Modules 1-5 has taken us through all the steps from picking a problem to solve all the way to coming up with a new business line that generates revenue. However, there is more to building a company than just the business.
In this module, we will cover three key topics that will wrap up your knowledge about building a new venture from scratch.
- Legal, accounting and marketing presence: All about incorporation, legal considerations, bank accounts, tax implications and a basic marketing presence
- Team, talent and culture: Hiring and nurturing your team, developing an intentional company culture, designing your organization to grow with you
- Funding your venture: Exploring multiple options to fund your for-profit or not-for-profit venture
Read on to learn more.
You’ve got business idea you’ve validated, potential customers are eager to try your product/service, and your team are excited to keep building momentum. How do you legally protect yourself, your team, and your business? Read through this section to learn all the legal considerations you should be thinking of to avoid any legal troubles down the road.
As a new venture team you can make tremendous progress without forming a legal entity. You can start doing business immediately as a sole proprietorship - that is how a lot of small business owners (such as general contractors, electricians, etc) do business. This preserves flexibility. However, at some point, you will know for sure that you are building the business for the next few years. At that point it will make sense to file to become a legal entity. The primary driver is that the legal entity protects the personal assets of the cofounders - keeping church and state separate.
There are several common legal entities you can choose from:
- A Limited Liability Company (LLC)
- An S-Corporation (S-Corp)
- A C-Corporation (C-Corp)
- A B-Corporation (B-Corp)
Goodwin Procter has a great article explaining the basics of company formation. Read on to learn more.
Also check out the Company Formation section of our searchable knowledgebase.
One very important consideration when incorporating your entity is to have a thoughtful process to determine founder equity split. Make sure to check out the Founder Dilemmas section of this page for more information.
While there are a variety of legal entities you can choose from, if you are building a growth style startup and have the intention of raising money from institutional investors (i.e. venture capital firms) at some point, you will almost always be best served by forming a C-Corp in Delaware.
Upcounsel has a good article on why Delaware is the place to go for classic growth-style startups. Read on to learn more.
If you are building a classic growth-style startup and intend to raise money from institutional investors (i.e. VC's) you will need to understand how stock and stock options work. Some key concepts you need to learn include:
- The difference between stock and stock options
- The idea of "vesting" (i.e. granting stock over a period of typically 4 years, with a 1 year "cliff" to incentivize people to stay long enough to help build the venture)
- The idea of the "cap table" (capitalization table) which outlines who owns what part of your company after you raise money
Check out the section of our searchable knowledgebase on stock and stock options.
Also check out the book "Venture Deals: Be Smarter than your Lawyer and Venture Capitalist" by Brad Feld.
When people hear "IP" they often think of just patents that cover technologies or inventions. That is actually only one of several types of IP that a new venture may own and want to protect. Here is a short list of common intellectual properties that you may want to consider.
- Utility patents
- Proprietary technologies
This is a big topic and you really should speak to an intellectual property expert to learn more. To get a lay of the land before you do so, check out the IP section of our searchable knowledgebase.
Managing money for your new venture
How do you keep track of your new venture’s finances? Make sure you understand important financial terms, learn how to budget, track expenses and revenue efficiently. That said: at the end of the day, cash is oxygen. Remember: The first, second and third job of the CEO is to not run out of money.
Entrepreneurs who are building new ventures (either standalone or in an existing company) need to have a basic level of financial literacy where it comes to managing money for the new venture. At the most basic level you need to understand:
- Revenue: How do you model your revenue streams over a period of time (e.g. 1 month, 1 year, 5 years)? This is the money you make.
- Expenses: What are the top 3-5 types of expenses for your venture over the same period of time? This is the money you spend.
With revenue and expenses, you basically can use arithmetics to get a rough sense of how much money you are making / losing by subtracting expenses from revenue. A common mistake for first time entrepreneurs is to spend too much time on the expenses and not enough time thinking about how to generate revenue in the 3-5 year timeframe. It is very much worth the investment to think about possible ways to generate revenue early on, because it affects how you will build out your business Check out our Module 5 for pro tips on revenue models.
Now, to truly understand how to operate your business you will need a little bit more than arithmetic - there are a lot of basic concepts that can help you become effective. Read this Venture Beat article on financial terms to learn more. Also check out the financial scoreboard section of our searchable knowledgebase.
