Eureka! You bolt upright in bed… you’ve got it.  The perfect business idea.  Finally.  Yes.

Wasting no time, you run to your computer and start searching to see if anyone else has done it… page 1 of your search… well, looks like maybe someone else might be.  But, let’s assume they aren’t doing it well.  Page 2… oh no, three more hits.  Page 3… dang it, Microsoft has a team and Google is ready to launch next week, and looks like three new startups just got VC funding last year.

You sulk back to bed, and hope another idea will strike you…

The First Idea might not be the Best Idea Anyways

Successful entrepreneurs note that the early stages of developing their business concept are a struggle between obstinacy and flexibility. On one hand, the entrepreneur wants to stick to his or her vision in spite of the criticism and doubts. But, on the other hand, the entrepreneur recognizes the importance of adapting the initial idea as research, experience, and understanding increases.

Researchers Hills and Singh asked the entrepreneurs in their study about the change in their original business idea since its beginning. Over 50% of the entrepreneurs said that their idea is about the same, while the other half said the idea or opportunity has changed a “little” to a “great deal”.

• Idea/Opportunity has changed a great deal – 13.2%
• Idea/Opportunity has changed a little – 36.4%
• Idea/Opportunity is about the same – 50.4%

According to the results of a survey by Launch Pad, a marketing consulting company, 44% of the high technology companies they surveyed in 2003 said the company had made a significant change in their business model in the prior year – changes ranging from a new product line or target market to pricing or sales model (and that is a significant change made in just the prior year). The ultimate lesson for entrepreneurs is to recognize that there is a balance in play between obstinacy and flexibility. Recognizing when the idea, focus, model or strategy needs to be changed, in any amount, is an important skill. However, the flipside of the discussion is that an entrepreneur also must recognize when to stick to their vision even in the face of outside pressures or scrutiny.

What is the lesson here?  Find an idea that you think is good, but don’t hold out for a perfect idea — since it may well change and change dramatically in the early stages.  Ideas are just the start — you can’t build a business on just a bright idea!

Why are you waiting around for a brilliant business idea?

Don’t be discouraged if you don’t have that “big” or “perfect” idea yet.  In fact, it may be better if you don’t, as you could find out that your ‘big’ idea really wasn’t that big at all or your ‘Eureka’ moment was only half the story.  Truth is, as you can see — many businesses (nearly half in fact) undergo change from that initial idea or opportunity, and the business itself will undergo a series of changes through its lifecycle.  If you are searching for the “perfect” idea or an idea no one can find fault with before you even start the business, you’re probably going to be looking a long long time…

We’ve all heard the story about what investors look at in a business — team, technology, and market (or some derivation of that combination).  Idea seems to be missing from that list… perhaps you could say it is part of technology, but the truth is, the big ideas aren’t the key to business success.

Missing that “big” or “perfect” idea can be holding you back from starting your business.  But perhaps what you are really missing is the right team around you to refine or enhance your idea to make it a ‘big’ or ‘perfect’ idea.

If you are waiting around for that perfect business idea to strike you in the middle of the night, I hate to tell you this, but look at these success stories that refocused or retooled their business idea during the process.  I’m sure very few of us would fault the Paypal founders now for starting down one path only to shift away from cryptography to “discover” the secret that led to its $1.5 billion dollar acquisition by ebay in 2002.

Imagine this scene…

You’ve come to a fork in the road in your career.  You’ve decided that change is coming, but you aren’t sure what that change will be.  On one hand, you’ve always wanted to start your own business.  On the other, you are considering graduate school — perhaps an MBA.  The question you have is whether the two years in the MBA program (and the costs of the MBA) will help give you a better chance at ultimate success in building your own business.

This is an all-too-common situation, particularly when the economy slows down — we saw a big jump in business and law school applications in the early 1990s and again starting in 2001.  If you ask your friends, mentors, colleagues, and entrepreneurs, you’ll get responses all over the map.  Some people will swear by the value of an MBA, while others will tell you that the weight of the debt from your MBA will keep you from being able to really take the plunge.

The fork in the road: the MBA or the Startup.  Ultimately, the answer is a personal one, but many researchers have studied successful entrepreneurs to better understand the link between their background and success — including education, prior startup experience, etc.  (And there is some added information below about the importance of prior startup experience in your success as an entrepreneur.)

Do I need a particular educational background to be a successful entrepreneur?

