Building Your Own Start-up Technology Company, Part 2
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In: Columns > Innovating the Web Experience
Published on April 10, 2006
The second part of this series (see part 1, Planning to Make the Leap) will cover some of the less exciting—but extremely important—business details that go into starting a company. Much of this will be the farthest from your personal experience and comfort level, so—just like in high school calculus—this is the time to pay attention!
Four More Steps
#6 The legal stuff
It is going to cost you money to incorporate. Even if you do it yourself, it is going to cost hundreds of dollars. The costs include:
- Incorporation fees payable to each state you are doing business in
- City licensing fees, typically under $50 if you only have a couple of people
- Filing fees for getting a federal employee identification number (EIN)
- Certificate of Good Standing, which is necessary to incorporate your business in states outside of the one your formed in
Most of these fees vary by state. The reason so many companies incorporate in the state of Delaware is not because it’s a great place to live—it’s because it’s the cheapest and easiest state to incorporate in and operate from. However, I would only recommend incorporating in Delaware if you are starting a products company, and/or you hope to eventually get bought or go public. In most cases, it is more straightforward to just incorporate in your own state.
One easy piece of advice I can give you is about what type of company you want to be. Unless you plan to go public at some point—that is, sell common shares of your company on a recognized open market, like Google did last year—you should incorporate as a limited liability company (LLC). It is cheaper and easier for both the company and its principals to do so. Unless you think you might go public, or if you just can’t imagine your company without the magical “Inc.” on the end, make it an LLC. You’ll thank me later.
You’ll also need to appoint a registered agent, an entity that any legal requests or correspondence will be sent to. This can be a member of your management team or an attorney. If your team has someone who is comfortable with reviewing legal documents, or if you have a friend or family member who is also qualified, it is by far cheapest to just do this yourself. If not, don’t skimp on the legal protection of your company—retain an attorney. For example, even though I spent over a year while in college working as a legal assistant and have a lot of business experience dealing with the legal side, we still have an attorney. We don’t use him much, but we have him as an extra layer of security, and a quick resource for assistance.
Getting an attorney to help you will cost more, but it will also give you access to someone who is knowledgeable about all of the different paperwork and requirements necessary to be compliant. Perhaps most importantly, an attorney can help you create Articles of Incorporation, which formalize the legal structure for your business today and set a framework for it to grow and change over time. An experienced attorney does more than just provide legalese, and will help you envision where your company is going in a practical and realistic way. They can also quickly provide you with templates and short forms for essential business documents such as:
- Client contracts
- Consultant contracts
- Non-disclosure agreements
- Non-compete agreements
- Patent forms and filings
While you can get some of these things from books or software, ultimately the advice of a person who is local to your area and knowledgeable about the law and small businesses like yours can add tremendous value beyond just provision of generic forms. Expect to pay a retainer—prepayment for future services, the way most attorneys do business—between $1,500 and $5,000.
#7 The financial stuff
Most design professionals have not cultivated financial administration and management skills, since they don’t engender much interest and excitement. But managing the cash going in and out, keeping good books, and planning ahead are the foundation of all successful businesses. You need to take it seriously and pay close attention to these issues right from the start.
The first thing is handling the money that comes in from clients and goes out for the various costs that your company incurs. The same day your incorporation is complete and you have the necessary identification, open a checking account at the bank. The requirements are different based on your state and type of company, so call the bank you intend to use for specifics. I recommend using a national bank if possible, so that if you move to another state or region, your bank moves with you. For the sake of organization, every dollar that comes into or goes out of the company should run through this checking account. This will give you an easy-to-follow money trail, even if you neglect or make mistakes with your financial management.
The survival of your business depends on getting paid, and the reputation of your business, to some degree, will be built on timely payments. In order to get paid, you need to create and provide invoices that detail:
- The date
- Your contact/payment information
- How much you are owed/were paid
- What products or services you provided
- Different methods of payment people can choose
- When the payment is due
- The penalty for late payment
- Any additional notes, comments, or annotation related to the products/services or payment
You can probably handle this on your own, at least in the beginning. Invoices are easy enough to create; just look at how some other people do them and create a version that works for you. Most likely, you will not have too many invoices to send out in the early months. Of course, if you just don’t want to do this work or there is too much for you to do, hiring an assistant should only cost you $10-$20 an hour.
Paying for contractors and supplies is pretty simple—it’s just a matter of sending them a check (many bank Web sites now allow you to do this online, and will even mail the check for you) and then keeping careful track of the date, who was paid, the amount, and the reason for payment. You can either do this tracking in a spreadsheet or in accounting software.
I recommend investing in Intuit’s QuickBooks. You’ll want to get some up-front training in using it though—like so many other things, QuickBooks is remarkably easy to use once you’ve figured it out. If you don’t take the time to learn how to use it properly, it’s easy to make a mistake that upsets the entire apple cart of your financial organization. In fact, if you don’t like or aren’t good at numbers, this is a good reason to invest in a part-time bookkeeper (about $25 per hour for someone competent) or even pursue a relationship with an actual accountant—you’ll almost certainly want one to do your end-of-the-year tax filings, anyway.
