6 Dos and Don'ts Of Launching A Startup

This post is sponsored by Pillsbury Winthrop Shaw Pittman LLP.

You dream of starting the next Apple, Google, or Twitter. And you're sure that your innovative idea will be a world-changing venture.

But then what?

If you make the right opening moves, your company has a chance. Take the wrong path, and that enterprise could be doomed.

These six startup tips and traps come from Pillsbury Winthrop Shaw Pittman LLP, a leading global law firm that focuses on the representation of entrepreneurs and their financiers, including venture capitalists and strategic investors.

Starting a company requires far more than just the information below, but bear it in mind before you take that big step.

DO decide who is the alpha dog.

Let's say you get together with three or four entrepreneurs and come up with a business concept. You'll often make the natural mistake of sharing your company's ownership and management equally. While you can all be friends, you'll still need a leader - otherwise, you'll quickly discover that you can't govern by committee.

DO lock up the family jewels.

Chances are, your device, widget, app, or big idea is at least partly made up of intellectual property. And while it's helpful to bounce ideas off different people, you'll still want to protect your IP. That most likely means you'll need to keep your idea confidential (and share it under a nondisclosure agreement only), at least until you file for a provisional patent. And of course it makes sense to talk through the costs and benefits of different approaches with your lawyer. Make sure to do it early in the life of your startup.

DO go to Delaware.

No matter where a technology startup might be located, it's great advice to form a Delaware C corporation. Delaware offers two compelling advantages for the startup entrepreneur. The first one is trust: When you tell potential investors or strategic partners that you're incorporated in Delaware, they'll probably be comforted, because they'll know the environment (and in fact will probably be organized there themselves). The second advantage is cost. Most industry standard forms are based on Delaware corporation law. When you're working with law firms or with investors, everyone will be on the same page.

DON'T tattoo your company.

Any obligation that you can't get rid of easily is a tattoo. You should view everything your enterprise does through the view of a potential acquirer. Entering into a three- or four-year contract with a vendor might not seem like a big deal to you, but it could end up being a deal breaker for your startup's would-be buyer. Generally, buyers don't want to be tied into long-term relationships that aren't of their own making. In other words, not everyone is going to be into your tattoos.

DON'T mess up your table.

Company founders need to view their capitalization table as a precious asset. Often in the developmental phase when founders don't have any money and need to outsource IP development, they'll ask a developer for a discount in exchange for a percentage of the new company. That's a dangerous (and ultimately expensive) thing to do because, down the line, having that minority shareholder can become a serious impediment to a subsequent financing or acquisition.

A founder's willingness to "give it away" can also signal a lack of confidence in the startup's prospects - how else to explain the tolerance for dilution? Bottom line: Anytime you're awarding equity to a third-party service provider, it should be done on an objective basis where the provider has to earn it over time.

DON'T talk to strangers.

If you don't already have a track record of successfully launching a business, raising funding from sophisticated investors will be challenging. And raising it from the unsophisticated is a big mistake. An experienced investor - or the founder's friends and family - will probably understand if the company has to change direction or simply doesn't make it. That chiropractor you met on the airplane probably won't.

Contact Pillsbury Winthrop Shaw Pittman LLP for more information.

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