Countless researchers have attempted to identify the link between educational backgrounds and successful entrepreneurs. The results of this research only prove that there is no single background that yields successful entrepreneurs. Research by Arnold Cooper of Purdue University suggests that technical entrepreneurs (those involved in high tech fields) tend to be well-educated, having at least a master’s degree. On the other hand, Robert Ronstadt of Babson College found that formal education was actually an obstacle to creativity, innovation, and other skills necessary for successful entrepreneurial activities.

Further research by Cooper and Javier Gimeno-Gascon does show that entrepreneurs having business or engineering degrees were more likely to grow firms to greater size. This research also concluded, however, that the number of business courses taken by the company’s founder was inversely related to the growth for larger startups. The lesson there – skip that extra accounting minor and pick up a degree in chemical engineering!

The one fact that seems to be widely held by researchers is that skills needed for entrepreneurs can be taught. And, given the growing number of collegiate and university programs, nonprofit trainings and private-industry coaching programs offering skills-training for entrepreneurs, there are numerous opportunities to hone important skills that will likely be used in new venture creation.

One of the biggest challenges for any individual thinking about starting a new business is taking that first step.  There are a hundred reasons not to start a business (many of which have been written about a hundred times over in numerous articles, interviews and books).

But what about your age — is that a reason not to start a business?  I spoke to someone recently who said he was considering starting a business, but thought it was just too old to do it.  “I don’t know what I’d do — I’m not really familiar with software coding or Web 2.0.  I’m probably just too old to be a high-tech entrepreneur.”

Am I too young or too old to start a new business?

Business schools across the country and around the world now offer a full range of entrepreneurship courses and programs of instructions. Undergraduates from technical backgrounds and business-entrepreneurship backgrounds are now graduating with the goal of starting their own business and leveraging their training. Likewise, lifelong employees of major corporations or researchers from government or academia are leaving their professions at a later stage in life looking to leverage on their experience and expertise. With these young and older entrepreneurs looking to start their own ventures, the question must be asked: is there really is room for these new entrants? Could you be too old or too young to build a high tech startup?

A number of researchers and industry trend watchers have examined the respective ages of the founders of successful startups to find the best age to create the proper mix of entrepreneurial “magic.” Nick Denton of Valleywag, a Silicon Valley blog, postured that twenty-six was the age that had produced the most spectacular recent successes (citing founders at the ages of 25-27 at the time they formed companies such as Yahoo!, Skype, Google, YouTube, and MySpace).

Looking at founders of European companies, VenturePedia data suggests that median and mean ages were 38 and 39.5 years respectively for founders of startups among their six hundred company sample. That data further suggested that founders of information technology companies were likely to be approximately five years younger than founders of healthcare, biotechnology, services, and retail companies. Fred Wilson of Union Square Ventures postured on his blog that founders in their thirties represented the prime time for entrepreneurship as these “thirtysomethings” were looking for “what’s next” in their careers and were armed with the right set of skills and experiences to find it.

But surely you can be too old to be a founder of a successful company? There are a number of examples of founders of very successful companies who would buck the research that says “thirtysomethings” represent the “sweet spot” of entrepreneurship.

Is there a time that is just right to become a founder of a company? Sure. Each founder will need to find the right combination for them when they hold the “correct” combination of experience and education, with the right timing for the business venture. Research suggests that the most crucial factor is your network, who you know or who you can get to know. Whether you are twenty-one or seventy-one, bringing a network (and then building) of associates and contacts is crucial to building a successful startup company.

And even if you are “past your prime” in the world of startups, you can sell that as the right mix of experience combined with the youthful exuberance of the others in the company. For Ely Callaway, perhaps his company would not have been a success if it had been started in the 1950s before a golf explosion began. And if you are a relative youngster, perhaps you can surround with “greybeards” (individuals heavy on experience) the way that founders such as the Google guys have. Remember that the key to success is not fitting the “right” persona or personality, but aligning your skill set with the right opportunity.

This article is an excerpt from my new book What Every Engineer Should Know About Starting a High-Tech Business Venture, available now.

Many folks are pointing to a coming wave of startups in 2009.  My friend Nathan Kaiser of NPost writes on his blog that we can expect a wave of bootstrapped startups, given the limited capital available, the increase of soon-to-be entrepreneurs, and the ease with which a business can be started.

And I don’t disagree.  It seems that more people are thinking “things are so bad anyways, why not give it a try.”  And more power to them, right?

So what is step one?  For many folks, one of your first steps to formalize a business is to form the business entity.  In a prior post, I laid out some of the reasons why your choice of entity matters.  The basic jist of the story is — pick the entity that fits your business and gives you the most long term flexibility.