You will initially want to choose an accountant who specializes in small businesses and is experienced filing in your state. Many of these accountants also offer small business services, and can serve as your accounting assistant to give you periodic or even day-to-day help. Our accountant’s wife provides ongoing assistant services to his clients. We don’t use the service but its nice to have available and something like this might be a big help in getting you going.
The final—and most complicated—financial issue has to do with payroll. If you have full-time, salaried employees, it opens up a whole new layer of complications. There are additional taxes and payments and insurance that you’ll need if you have people on payroll. Either your attorney or accountant can advise you on this, but you will need outside support to handle your payroll. When you add payroll, it becomes essentially impossible to manage your company’s finances yourself.
Speaking of insurance, one of the scariest parts of going out on your own is figuring out your insurance. After all, we know how important it is to have health insurance, and hear stories about how expensive it is. What will this mean to your company?
Believe it or not, I went without insurance for more than a year and a half when we were getting started. This was stupid to do, and I’m just lucky that nothing bad happened to bankrupt me for many years still to come. You want to make sure you have health insurance at all times, either through your spouse or partner, Cobra legacy coverage from a past employer (in the U.S.), or through your company. The good news is that it is not expensive: in California it can be as little as $175 per person with no additional charges or membership fees for solid, mainstream coverage. All things considered, that’s not too bad.
If everyone in your company already has other coverage and you don’t need it as an incentive/benefit for employees, then maybe you can wait to add it. But if any of your key employees are uninsured, just take the leap and get it sooner rather than later. The worst thing that could happen to your company or that person is for them to be uninsured and have something happen. It just isn’t worth the risk. However, especially if you have a number of employees on the insurance, consider the time it will take to:
- Do the up-front paperwork
- Integrate it into accounting and payroll
- Create policies and procedures: How long until a new employee is eligible for coverage? How much of the coverage will the company will pay?
The other type of insurance you will definitely need is general liability insurance. Any large company that you would want as a client is going to request this. We found an insurance broker who shopped for the best deal—and got us a really good one. That service cost $300. We probably could have done it for less—or free—ourselves on the Web, but in the process of working with the broker we’ve built a relationship. Whenever we need to add a new rider (insurance industry jargon for a company you are working with that needs to be covered by the policy) to our coverage, the broker does all the paperwork. When we decided to get health insurance, the broker pointed us to another agency that gave us a great deal. That up-front $300 was money well spent. In some ways we got a local insurance consultant on permanent retainer, without having to pay an hourly rate for the consultations. You can’t beat that.
Insurance is much easier to take care of than the legal and financial aspects of your business, but every bit as important.
#9 Human resources
Human resources (HR) cuts all the way across a company: policies and procedures, paperwork and information pertaining to employees, and emotional and problem-solving support when people have issues they are unable to address directly with the people involved. Many small companies do not have a dedicated HR function, and instead delegate those tasks to a clerical professional or administrative assistant, with some limited oversight. This works well for most companies, particularly those with 10 or fewer people. However, if you expect to get big quickly, you should be sensitive to the fact that HR needs will grow along with the size of your team. The process of gathering and tracking information for everyone, not to mention being the information conduit whenever people have questions, is a time-consuming process. Basic information you need to track for all employees and contractors includes but is not limited to:
- Legal name (duh!)
- Social security number (in the U.S.)
- Date of birth
- Current residence/mailing address
- Date of hire (and, if they leave, last day of employment)
- Vacation/sick/personal days used/remaining
- Salary and withholdings
- Clear accounting of optional benefits
There is a wide range of software programs out there to help mitigate these challenges. In our case, I’ve just used my experience in HR to create the information infrastructure for our company, so I don’t have a specific recommendation for you. However, a quick search on Google provides a myriad of options, with lots of different features and functionality. You can pretty easily find something that looks right for you. Or, if you’re a software company, you could always just build something yourself!
The one thing I would recommend implementing sooner rather than later is a policies and procedures manual. This document sets the legal foundation for everything that is happening inside your company. More than just providing one place for employees to find answers to things that concern them, it offers you legal protection from the unexpected. If you don’t have this document created, read, and acknowledged by your employees, interpretation is left to the courts. Policies and procedures will not only guide you to make sure you are on the right side of contentious issues, it will also keep you out of court in the first place. As an easy starting point, I again suggest buying software that helps you to create your initial manual. It should cost under $200 and make the process simple—but still time-consuming.
Whew! That takes us through the all of the incredibly dry but absolutely fundamental stuff in creating a business. The third installment will cover some of the sexier parts of starting your own company, like getting office space, hiring people, sales, and managing the company. Until then…
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Dirk Knemeyer is a Founding Principal of Involution Studios LLC, a digital innovation firm located in Silicon Valley and Boston. Dirk is responsible for managing the business and for providing design strategy, brand innovation, and training services to organizations around the world. Dirk is on the Board of Directors for the International Institute for Information Design (IIID) headquartered in Vienna, Austria, as well as the Board of Directors for the AIGA Center for Brand Experience, based in New York City. He is also a member of the Executive Council of the User Experience Network (UXnet). He has published more than 100 articles—many on the topic of design strategy—and regularly gives presentations all around the world.