specialist firm involved makes sense, imho.
Not sure about the title, btw... are those really ways startups get screwed, or just aspects of running a startup?
Maybe the title was sensationalist... :)
I strongly clicked with the Investor part. It's funny that every one and their mother is saying they are part of a seed fund these days, while they do not invest in companies that have less than 2 years/15 employees/numerous clients/revenue in the 7 digits already.
And, maybe could he add : "11. Hacker News. After reading it for a while and understanding a bit better what it means to run a startup, just stop reading it all day long and focus on your customers. I've seen startups fail because the founders hired people only to monitor HN and report on interesting stories"
And, maybe could he add : "11. Hacker News. After reading it for a while and understanding a bit better what it means to run a startup, just stop reading it all day long and focus on your customers. I've seen startups fail because the founders hired people only to monitor HN and report on interesting stories"
I think the last comment is ridiculous, if they are starting a company and they literally hired someone to report on HN stories, they need to not be starting a business.
This seems like bad advice from someone who is not especially experienced at building startups. As he suggests, there are kernels of knowledge but the recommendations are unbalanced and in many cases suggest he made newbie mistakes (e.g. - I didn't know how to manage my lawyer, so you should not hire one at all!).
There seems to be an abundance of advice out there regarding startups from people who have very limited experience, and it's a bit worrying to see it get voted up on hackernews so easily.
There seems to be an abundance of advice out there regarding startups from people who have very limited experience, and it's a bit worrying to see it get voted up on hackernews so easily.
Over a sample size of about 10 million page views, our top 4 referring domains of all time are all exclusively social media, and account for a total of around 30% of our visits. Twitter is the most engaging, on average Twitter referals view 4.5 pages per visit.
I think it's easy to dismiss social media, it's gotten quite clichéd, it's sometimes dull, it's sometimes frustrating, but if you understand the differences between each channel and utilise them properly they can have great benefits.
I think it's easy to dismiss social media, it's gotten quite clichéd, it's sometimes dull, it's sometimes frustrating, but if you understand the differences between each channel and utilise them properly they can have great benefits.
Schmerg has already stated #11. Here's my #12.
#12... Reading blogs/articles about startups. I'm guilty of this as well. Its ok to ready every once and a while, but the constant research on startup life does take you out of your element.
Put your head down and get to work! Its all up to you and you alone. Make the effort, and get to coding/building. The rest will fall into place.
#12... Reading blogs/articles about startups. I'm guilty of this as well. Its ok to ready every once and a while, but the constant research on startup life does take you out of your element.
Put your head down and get to work! Its all up to you and you alone. Make the effort, and get to coding/building. The rest will fall into place.
Can somebody more experienced in the matter attest there are no seed money in the UK? I was under impression that Launch48, Seedcamp and others do a great job here.
If you have a startup that is taking a proven idea and exploiting a niche ("twitter for left handers", "ebay for counterfeit goods", "airbnb for dyslexic vegetarians") or you're taking an existing business model and disrupting it via the internet (car rental, clothes swaps, food delivery) then you may well find seed money in the UK.
But if it's a new idea (new product/service) then in my experience even with a team with a proven track record, and a product built up and running to proof-of-engineering-principle, there aren't many people who can look at an idea and a first version and see beyond the fact that it's new, different and raw to see the opportunity to invest.
It would seem the early stage money is not tech-savvy, not excited by tech, and is looking for iteration over innovation. That is, it's risk averse and favours the reliability of a decent chance of incremental gains rather than lower chance of much bigger gains.
I haven't met everyone, by a long stretch, and it may well be that my product/pitch is wrong, but genuine innovation doesn't seem to come through the UK seed/VC channels, while such products start in the UK they generally find seed money from the US.
But if it's a new idea (new product/service) then in my experience even with a team with a proven track record, and a product built up and running to proof-of-engineering-principle, there aren't many people who can look at an idea and a first version and see beyond the fact that it's new, different and raw to see the opportunity to invest.
It would seem the early stage money is not tech-savvy, not excited by tech, and is looking for iteration over innovation. That is, it's risk averse and favours the reliability of a decent chance of incremental gains rather than lower chance of much bigger gains.
I haven't met everyone, by a long stretch, and it may well be that my product/pitch is wrong, but genuine innovation doesn't seem to come through the UK seed/VC channels, while such products start in the UK they generally find seed money from the US.
It depends on what you define by seed money, if you've just got an idea and no track record you'll find it hard to raise any seed money.
The following things will make it easier for you to raise money:
The following things will make it easier for you to raise money:
* a track record (i.e. a strong team)
* a product
* customers desperate for your product
* traction
* a large market size
Just a friendly reminder about the title of the submission from the HN guidelines:
If the original title begins with a number or number + gratuitous adjective, we'd appreciate it if you'd crop it. E.g. translate "10 Ways To Do X" to "How To Do X," and "14 Amazing Ys" to "Ys." Exception: when the number is meaningful, e.g. "The 5 Platonic Solids."
That's weird.
Y Combinator is different from other accelerators in that it isn't an incubator. This is part of what sets it apart IMO.
I think that TechStars is an exception to the rule about accelerators and incubators being little more than a distraction, but you're entitled to your opinion. The benefits of Y Combinator are much clearer.
I think that TechStars is an exception to the rule about accelerators and incubators being little more than a distraction, but you're entitled to your opinion. The benefits of Y Combinator are much clearer.
I don't accept that "negative people" somehow screw a startup. Handling criticism makes for a stronger product.
Sure, if you're ready to 'handle' them. When you've quit your job and are embarking on this adventure, you're fragile. Depression IS common among startup founders. It's lonely at times. Those negative people can be dangerous.
But yes, at the right time, they serve to strengthen.
But yes, at the right time, they serve to strengthen.
Except that once you start avoiding or ignoring them, it is never likely to become the "right time". Handling criticism appropriately is one of the most important skills any would be entrepreneur (or consultant or any other small business person) needs to develop.
0. Adding a launchrock page before anyone has any idea who you are.
This is unreadable on mobile.
To add detail, when I zoom in on my iPhone the text from the top-left (Innovation Thoughts: ... ) covers the main body of text.
Yes, sorry, you're right. This Tumblr theme is frustrating on mobile... I'll work on it.
They cost so little in the grand scheme of things and take so little time. I don't know what he means about them becoming advisers. Mine have never advised me in any unnecessary capacity, and I suspect he just has experience (first or second hand) with some Saul Goodman type.
Get an experienced startup lawyer to help you incorporate at a bare minimum. Many will even defer something like your first $15k of fees (more than enough to get started) in the hopes of earning more business later when you turn into the next YouTube.