Well, what choice should I make then?

Okay, so that bit about “flexibility” makes some sense, but then what choice should I make?

Joe Wallin, a fellow attorney from DWT, offers his take on why he generally encourages technology startups to consider S-Corporations over LLCs on his blog:

“I like S corporations better than limited liability companies as a choice of entity for technology startup companies for the following reasons.

1. S corporations can engage in tax free reorganizations, such as tax free stock swaps; in contrast, limited liability company owners have to pay tax on stock received in such transactions.

2. S corporations can grant traditional types of employee equity, like stock options, more easily.

3. S corporations can more easily convert to C corporations in the event of a venture financing or public offering.”

I happen to agree with Joe’s analysis for the most part — but I’m not willing to quite make it so black and white.  Generally, I think it makes a great deal of sense to go the S Corporation route for folks considering building a high-technology business.  But since there isn’t a one-size-fits-all approach to businesses, let’s assume things are a bit more nuanced in entity selection.

Rules of Thumb to Entity Selection

So, without further ado, here are my “Rules of Thumb” in entity selection:

Read the full story

You’ve made your 2009 resolutions, and somewhere between “Be nicer to my in-laws” and “Floss once a week” is your goal of starting a new company.

Here’s to those 2009 resolutions… so what’s next to start that new company of yours?  Well, you need to start… a… new… company.  Okay, so what do you do?  Do you need to file something with someone?  Do you need to hire a board of directors? What should you tackle next?  Fortunately (and unfortunately), you can find lots of advice from lots of people on what to do and not to do.  Some will say definitely do an LLC.  Others tell you to form in Delaware.  Still others say that don’t bother forming a company yet.

So what is it?  If you want to form a new company, what should you do? Well, those “experts” above are probably all correct in some way or for some businesses.  In some cases, you don’t need to form a company for your side-project, but in others it is much better to form a C-Corp over an LLC.  Sometimes a S-Corp is the way to go, while other times it won’t cut the mustard for a new company.  Why you ask?  Well… it depends.  But, because it depends, you should get advice tailored to your business strategy.

Following the masses

Perhaps you’ve heard the statistics that more than half of all US publicly traded companies and more than 60% of the Fortune 500 are incorporated in Delaware. You might have also heard that many VCs prefer to fund Delaware corporations. Maybe someone once told you that “going public” is the easiest as a Delaware corporation. And, to heap on more evidence in favor of Delaware, you may have heard that Delaware has the most “business-friendly laws in the country.”

So, since it seems like most everyone is a Delaware corporation and you would like to raise VC money and go public, then I guess all that evidence just means I should form a Delaware C-corporation too, right?

Read the full story

As we begin 2009, many companies are again considering whether or not to begin or restart the fundraising process.  For some technology or life sciences companies, raising venture capital is an important and necessary step in their company’s life cycle.  But, before any company invests the time, energy and effort required to raise venture capital funding, ask yourself the important question…

Is our company a good fit for venture capital?

The harsh reality is, many business plans received by venture capital firms will be immediately rejected because the company is not a good “fit” for that venture fund or for venture capital financing in general. This could mean the company is serving a market that is too small or is a niche market. It could be that the technology has few barriers to entry. Or, it could be a company that will have fairly low gross margins.

But, in many of the cases, it doesn’t mean that the business isn’t a good business.  Rather, it most likely means the business isn’t a good fit for venture capital.

The reasons listed above represent just  a few of the important criteria in the venture capital marketplace.

So how do you know if you are a good fit for venture capital?  At the end of this post is the VC “Fit” Test, a tool I’ve developed that can help companies determine if they are a good fit and should spend the time raising funds now, or should wait for a better point to raise funds.  Use the tool to understand whether your company is ready to focus its fundraising efforts on venture capital.

Read the full story

Without fail, when I mention that I’m a startup technology lawyer at an event with startup-folks, someone nearly always approaches me and asks, “So I work at [Insert Company Name here], but I’ve got this project or idea I’ve been working on. I’d really like to leave at some point and do that full-time, but I need my job at [Insert Company Name here] to pay the bills for now.  How can I do both?“

It is a great question and one that people really should be thinking about.  Many very successful companies were spun from side-projects or part-time development work in a basement or garage.  One of my favorite stories is about the founder of del.i.cious, that I write about in my book:

Joshua Schachter started his collaborative bookmarking website del.icio.us in 2003 as a personal project simply to allow him (and a few friends…) to tag and share web pages. Schachter had collected links to thousands of web pages he like and didn’t find any thing that could help him organize and share those likes with others. So, he developed del.icio.us in his spare time and started tagging websites to share with others.