Once you get the basic terms down, you need to actually understand how to model how much money you will make (revenue) and how much money you will spend (expenses).
When you plan out your business, it is generally a good idea to think directionally about how your revenue and expenses might look in the 3-5 year time frame - and put deep thought into the specific details of how your next 3-6 months might look like. The long term thinking helps you structurally consider your assumptions and gives you the ability to do scenario planning that can help you make strategic decisions about go to market strategy. The short term thinking is a roadmap that guides what you do right now.
The further out the timeline the less accurate the plan is, but the value is to think about your assumptions and your parameters which will help you get a sense of the nature of the business you are building. We always recommend you to take a bottom up approach to modeling revenue and expenses (e.g. if you are selling lettuce to grocery stores, rather than saying "we will capture 1% of the lettuce market" - which is a top down approach, we recommend you think about "we will reach x number of small neighborhood grocery stores and farm stands in Y1 via such-and-such mechanism and we will also expect to ship y boxes of lettuce directly to customers" - which is a bottom up approach). The bottom up approach forces you to be realistic about the amount of business each of your channels can support and also gives you a roadmap to start building out these channels.
We already covered revenue models in Module 5. As for operating expenses, the most common expense categories for a new venture are: Headcount; prototyping cost (if hardware/consumer packaged goods); server costs (if software); IP/legal (if you have any intellectual property to cover); marketing & sales (e.g. Google Ad budget); general & administrative (e.g. the computers you will buy for your staff, the coffee you drink, your business software subscriptions).
There are three financial statements that businesses use to keep track of their finances:
- Profit and loss statement ("P&L") or income statement: This is the most common format entrepreneurs need to learn
- Cash flow statement: This is the most critical format to help you avoid running out of money, because cash is oxygen.
- Balance sheet: This is a statement that lists all the assets that your business owns (like equipment, buildings, cars... and also the cash in your bank, etc) this is of less relative interest as you have very little assets to start with.
Of the three, the P&L is the financial statement that is the most important in planning out your business, especially if you plan on raising money. The Blueprint, a Motley Fool service, has a great article that demystifies how to build your first P&L.
Bare bones marketing presence
To be successful, you must break through everyone else’s marketing noise and capture your prospects and potential customers’ undivided attention. Here you will learn the tips and tricks from naming your startup, develop smart branding for your startup, and techniques to get your business noticed.
Word choices matter and the name of your venture matters a lot - because you will be spending time and energy building brand awareness for your venture. Picking the right name can be stressful. That said, some entrepreneurs place a little too much importance in coming up with the first name. Most businesses change their name and/or logo at least once along the way. You are not stuck with the very first name you choose for your venture - so you should spend some energy naming your venture - but don't overinvest in this activity as things may change as you learn more about your market and customers.
To come up with a name most new ventures start with a brainstorming process where they come up with options, from descriptive words (e.g. The Predictive Index) to made-up sounds that have a vague connotation to the business you intend to build (like Hubspot). For new ventures we recommend you take artistic freedom in the name in order not to box you into the approach you think you are going to take or the product/service you are going to provide. We also recommend you spend at least 1-2 hours googling and searching on the US Patent and Trademark office's website to make sure the name you want to use is not already taken and/or trademarked by someone else who is running a business that can be confused with yours.
Inc magazine has a good article that outlines the ins and outs of naming your venture. Read on to learn more.
Once you have a name, the next step is to design a logo. This again is something people often overinvest in - so you should start with making peace with the idea that you will redesign the logo at least once in the lifetime of your venture.
In 2021 the common approach is to have a "glyph" (the art part of the logo) that is simple and eyecatching, that looks good both as a tiny "favicon" (the tiny logo you see when you open multiple tabs in your browser) and as a large printed icon on a 6-foot hanging poster. The second part of the logo is the "word mark" which states your company name. You will likely have three treatments: A horizontal one (glyph on the left, word mark on the right), a vertical one (glyph on top, wordmark at the bottom) and a simplified social icon for social media.
If you or someone on your team has great design skills, you can definitely do this yourself. Otherwise, there are lots of free and cost effective logo maker services that can help you come up with a graphic design for your logo from service providers like Wix, Canva, 99 design and more.
Read 99 design's article on how to design a logo.
