This post is dedicated to a team of promising young entrepreneurs who asked me recently if they could all just "put some money in a bank account" to launch their startup.
I wanted to say 'yes' because I know how much other work they have to do to build a successful company. But instead I had to warn them that there were several essential elements of their corporate structure they had to get right now to maximize their probability of success.
This question comes up frequently, so I started a list to help other entrepreneurs ensure they don't miss one of the essential structural components.
As soon as I started typing out the first draft of the list, I realized I was trapped. I've been part of several dozen startups and invested in a couple of dozen more. I've seen many startup structural errors that cost entrepreneurs much, or all, of their investment. I often talk with other angel investors about promising young companies that would be fundable if it weren't for the structural problems. So I am supposed to know better.
I realized that if the list I assembled wasn't complete, and as a result a company got started with a structural flaw, I would feel terrible. So I worked hard to ensure the list was comprehensive.
One part of the trap was that the list kept growing and growing. I kept thinking to myself, "This can't really be necessary this early" but then remembered previous examples that proved that wrong. I spoke to a couple of other startup veterans and they added more points to the list.
Now this list of the essential startup action items has over 50 items. It was so long that it was actually discouraging. That was the other part of the trap. If you write it all down, it does look pretty daunting.
But at least now there is the start of a list that entrepreneurs can use to check their progress. I hope that it saves a few dozen young companies from making the easy-to-avoid fatal, or expensive, mistakes.
If you think of any additional essential startup action items, please post a comment or send me an email. I hope that in a year or so, the list will be complete (and still under a 100 items.)
This is the "Essential Startup To Do List".
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Alternative Essential Start-up To Do List
a. Print off the original "Essential Start Up To Do List"
. Soak in a 100%ethyl alcohol solution and ignite. Now get down to work.
c. Find two other people that you trust completely, who will put in 18 hour days with you and who want to do the same stuff as you (go for chemistry, market is secondary).
d. Don't settle for one other partner, you will disagree at some point in the future, won't come to a consensus, and will destroy your business with your infighting. All the while, you'll be thinking that you would like your partner more if he had only slept with your girlfriend.
e. Find a mentor. A real mentor. One that is filthy rich and can burn the money that they put into you and not cramp their lifestyle. One who cares about your success on a personal level. Someone that you respect SO MUCH that there would never, ever be any f-ing way that you would let this dude lose money in YOUR company.
f. Get a good lawyer that explains all this legal shit to you and does it properly. Let him explain the articles. You will have as much success reading the legalese as your lawyer does reading your PHP include files. There are experts in the world, use them or you won't scale past your basement.
g. If you can avoid external financing, avoid it. If you need to get it, and you are a tech startup, don't get angel money from a restaurateur. Be picky. Get references from other investees (including the failed ones). Don't think you are smart enough or connected enough to do this? Drop the start up and start therapy. If you haven't got cajones, you are going to get SQUISHED. I don't care how good you think your latest take on a genetic programming based feed forward neural network algorithm is. If you need a release, go write a paper.
h. Angels (despite their name) aren't doing the Lord's work. You can't trust them. Why? Because they don't trust you. That's why they bind your legal wrists and ankles with paperwork. Get someone on your side that you TRUST COMPLETELY to help you with this (hint fool, your lawyer/mentor). See the end note for an example.
i. If you can't get a mentor, stick to your day job. Then network. Then build relationships. Then get a mentor. Then start a company. This will take you five years.
j. "But Pwn, by then someone will steal my idea!" Repeat step 2, but this time with the hair on your arms. Let that be a lesson that 99% of value is created with execution and 1% with an idea. If you don't get that, then get a job in fashion design where people of all sexual preferences frolic over Grey Goose martinis while discussing skirt length. Your hairless arms will fit right in.
End note: Want proof? Point 14 on the list says change the articles so a 51% vote is all that is required to sell the company. Follow the links in point 9 about vesting and realize that this change in the articles is designed to let your new investors sell your company right out from under you, without your consent. Ignore the recursive and subjective logic about why all of this makes sense (because it is full of holes you can drain cottage cheese with), just look at the math:
Assumed pre-money valuation: doesn't matter
Assumed angel financing: doesn't matter
Your prior friends and family round: doesn't matter
Your share post financing based on "optimum" vesting: 0%
Your share after one year based on "optimum" vesting: 16.67%
So, who considers this "optimum?" As an entrepreneur, I sure wouldn't.
@basil: feel free to correct my logic here
I am all for stupid startups getting a bullet so that their founders can go get junior jobs maintaining legacy accounting systems at the GVRD, but understand that these angels aren't guardian angels. They ain't working for you.