But Schachter didn’t even consider himself to be an entrepreneur or a business owner. In fact, Schachter’s full time job as a Morgan Stanley employee. However, the power of the web made del.icio.us a huge hit and by 2005, Schachter felt it was best to incorporate the company as del.icio.us, Inc. Shortly thereafter, Schachter sold the business for an unnamed amount. All this from a little hobby…

At a time like this with funding options somewhat tight, many entrepreneurs are looking for a way to continue to build their product or idea, but keep the regular cash flow of their current job.  Sure, this comes with risks of less time to dedicate to your startup project or idea, but it also allows you to have your cake and eat it too, so to speak…

How to have your cake and eat it too…

So, to the question at hand, if you are employed elsewhere and have a side project or part-time startup, what should you watch for?

First thing to remember is that each situation is unique — each company will have different policies and procedures in place.  So be sure to be cautious.  Carelessness can get you into trouble (and can sometimes get you fired from your employer) if you are using company resources for your startup such as photocopying hundreds of color business plans, doing tests in the company lab or using your company laptop for development work.  So know your company, understand its rules and contracts, and avoid being reckless.

Here is a good set of questions and considerations to think about with respect to your current employer and your startup:

Read the full story

Imagine a scenario where you’ve got a cross-border team of founders considering setting up the business in either the US or Canada.  Why choose one over the other?

In a perfect world, you should register the business in the country where it provides you the most benefits including low taxes, access to government grants/loans, favorable corporate laws, and ease of activity.

The truth is, for a start-up business, you may be too early in your process to know where that place is. Therefore, I usually advise clients who are forming a new start-up business to register in their residential country. The reason is that if, at some point in the future after you are established, you wish to change locations, you can usually do. There will be some obstacles and costs to the switch, but if there are enough advantages, it can be done.

Couple points to consider when choosing between the US and Canada:

(1) VCs in Canada tend to prefer to invest in Canadian entities. Plus, oftentimes the investors in Canada will have some tax-reasoning for investing in a Canadian company. We have had to set up a US and Canadian sub to accomplish this. That said, there is more capital available in the US and US VCs most likely will only invest in a Delaware C-corporation (due to limitations in the types of entities they can invest in and their familiarity with Delaware corporate law).  So the short answer: If you are looking for US money, become a US company and if you wind up finding funding in Canada, set up the Canadian entity to make this funding work (this structure allows for funding from both US and Canadian VCs).

(2) If you are developing technology in the US, odds are that the most likely issue related to IP development will be had in the US. Therefore, most contracts that revolve around that IP (invention assignments, consulting agreements, etc.) will be done in the US and involve US law. Easiest not to hire both US and Canadian lawyers to review. Therefore, pick a US entity as your “base” since your technology would be developed there.  If you are developing technology in Canada and that will be the base of operations, then I would most likely advise the reverse.

(3)  If you are building a cross-border business, expect to have legal fees and expenses in each country where you operate. As a lawyer, I can’t make judgments on Canadian law nor could a Canadian lawyer make judgments on US law.  So be ready to deal with multiple lawyers if you operate in different jurisdictions.

Short answer here, unless you are planning on being a Canadian company — one that will raise fund in Canada (primarily) and operate a substantial chunk of its business in Canada, go with a Delaware c-corporation. Follow the money on this one. And, if things change, while it may not be simple, it isn’t impossible to switch or create a Canadian subsidiary for the business purposes.

Also, for a new start-up who isn’t certain to succeed or even know what it will do, go local which should be the cheapest and easiest option to consider. If you have a strategy in place for tax minimization or related to something similar, talk to your lawyer and accountant to make sure you set it up correctly. Either way, it will involve filings in both your residential and registration country — so be aware that it won’t be enough just to make an international filing — which means you’ll like have some filing due in both places.

When to Involve your Lawyer

One of the biggest challenges I’ve seen working with new entrepreneurs and startup companies is balancing the need for getting good legal advice with the cost of good legal service. In a prior post “When to Involve Your Lawyer: Part 1, I wrote about the types of agreements when a startup should nearly always have their lawyer review. In this post, we’ll examine how to ‘Pre-Review’ a contract or agreement before getting your attorney involved.

