Companies built on solid business foundations aren’t guaranteed success, but they do have a better chance of it. Let’s consider three pillars that make any company’s foundation for success that much stronger:
Financing: The most important pillar of success has to be financing, of course. Subsequent installments of this series will explore this pillar in more detail and show how financing can be in the form of debt or equity. Also, it may require giving away only a small percentage of the company or more than you would like, depending on your approach and your success. And it will depend a lot on how you match investors and investment instruments with specific kinds of ventures.
Your team: The people who are part of your organization are a fundamental pillar to any success your organization will achieve. And though many organizations might extol the exceptional value of their specific teams, it’s not always easy to select the right people for the right situation, no matter the talent pool. And how do you incentivize these employees, and what share of your company is required to lure the best players for your specific business situation?
Your company’s legal outline: This foundational pillar to your company’s success might not get the same attention as financing and staffing, but its importance can’t be trivialized. And since your legal outline begins on Day 1, let’s look at this pillar in more detail first.
After all, this is the pillar that lays a foundation of predictability. When done right, it can produce a culture of transparency and trust that will minimize future surprises, disappointments and ill will between founders, investors, team members, and even vendors and customers.
When you create your company, you have choices that can carry outcomes far into the future, and it’s important to understand that your entity type is dependent on what you are doing and where you are doing it and what your goals are. You can organize your business creation as a sole proprietorship, an LLC, a general or limited partnership, a C- or S-Corp or even a less-frequently used entity, such as a B-Corp or a trust.
It can be a dizzying array of decisions to make before you launch your organization. My advice is to consult with other business people in your industry and its related fields. Talk to friends that are entrepreneurs, and look online for examples and definitions of entity types to be better educated. You can even bounce your ideas off people that you think resemble the kinds of investors that you would like to eventually attract. Ask about their experiences with the entity they chose, and ask what they would do differently if they were starting over.
Then, armed with some understanding of your own, talk to lawyers and CPAs.
In all of this, it’s important to remember that you are the founder, so don’t accept that you can just trust someone else’s opinion without you feeling like it’s the right thing for your company. For example, if something is so complicated that even you can’t figure it out, how are you going to convince investors to come along for the ride? Invest the time to know why you are choosing this entity type, then go forward with confidence.
If you only remember one thing from this series of entrepreneurship tips, let it be the concept of predictability. And a predictable legal outline means having good legal agreements among founders and investors and teammates. That means any multi-owner entity should have a shareholder’s agreement or operating agreement, as applicable.
And good business agreements also should lay out, in the beginning:
- Ownership percentages
- Rights and limitations of owners
- Management obligations
- Rights to buy and sell your interest
- Procedures for taking on new owners/investors
- Steps for winding down the business
Organizational documents can (and dare I say should) address how the company and its owners handle life’s changes—new jobs, changes in owner interest and company mission, disability, death, and bad conduct. Risk of major change may seem unlikely when everyone is on board and excited about the business early, but things inevitably change, as even our current COVID-19 pandemic can attest.
Good organizational documents can clarify matters for not only you and your partners but also your heirs, accountants and courts that interpret rights and responsibilities.
And good organizational documents can help head off litigation amongst owners and also with third parties by establishing clear rights of ownership, lines of authority, and dispute resolution procedures.
Organizational documents should be adaptable to meet the changing needs of the business, too.
Predictability means that, if you know what to expect from the business, from your partners and your colleagues, you’ll have a lot less stress in your life, even in these current days of business uncertainty.
And the only way to best achieve predictability is through your organization’s legal outline, one of the three pillars of success your company needs.