I have talked with several student and alumni founders over the past few weeks about pre-incorporation issues. I am writing this post to hopefully capture some of the key issues to consider. The order here is not particularly important. Please note that I am not addressing the juicy business issues like is there a market, do customers care, is there a good product/market fit, etc. I am rather addressing the boring, but oh so critical few things that you best consider at time zero.
1. Is your business idea legal? Ok, this sounds pretty basic, but I have been hit with questions from more than one team that involve business ideas that are not legal. I try very hard not to give a definite answer on this, but rather say “have you talked with a lawyer about this?”. For example, if you want to sell craft beer on line in all 50 states via the internet, make sure that it is legal in all 50 states. That can be a HUGE task when all 50 states are in question (as they all have different sets of laws and regulations).
2. Is your business subject to regulation? Again, pretty basic, but not always obvious. Regulatory issues require research and understanding. Just look at all the issues Uber and Lyft are facing with taxi regulations. Look at the issues facing marijuana growers in states where that is legal. You must know the regulatory framework, and then decide how to operate within it or how to change it.
3. Is your product subject to FDA approval? If yes, you better have someone on your team who understands the approval process (or have access to a good consultant who does).
4. Do you have any clue how your business will make money? Perhaps you do – GREAT. Perhaps you are just building a user base and worrying about monetization later – NOT AS GREAT in my view. Regardless, I hope you know what the revenue plan is.
5. Who are your co-founders? This is a tough one. I talk with many students who need a co-founder with a certain skill set. Tough to find a trustworthy co-founder. That is the stark reality. This requires a real search, and perhaps a soul search.
6. What is the equity split? This is critical to nail down as soon as you have a team of co-founders. There is no magic formula for the split. And I have already written about the importance of pre-incorporation agreements. See that post here. But i would like to share a simple pre-incorporation agreement. I did not write this form, but it covers the key items: equity split, roles and vesting of shares. I am a fan of pre-incorporation agreements as they level set all the founders and get them discussing the tough questions immediately.
Add more thoughts in the comments and I will edit the post to include them. Thanks!