See the following links for our previous discussions on “You Want to Start a New Business:”
You are an entrepreneur, not an employee. An entrepreneur is an individual who drives her own vision and tries to materialize the vision in a profitable business venture. Yes, your vision will evolve over time, like the innumerable updates you get every day for your computer programs or a computer app. You do need advice. You need to bounce your ideas off someone, and you will most certainly need help from employees and consultants regarding financing, capital, accounting and legal issues.
You have your vision, you have your business idea, you’ve identified your company’s name and brand name, and you have undertaken internet searches for possible competitors, and you have prepared a business plan. You are getting ready to take those cerebral concepts and turn them into a real-world business. Yes, you, as an entrepreneur, are ready to launch your business idea.
The burden is heavy; the time demands are inordinate. You are required to be a janitor, business plan writer, researcher, business manager, sales person, promoter, etc. You have a host of duties and responsibilities not yet even envisioned and which seem daunting. During the process of starting your business, at every step, you are at risk of losing Control of your idea, vision and your company. If you lose control, you are merely another employee subject to the demands and wishes of another. You will no longer be an entrepreneur. Therefore, strive in every way possible to maintain actual and effective Control.
Be as adamant as you can to keep control of your enterprise and secure and safeguard your vision and business. How do you respond and deal with these type of issues? How do you get individuals and others to participate in your enterprise, how do you get financing support without losing control?
First, you will find that you need more money to start your business than you thought. Your need for funds most certainly will outstrip your resources. You will be looking for financial help. There are financial people and investors who may support your idea and your prospective business, but you have to be cautious about those initiatives. You may have other enterprises that see your successful business niche, and they will reach out and seek to manage and control your business.
With financial investors, be careful about specific representations and statements you may make regarding the future. Be careful of giving up majority control of your business.
Second, if you require others to participate in your vision, you may not have the financial resources to pay them full compensation reflective of their skill set. You may have to offer a portion of your business and your vision to them. Start out small. Offer a five percent (5%) interest in the enterprise in the first year and maybe build-up five percent (5%) each succeeding year for every year that person is involved, up to twenty-five percent (25%). Make sure you provide for the departure of a participant, and provide a way to retrieve that ownership interest for a small consideration if the person leaves.
Third, another area where control is lost is in the creative process. If you hire a designer of your website, your logo or other intellectual property, you must have a “work for hire agreement.” In other words, the person is hired as an independent contractor, and you pay for that individual’s creation of the intellectual property for you under a “work for hire agreement.” All intellectual property must be assigned to you with all rights, title and interest.
Fourth, control is often lost when you reach out for additional funding, capital or investors. Make sure any capital contributions are reflected by a minority interest in the business or enterprise. Up to twenty-five percent (25%) could be considered for an investor under the right circumstances.
Fifth, you have to consider the possibility of one of your employees or partners setting up a competitive business. You should consider a confidentiality and non-compete agreement for any proposed employee, independent contractor or investor. Confidentiality agreements are enforced, and non-compete agreements, while disfavored by the courts, have been judiciously recognized in many states. In many states, courts will also enforce a non-compete agreement if it is reasonable in time, scope and nature.
The final area where you might lose control is in your relationship with your spouse or significant other. You should consider a buy-out mechanism in the event your marriage or relationship with your significant other deteriorates.
Resist losing control until the right time and until the time you are willing to exit your entrepreneurial activity. The classic examples of maintaining control are reflected by Mark Zuckerberg of Facebook and Bill Gates during his tenure at Microsoft. They maintained effective control of their enterprises. Because of the size of their businesses, they were able to do so by owning just a minority stake in the company, but exercising effective control over the enterprise through documents, corporate structure and the board of directors.
In choosing a business entity, you must keep in mind that you are subject to losing control at every step of the way. In the next blog I will discuss your choice of business entity.
Lat J. Celmins
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.