If you are a non-technical founder, you may find the idea of building a website daunting and may feel that you need to hire an engineer to build a custom site for you. This is almost never the best, fastest or cheapest first step. Unless your web app is actually the product or service you deliver, a lot of times all you really need is a simple landing page or a 3-5 page brand site that you can easily create on a WYSIWYG platform such as Wix, Weebly, Squarespace and the like. These services allow you to build a beautiful site from templates and offer stock photography to help you get started. They will charge a fee if you want your site to use your own domain name (which you can get from a variety of domain services.) This is typically not a long term solution and you will need to upgrade later (see next paragraph). But for the price these services charge, it gets you past not having a website and frees your time to work on your business. Every minute saved is gold.
If you have technical skills, you may want to invest in a more full featured platform that affords you the features and flexibility for the long term, you will want to get your own domain, website hosting and choose a content management system (CMS) that allows you to set up the site and have multiple people be able to modify content without worrying about the technology behind the website. For example, the site you are on right now is built on WordPress. Read Neil Patel's article on how to build a website this way.
Team and Talent
The investors’ adage of: “We invest in teams, not ideas” is true. A high-performing, effective startup team is worth its weight in gold. But how do you build and develop a high-performance, effective startup team? Learn from Tufts’ collection of valuable insights and knowledge on how to build, compensate, and streamline your team to boost productivity and value of your startup.
Hiring for a new venture is very different from hiring for, say, Google. You do not have the cash compensation to offer. How might you attract the best talent? The answer is very simple: You attract people who resonate with your mission and want to achieve the same goals you want to achieve, so the compensation package alone is not the reason they are coming to work for you. You can also offer learning opportunities and flexibilities big companies cannot offer. Lastly you can offer equity for upside.
Angel List has a great article about how to hire your first 10 employees. Read more here.
Also read Professor Elaine Chen's article on the E.I.E.I.O. Hiring Test.
The first step in recruiting great employees is to have a good job description to describe the role you are trying to fill and what qualities and qualifications you are looking for.
Do note that for a new venture, the roles and responsibilities may not always map to traditional roles in larger organizations - you can certainly start with a template for a role (e.g. Technical Lead, Product Manager) but make sure you think deeply about what else you need the person to do and make sure those are represented.
Indeed has a great article on how to write job descriptions.
Simon Sinek said: "A team is not a group of people who work together. A team is a group of people who trust each other."
A high performance team with people who trust each other can be cultivated intentionally. Forbes has a good article on 5 ways to build high performing teams. Read more here.
Also read Professor Linda Hill's classic case on Harvard Business Review titled "A note on team process".
In the focus to achieve their vision, it is easy for founders of new ventures to lose sight of their own need for personal and professional growth. That does not mean they need this growth any less than if they were working in an existing organization - in fact, they need to grow even faster and in more areas.
Founders do not have the structured mentorship that a traditional corporate job offers so they have to create their own support system to foster this growth. Forbes has a great article that outlines how to do this well. Read more here.
For a first time founder, there can be a lot of firsts- first hire, first customer ship... and sometimes, first fire. Firing someone is difficult no matter what and firing someone for the first time is very stressful. Professor Elaine Chen of Tufts University has an article on things to think about when firing someone. Read more here.
Cultivating an intentional culture
Company culture can make or break a business. As you morph from idea stage to co-founding team to hiring your first few employees and beyond, it is beyond important to create an intentional healthy company culture. Learn the important considerations you should know to build a sustainable and long-lasting compay.
Culture is something that first time founders often do not pay enough attention about - but they should. A company's culture defines how team members relate and how people get things done. It can guide decision making at all levels.
It behooves founders to define their company's culture and values, and write it down for current and future employees so that leaders and team members can all work together to cultivate and nurture an intentional culture.
Read Forbes Magazine's 2020 article on startup culture here.
Hubspot has one of the most well known culture codes in the Boston startup ecosystem. While there are detractors, Hubspot was voted #4 Best Places to work in 2021 by the Glassdoor's Employee Choice Awards.
Zappos, the company known for its customer obsession, also has a well known Culture Book that you can download here.
These two companies have extensive culture codes that were developed over years of iteration. You don't need to have such a comprehensive culture code on Day 1. Just start by articulating your company's why and your values and build it up from there - any definition of your culture will help.
