Ask HN: How do you startup?
So, you got a team together, have your idea ready. What now? Do you incorporate or not (I know the YC prefers that you not incorporate, but what are the advantages/disadvantages?). And if you don't incorporate, how do you split the equity between co-founders? Do you sign contracts or do you just trust each other? And if you do, what sort of contract? What about building your product, do you set up an extensive design document? Do you just wing it? Something in between? What other issues need to be taken care of before you can focus on building your product?
2 comments
That's a lot of questions, and most of the answers are "it depends", or there's more than one right answer.
I'd suggest you consider reading The Art of the Start[1] by Guy Kawasaki, The Four Steps To The Epiphany[2] by Steve Blank, and High Tech Startup[3] by John Nesheim. Between those, they cover a big chunk of the basic stuff you need to know.
The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup[4] also has a good reputation, but I haven't had time to read it yet, so I can't give a personal endorsement. But it sounds like it might be worthwhile.
FWIW, though, I can tell you what we did at Fogbeam[5]: The company is organized as a legal entity, but we are an LLC right now, not a Corporation. I would not necessarily recommend doing that to anybody else though... while it is possible to build a big company as an LLC, practically speaking, if the intent is to build a scalable startup, the kind that's going to seek VC money and that you ultimately hope to IPO, you need to be a corporation. VC's essentially will never invest in an LLC (there are technical reasons why) and LLC's have serious limits if you need more than a hundred or so "shareholders" (I forget the exact number, but it's a pretty small number). The reason we are an LLC is a historical coincidence, rooted in weird shit that happened back when I was planning to start a consulting company, before deciding to do a product. Fortunately the prevailing wisdom is that it's fairly straightforward to convert from an LLC to a C Corporation. When they day comes that we need to do it, we'll switch.
As far as equity distribution, we have been operating on a handshake agreement between the founders. Technically speaking, I own 100% of the company "on paper" since I'm the only Member listed in the LLC operating papers. But that is, again, only a historical legacy. I created the company and worked alone for the first year before inviting the first co-founder onboard. It would be easy enough to amend the papers to update the equity split, but we've basically taken the approach that "well do that when we convert to a C corp, or there's a specific need to" (like, if we get an acquisition offer). So, yeah, we are operating on trust at the moment. A lot of people will recommend against doing that sort of thing for various reasons (see: The Social Network for example), and I have known friends who got screwed by co-founder disputes because things weren't put into writing up-front. If I had to advise somebody, I'd probably advise you to decide on the equity splits, intellectual property assignments, etc. up-front, and formalize everything from the beginning just to be on the safe side. The downside to that is, it costs a little bit of money and time. shrug
As for YC... nothing against them, but I'd never make a decision based on "what YC wants". But I look at all accelerators / incubators / etc. as "something that might be nice to do, but we'll succeed with or without them." Being that we are an East Coast startup with constraints that would limit out ability to move to CA in order to do YC, we've never even applied and probably never will. If doing YC is super important to you, then maybe you should treat this a bit differently. It's up to you.
Design document? Meh... I mean, yeah, but no. Not exactly. You need to know something about what you're building, but as a rule, you probably won't know exactly what you really need to build to achieve "product / market fit"[6] right away. So no sense spending months on an elaborate BDUF design doc. Sketch out the high level design, and IF you wind up subcontracting any work, then you'll have to formalize a spec for the contractor. But don't spend months and months designing something nobody wants. "Get out of the building" as they say, talk to customers, and iterate the design as you learn what people want/need.
[1]: http://www.amazon.com/Art-Start-Time-Tested-Battle-Hardened-...
[2]: http://www.amazon.com/Four-Steps-Epiphany-Steve-Blank/dp/098...
[3]: http://www.amazon.com/High-Tech-Start-Revised-Updated/dp/068...
[4]: http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Ent...
[5]: http://www.fogbeam.com
[6]: http://www.stanford.edu/class/ee204/ProductMarketFit.html
I'd suggest you consider reading The Art of the Start[1] by Guy Kawasaki, The Four Steps To The Epiphany[2] by Steve Blank, and High Tech Startup[3] by John Nesheim. Between those, they cover a big chunk of the basic stuff you need to know.
The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup[4] also has a good reputation, but I haven't had time to read it yet, so I can't give a personal endorsement. But it sounds like it might be worthwhile.
FWIW, though, I can tell you what we did at Fogbeam[5]: The company is organized as a legal entity, but we are an LLC right now, not a Corporation. I would not necessarily recommend doing that to anybody else though... while it is possible to build a big company as an LLC, practically speaking, if the intent is to build a scalable startup, the kind that's going to seek VC money and that you ultimately hope to IPO, you need to be a corporation. VC's essentially will never invest in an LLC (there are technical reasons why) and LLC's have serious limits if you need more than a hundred or so "shareholders" (I forget the exact number, but it's a pretty small number). The reason we are an LLC is a historical coincidence, rooted in weird shit that happened back when I was planning to start a consulting company, before deciding to do a product. Fortunately the prevailing wisdom is that it's fairly straightforward to convert from an LLC to a C Corporation. When they day comes that we need to do it, we'll switch.
