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How Your Business Can Survive and Dominate in the Startup Phase

Startups have long held a certain mystique in American culture, capturing the entrepreneurial drive and innovation responsible for our many economic and technological successes. Startup companies drive innovation and shake up otherwise stagnant industries. Launching a startup is a truly thrilling endeavor; as an entrepreneur, you feel driven and committed to revolutionizing your chosen industry.

Unfortunately, in the midst of all this excitement, there is the sobering understanding that a clear majority of startups eventually fail. From disagreements between founders to minimal interest from investors, emerging businesses find themselves mired in disputes and short on the cash they so desperately need to succeed.

Before you get too discouraged, remember that many startups fail because they make key mistakes in the early stages of the business lifespan. The more conscientious you are early on, the better your chances of surviving the startup phase and thriving as your company expands.

Conduct Market Research

You are thoroughly convinced that you have come up with the idea of the century. Do the facts actually justify your current confidence? Before you proceed, determine whether your business truly has what it takes to thrive through the rigors of the startup phase. Dig deep for industry statistics and consumer surveys, and seek information from the United States Census Bureau. Your findings will help substantiate the ideas underlying your business. The better you understand the complexities of your industry and niche, the better you can appeal to both investors and future customers.

Develop a Solid Business Plan

Upon completing essential market research and honing your hallmark idea, get to work on your business plan. This document should describe in detail how your company will achieve its most ambitious goals. A comprehensive document, your business plan should outline your company's intended sources of financing, budgetary constraints, projected revenue, marketing techniques, and operational objectives.

For many startups, the exclusive goal of the business plan is to attract investors. This approach may be short-sighted, however. A solid business plan serves as a valuable blueprint for your company, keeping you on track as you face unexpected challenges. The sheer act of writing this plan will force you to re-evaluate your goals and determine whether they are truly realistic. While drafting your plan, you may identify previously overlooked ideas or obstacles. Thorough planning at this early stage will help your business avoid common pitfalls during the first few years of operation.


An ideal business plan document includes a catchy elevator pitch, thorough market analysis, and actionable language throughout. Your plan should be thorough, but also concise. Establish a page limit and stick to it; this will prevent you from transforming your plan into a lengthy to-do list. Upon completion, review and edit your plan extensively. This document could be responsible for the future success of your business; you cannot afford to take a single word for granted.

Commit to Clear and Early Agreements with Co-Founders

In the early stages of building a business, your co-founders may appear to be on the same page regarding business goals and obstacles to achieving them. You are all united by a grand vision that you work incredibly hard to achieve. Eventually, however, disagreements will arise. When they do, you need to be prepared with a partnership or founder agreement. Think of this essential document as the startup version of a prenup: you do not intend to become the next Mark Zuckerberg or the Winklevoss twins (just as few couples anticipate eventual divorce), but it is best to cover your bases regardless.

Your founder or partnership agreement should have clear stipulations regarding the following:

  • What are the founders' roles and responsibilities?
  • How much in assets or cash will founders invest into the business?
  • How much time should the founders dedicate to the company? How will their time commitment be reflected by their salaries or shares?
  • Can one founder purchase a departing founder's shares in the company?
  • Will the CEO make key decisions, or will these be put up to a vote among founders?

Most importantly, founders should outline the primary goals and visions of the company. If they remain in disagreement about this crucial topic, none of the other details will matter in the end.

Find Creative Solutions to Funding Problems

Financial shortfalls constitute arguably the chief struggle of new startups. Many have great ideas and fleshed-out business plans, but insufficient capital. Courting investors is key, of course, but you may also need to seek other funding sources. Crowdfunding is an excellent option for ideas that boast mass appeal. Interested consumers will happily contribute toward your cause if they find your ideas and presentation compelling enough. Success stories include the Oculus Rift, Pebble SmartWatch, and Star Citizen.

Another resource worth checking out is business incubators. These unique companies provide valuable resources (such as office space or management consulting) that may otherwise be out of reach for cash-strapped entrepreneurs. Small Business Development Centers and other government resources can likewise provide much needed support during this critical phase.

Choose Your Company's Legal Entity Carefully

Proper legal entity designation is essential; not only will this provide valuable protection for your growing business, but it will also help you to achieve the best possible tax arrangement.

If possible, avoid general partnerships. Although tempting due to their seeming simplicity, they do not provide sufficient legal protections or tax benefits for most startups.