Starting a new venture is hard. Having cofounders can make a huge difference. Cofounders serve as your thought partners, cheerleaders and you can also divide and conquer and get more done in the same amount of time. Forming a winning cofounding team takes careful consideration. Alignment in values and goals are key, as are your ability to build trust and confidence and keep communications open. This section covers topics that can help you avoid common cofounder pitfalls.
Hubspot has a great article on the roles and responsibilities of a founder (which is both a superset and a subset of a CEO in an existing enterprise). Read more here.
Discussing equity amongst cofounders is a difficult conversation because it is often a proxy for a conversation about economics and control. Noam Wasserman's excellent book "Founder Dilemmas" outlines what cofounders should think about and Chapter 6 specifically covers the topic of founder equity split and is a great read.
There are many more resources to help you think about founder equity split including this excellent Y Combinator article.
Also check out our Knowledgebase article on Founder Decisions.
While cofounding a company can be exhilarating, sometimes things don't work out between cofounders. The most difficult conversation a cofounder may face is to discuss how you part ways with your cofounder.
Inc. has an article that can help you think about this difficult conversation. Check it out.
Also check out the book "Difficult Conversations" - this is a difficult read but is an invaluable guide to navigating tough discussions.
Equity-free sources of cash
Contrary to common misconception, most new ventures don’t start by raising capital from venture capitalists or VCs (in which they receive an investment in retrun for giving away part of their company). Not all businesses go that way and for businesses that do, they usually need a few years to build traction before they become attractive to VCs. In this section, we will discuss equity free sources of cash that will sustain a new venture in the early days.
The best source of cash for an early stage venture is revenue from customers. Revenue serves two purposes: First, it brings in cash to help float the enterprise; but second and more importantly, it is an important validation point that you are able to attract the attention of paying customers who will vote for you by opening their wallet.
Sometimes new ventures need a bit more incubation before they are ready to develop revenue streams from paying customers. For student entrepreneurs, university level competitions and prizes can be a good fit.
For student entrepreneurs in the greater Boston area, check out the Boston Innovation Guide for student ecosystem players who offer competitions and prizes.
Tufts students can explore both the competitions and prizes offered by the Derby Entrepreneurship Center as well as prizes offered by other schools and colleges, such as the Fletcher School's D-Prize. or the Friedman School's Food and Nutrition Innovation Institute Prize.
For tough tech ventures that need help hardening their technology before developing products and services, the US Small Business Administration offers two options: SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) grants. Check out our Knowledgebase section on these and other government grants.
For entrepreneurs starting non-profit ventures, VC investments are not appropriate. Instead, the most common sources of capital are philanthropic gifts and foundation grants. The latter can be a substantive source of cash and it is worth exploring which foundations support causes that resonate with your new venture.
For example, the Cummings Foundation distributes $25 Million per year to local non-profits serving the community in Massachusetts, largely in the area of food insecurity and mental health. VentureWell is another source of grants targeting inventors and innovators.
Traditional VC money
For growth-style businesses, a very good reason to raise VC money is to receive an injection of capital that will allow them to build traction quickly in a fast-moving and highly competitive market. In this section we will de-mystify how VCs work and provide first time founders with a roadmap to navigating this world.
Read this excellent article from CB Insights that explains how VCs work.
Read our Knowledgebase section on VC 101.
The first check that a growth-style startup will receive is typically part of an angel or seed stage investment. This is frequently set up as a convertible note or a SAFE note instead of an "equity round".
Read our Knowledgebase section on Convertible notes versus SAFE notes to understand the in's and out's of structuring an angel or seed stage round.
For ventures that are ready to scale, "lettered rounds", "priced equity rounds" or equity rounds can be the next step. Y Combinator has a great article that outlines the differences between a SAFE and a priced equity round.
When you are raising any type of round that eventually leads to an equity round, you will need to understand the "term sheet". This is the document that outlines what your investors are putting in and what the expectations are for how much of your company they will own, and in case of a "liquidation event" (i.e. IPO, acquisition, etc), how the money gets distributed amongst the investors and the founders and employees.
The best resource to help you understand the in's and out's of term sheets is Brad Feld's book "Venture Deals: Be Smarter than your Lawyer and Venture Capitalist".