As far as equity distribution, we have been operating on a handshake agreement between the founders. Technically speaking, I own 100% of the company "on paper" since I'm the only Member listed in the LLC operating papers. But that is, again, only a historical legacy. I created the company and worked alone for the first year before inviting the first co-founder onboard. It would be easy enough to amend the papers to update the equity split, but we've basically taken the approach that "well do that when we convert to a C corp, or there's a specific need to" (like, if we get an acquisition offer). So, yeah, we are operating on trust at the moment. A lot of people will recommend against doing that sort of thing for various reasons (see: The Social Network for example), and I have known friends who got screwed by co-founder disputes because things weren't put into writing up-front. If I had to advise somebody, I'd probably advise you to decide on the equity splits, intellectual property assignments, etc. up-front, and formalize everything from the beginning just to be on the safe side. The downside to that is, it costs a little bit of money and time. shrug
As for YC... nothing against them, but I'd never make a decision based on "what YC wants". But I look at all accelerators / incubators / etc. as "something that might be nice to do, but we'll succeed with or without them." Being that we are an East Coast startup with constraints that would limit out ability to move to CA in order to do YC, we've never even applied and probably never will. If doing YC is super important to you, then maybe you should treat this a bit differently. It's up to you.
Design document? Meh... I mean, yeah, but no. Not exactly. You need to know something about what you're building, but as a rule, you probably won't know exactly what you really need to build to achieve "product / market fit"[6] right away. So no sense spending months on an elaborate BDUF design doc. Sketch out the high level design, and IF you wind up subcontracting any work, then you'll have to formalize a spec for the contractor. But don't spend months and months designing something nobody wants. "Get out of the building" as they say, talk to customers, and iterate the design as you learn what people want/need.
[1]: http://www.amazon.com/Art-Start-Time-Tested-Battle-Hardened-...
[2]: http://www.amazon.com/Four-Steps-Epiphany-Steve-Blank/dp/098...
[3]: http://www.amazon.com/High-Tech-Start-Revised-Updated/dp/068...
[4]: http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Ent...
[5]: http://www.fogbeam.com
[6]: http://www.stanford.edu/class/ee204/ProductMarketFit.html
I wanted to appreciate for writing this reply. Thank you.
Just ordered Guy's book. Thanks!
No prob. I enjoyed that book a lot. It covers a lot of the "nuts and bolts" stuff, especially in terms of the equity stuff, and some of the stuff around raising VC money. If you think you'll be looking for outside investment eventually, it's a very good book.
I really can't recommend @sgblank's book highly enough either. If you haven't read it, or aren't already familiar with the "Customer Development" methodology, I would definitely suggest you put that on your reading list. When I read it, my reaction was something like Keanu Reeves' in The Matrix - "Whooah". I felt like I saw the matrix. While you can never reduce something as complex as building a business down to a "paint by the numbers" process, TFSTTE is about as close to a "paint by the numbers" guide as you can find. It really lays things out in excruciating detail.
I really can't recommend @sgblank's book highly enough either. If you haven't read it, or aren't already familiar with the "Customer Development" methodology, I would definitely suggest you put that on your reading list. When I read it, my reaction was something like Keanu Reeves' in The Matrix - "Whooah". I felt like I saw the matrix. While you can never reduce something as complex as building a business down to a "paint by the numbers" process, TFSTTE is about as close to a "paint by the numbers" guide as you can find. It really lays things out in excruciating detail.
Oh it's on my reading list. I'm just taking it one at a time. Thanks!
Lean startup preaches finding customers or at least users first. doing some customer reseach. also equity should probably be vested. over the next year I'm going to do this and this I get x equity.
That's a good point, regarding equity vesting. If you're a solo founder, it's a moot point, since you own everything by definition and there's nobody to conflict with one way or the other. But if you have multiple founders, equity should vest over a period of time, so somebody doesn't come in, get assigned, say, 50% of the company, work two days, and then quit, still owning 50%.
On a related note, even if the founders have gone through a vesting period, if you later take VC money the VCs will usually ask you to subject some or all of your equity to vesting again. It's understandable, since they want you to have a strong motivation to keep working as hard as possible to make the company a success, but I can see how founders could be annoyed by that. I suppose it's one more reason to debate the merits of taking VC money...
Now, where oh where is michaelochurch to chime in when you need him?!??
On a related note, even if the founders have gone through a vesting period, if you later take VC money the VCs will usually ask you to subject some or all of your equity to vesting again. It's understandable, since they want you to have a strong motivation to keep working as hard as possible to make the company a success, but I can see how founders could be annoyed by that. I suppose it's one more reason to debate the merits of taking VC money...
Now, where oh where is michaelochurch to chime in when you need him?!??