Legal Entity

Legal entity designation is essential; not only will this provide valuable protection for your growing business, but it will also help you to achieve the best possible tax arrangement.

If your business is backed by venture capital, consider forming a C corporation under state law (ideally, your home state or a state with favorable corporate regulations). If you expect to form a closely held corporation with fewer than 100 shareholders, an S corporation may be your best bet. Hedge funds and private equity firms sometimes favor limited partnerships, which protect those involved from personal debt liability.

No matter which legal entity you choose, it is important that you back your decision with careful research about potential legal and tax implications. Weigh the upfront cost of LLCs, corporations, and limited partnerships against potential long-term benefits, including tax savings, liability protection, and enhanced ability to raise significant capital. Yes, it may be possible to convert to an S corp or C corp later, but conversion costs could prove staggering. If your business is like most in the startup phase, your best bet is to select an entity at the outset.

Protect Your Intellectual Property

Like many startups, your business likely centers around a new and unique idea for a product or service. Seek immediate protection for new products via patents. Patents prevent others from manufacturing your product or selling any patented subject matter. The process of obtaining protection from the U.S. Patent and Trademark Office is unfortunately lengthy and complicated, but the sooner you get started, the better. As your business grows, you will enjoy the relief of knowing that the secret sauce underlying your success is safe.

In addition to seeking patents, consider trademarking your company's name or slogan as they are critical components of your marketability as a business. Ideally, you will register your desired trademark with the U.S. Patent and Trademark Office as soon as you come up with the perfect name for your company. Realistically, limited funding may make this impossible. The sooner you get started, however, the better. Your trademark should be secured by the time you emerge from the startup phase.

Aim to launch the trademark process as soon as you begin extensive branding research or full-blown marketing efforts. Be sure to conduct a trademark clearance search. This will ensure that your desired trademark is available for use in the United States. As you leave the startup phase, the last thing you need is to discover that you have inadvertently infringed upon somebody else's trademark.

Hire the Best Employees You Can Afford, But Be Willing to Let Them Go

Eventually, you will need to extend your company's reach past your co-founders and their close circle of cohorts and place your trust in new employees. In a cash-strapped situation, it may be tempting to hire whoever will work for the lowest salary or promise of shares. Investing in your employees is crucial, however, as these are the people responsible for bringing your vision to life. Furthermore, a solid team can make your pitch far more enticing to otherwise lukewarm investors. Be as picky in hiring as your budget and timeline allow.

Keep in mind that desirable employee qualities for an established company may not apply to your hiring circumstances as a new startup. In your situation, grit, determination, and innovative thinking are most important.

As your company expands beyond the first few employees, you may eventually have to let go of the people responsible for your current success. This is an unfortunate but necessary aspect of moving through the startup phase. Eventually, the drive and innovation that set early employees apart will give way to a need for specialization. Try to find a place for early employees, but do not be afraid to look for outside talent, when necessary. No matter who you hire, or when, establish their responsibilities right away with a detailed employment agreement.

Listen to Your Investors and Customers

At the early stages in your company's development, you need all the feedback you can get. Attracting investors in the first place can be a struggle, but once you secure their interest, think of key investors as more than a mere source of cash.

Your investors are, above all else, a valuable font of wisdom. They likely hold far more experience than you and your co-founders. They have seen repeatedly what leads to the success or downfall of a company, no matter how initially promising. Once attracted by your company's spark and momentum, they may share their ideas about the future of your business and how you can better position yourself for long-term success.

If you fail to capture a particular investor, do not be afraid to ask why. The information you glean from this conversation could be just as valuable as feedback from actual investors. Typically, investors seek startups with strong momentum, capable management, and a proper market size. Pay attention to dissatisfied investors' critiques, and make the changes necessary to secure commitment from the next prospect.

In addition to listening carefully to your investors, consider the opinions of your clients and customers. This means extensive market research not only in the beginning stages of your entrepreneurial journey, but also as you expand on and solidify your company's mission. Identify your target demographic (which may slowly evolve alongside your business) and determine what this person or group of people wants most from your company and industry at large. Valuable information can be obtained through surveys of current or prospective customers or on social media. Pay attention to customer or client comments and respond respectfully.

How LegalNature Can Help You with Your Legal Form Needs

Whether you intend to draft a partnership agreement, obtain a patent, or select a tax structure, you need the right legal forms and clear explanations for how to complete them. Click here to start your business now.

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