The Pre-Review

Truth is, lawyers usually bill by the hour. Therefore, whether your lawyer is negotiating your Series A financing terms or washing your car, it is costing you the same. (For the record, I usually give a discount for my car washing services.)

One of the issues that startups struggle with is when to involve their attorney in negotiating or entering into a contract. Your startup is like a paper-generation machine. You’ll be looking at more contracts than you ever thought possible. And the problem is, if you had your lawyer “review” or “negotiate” every one of them, you may hit the poorhouse.

That’s where the concept of a pre-review can help focus your lawyer on areas where you really need his or her assistance. The concept of a pre-review can help you to better understand the contract itself, identify the easy issues you can handle and address with the other party to the agreement, and then get the insight and experience from your lawyer to address items above your pay grade.

This saves you money and gets legal review where it is needed. That, in a nutshell, is the pre-review.

Being an Informed Consumer of Legal Services

So what should you do? Be an informed CONSUMER of legal services. Not every contract will rise to the level needing attorney review. But, and this is a big but, remember that you should ALWAYS have your attorney review certain types of contracts or agreements as noted in the previous post. Don’t scrimp on those contracts as you’ll probably wind up paying for it sometime down the road (having your attorney FIX the problem you didn’t see playing part-time lawyer).

So, don’t blindly send a contract to your attorney. Pre-review it and handle what you can with the other side. Then, get your attorney focused like a laser on areas you aren’t equipped to handle. Anyways, before you send any contract to your attorney, here’s a suggested approach:

1. When you get any contract, read through it before you do anything. Print it out, and write notes where you disagree, have questions or don’t get it.

2. In those places where you have questions or you don’t understand, ‘Google’ it and look it up on Wikipedia. Hopefully that will help you understand better.

3. After you’ve read through it and used the Internet to educate yourself, have someone else in your company also read through it (if you are the only one in the company, then get your spouse, significant other, mother/father, neighbor, etc. to read it).

4. Talk through your comments, questions and concerns and come up with a list of issues.

5. Then, get on the phone with the other side and talk about those issues, questions and concerns. Don’t agree to something that you aren’t sure of, but try and get a rationale as to why the other side put something in the contract.

6. NOW, you can finally involve your attorney. You’ve focused the issues down and can get the lawyer to provide the value-add service (rather than car washing services).

When to Involve Your Lawyer

Lawyers are expensive and we bill by the hour.  Which means one thing: using less legal services saves you money. Unfortunately, it just ain’t that simple.

The real problem is, failing to use legal services when you really need it, can cost you down the road.   So, the purpose of this article is to help you identify the types of contracts where you should have your attorney review.  What can happen if an attorney doesn’t review these?  Well, I’ve seen venture financings get helps up, huge tax bills created, M&A deals die and companies spend tens of thousands of dollars to fix a problem that could have easily been fixed in a few minutes, just because the client didn’t have their attorney review certain agreements up front.

I’m not an advocate of having your attorney review every contract (the expense isn’t feasible), but I do think for certain types of agreements or very important agreements, those dollars spent can keep you out of trouble down the road.

So, without further ado, is a list of a few times and types of agreements that I think a startup should ALWAYS involve their attorney (at least in some level of review):

• License Agreements. License agreements oftentimes involve complicated scenarios over ownership. Be careful in cases where you are licensing technology from a third-party or are licensing your technology to a third-party.

• Non-Standard Employment or Consultant Agreements. Many startups will work with their attorneys to create standard form agreements for employees and consultants. In the event the employee or consultant has proposed changes to legal terms (ownership of intellectual property, non-disclosure, non-solicitation, or non-competition, just to name a few), you may want to involve your attorney.

• Investment Agreements. Compliance with securities law exemptions is very important for any privately-held business. You should involve your attorney when you negotiate any non-standard investment contracts.

• Joint Development Agreements. Be careful of intellectual property issues that may arise when you negotiate a contract that involves two parties making contributions.

• A “Material Contract”. Any time you are entering into a contract that you would consider to be material to your business you should get your attorney to review it. A material contract is any contract that is not entered into in the ordinary course of business. If it isn’t a contract you’ll enter into with regularity in your business or involves a major amount of expense or revenues in your business, you should consider outside review as well.

• When the other party involves their attorney. In the event the other party has elected to have their attorney participate in the negotiations and the contract preparation, you may consider involving your attorney.

When in doubt, you should check with your attorney on provisions that raise issues. You may find that your attorney can quickly review select provisions of a contract even if they do not review the entire contract, or may be able to provide a final review prior to signing to flag any potential issues.