Some of today’s most impressive tech companies have sprung from a university or college student.  Google and Yahoo! — each developed by PhD students at Stanford.  Oh, don’t forget about HP, Sun, and Cisco too, each proud Stanford University projects.  DEC was started at MIT’s Lincoln Labs. And Akamai, another proud MIT product.  There are countless others out there…

The National Council of Entrepreneurial Tech Transfer posts the following evidence that startups that are created using IP or smarts from universities and colleges are more successful than others:

• 20 year returns for Early/Seed VCs was 20.6%, compared to 13.8% for Later Stage VCs and 8.2% for the S&P 500
• 8 percent of all university startups go public, in comparison to a “going public rate” of only 0.07 percent for other U.S. enterprises – a 114x difference
• over 400 university startups are created nationally each year based on federally funded R&D, which included Google, Netscape, Genentech, Lycos, Sun Microsystems, Silicon Graphics, and Cisco Systems
• 68% of university startups created between 1980 to 2000 remained in business in 2001, while regular startups experienced a 90% failure rate during that same time period

And, to top that off, more colleges and universities are offering entrepreneurial courses or business plan competitions where the goal is to create a winning business plan (that can be turned into a business).

So it isn’t all that surprising that many of these undergraduates, MBAs or PhDs ultimately decide to give this whole “startup-life” a try.

What should you consider before turning a school project business plan into a real business?

Fortunately, I’ve had the opportunity to work with several actual or aspiring entrepreneurs through the University of Washington Business Plan Competition put on my the excellent Center for Innovation and Entrepreneurship.   As a result of this experience and others, I’ve worked with several groups that involve a number of students or former students who have a business plan or project, and decide to turn it into a business.

The biggest issue for these teams that want to become a business: Keeping Momentum.

The biggest challenge for these teams: Weeding out the “hangers-on”.

So, here are a couple thoughts and pieces of advise for a student looking to turn his or her business plan or class project into a business:

(1) Get a friend who is a lawyer. At this stage of things, you will need some legal help and guidance. But you don’t really need a lawyer on retainer yet. So find someone to help you out pre-business. Agree to buy them coffee or take them out for a beer and get their insights. While you are sorting this all out, find someone who you can talk to over coffee about the pre-business stage.

Thankfully, in a city like Seattle or Boston or Silicon Valley, we’ve got plenty of lawyers with start-up expertise. So find someone and get them to be your trusted advisor.  Even just with some real basic questions at this early stage, having an advisor with some legal experience can be crucial.  Then, when it comes time to hire a lawyer, you’ll already have someone to turn to.

(2) Take some legal formalities. The thought of incorporating the business, signing employment agreements, etc. will make people see this is serious.  If you are serious and want to get your business going, then incorporate or get the LLC paperwork done or get stock issued to the founders (but be sure to read #4 before you issue any stock).  It’ll cost you a few bucks of legal time (or perhaps not, if you just incorporate and that’s it), but it gets people to realize that the business is official and no longer just a class project.

(3) Ask for a financial commitment. The average start-up takes about $75K of founder money to get it started. That means not just sweat equity, but real cash. If you want to have three or four people start a business, let them know that to do so (or even to find out if this is a realistic option) everyone needs to commit to raising or contributing $10,000. Nothing says commitment like being on the hook for cash.

(4) Put vesting on all founders stock — including a 1 year cliff. I have seen this over and over — a start-up team forms and are like a bunch of newlyweds.  It is tough for the business plan or class teams as they already feel like they’ve gone to war together — a few weeks of late nights for that ‘A’ or to make it to the finals of the business plan competition. However, as most tried-and-true entrepreneurs will tell you — writing the business plan is just the first in a long and drawn out series of battles.  Don’t peak too soon.

The problem for this new founders team is that they enter this “partnership” with one another with rose colored glasses, not realizing that the odds of the team sticking together is pretty low.  So the team issues their stock and decides not to put any restrictions on it (vesting — where if you leave before a period of time, the company gets the stock back).  I can’t stress this enough: Don’t do it!

The odds just aren’t in your favor.  So agree on vesting for the good of the business. Get everyone to agree to a 3-4 year vesting term where nothing vests for a one year period.  If someone commits for a year, they get 25% of their stock and the rest on a monthly basis. If they leave after a month or two, or just don’t work out, they get nothing.  Then you effectively solve for the hangers-on issue.  If someone contributes for a year, they’ve earned a portion of the company.  If not, no harm-no foul.

(5) Ask “Hesitant” Team Members to Be Advisors First. If you aren’t sure of a team member’s commitment levels, have them join the business as an advisor.  This is almost like a glorified summer internship, where you can feel them out on a very low-cost basis, and see how ‘into-it’ they are.  Give them 0.5% of the stock (which can be given to the Advisor in exchange for any IP they’ve contributed). Then, if they are really committed, you can give them additional equity and get them full-time.

(6) Get all team members to sign a Release/Acknowledgment if they don’t join the business (and perhaps, even if they do). If you decide to go forward with the business, hire a lawyer and make sure they draft a release for those classmates of your team that didn’t join.  And, for good measure, ask that the release/acknowledgement language be given to all founders if there were any oral promises or other types of ownership arrangements made.  That is the only way to protect yourself fully — and consider #5 about having them come on as advisors.

Conclusion

Remember, inevitably a start-up team will lose founders. And, if a business is started from a business plan you prepare in a class or for a business plan competition, the odds are likely to be even higher. Students have varied levels of commitment and starting a business with a mountain of student loan debt or a wealth of options ahead might not be the best approach.

So remember that you may lose team members and may be best off trimming people early rather than having hangers-on that only minimally contributed to your class project or business plan.  It doesn’t mean you are a failure to let these people go or have them leave — it is just part of the deal.

See who rises to the top and let the rest go. But don’t give any equity to anyone unless you have vesting — that way, if someone walks after a couple months, no harm, no foul.