You will face hundreds of decisions during the startup process, and there’s often a temptation to optimize each one of them—sometimes by breaking new ground. However, it’s best to focus your energy and attention on milestone issues.

For everything else, go with the flow and stick to your MATT by keeping things clean and simple. My experience and expertise are with U.S. companies, but these are generally accepted entrepreneurial practices:

“In the United States, if your goal is to create the next Google, you want to form a Delaware C corporation.”

CORPORATE STRUCTURE.

Every country has different commercial entities, such as corporations, partnerships, limited-liability corporations, and cooperatives. You want a corporate structure with three characteristics: one that is familiar, if not comfortable, for investors; sellable to other companies or on the public stock market; and capable of offering financial incentives to employees.

In the United States, if your goal is to create the next Google, you want to form a Delaware C corporation. This is a separate tax-paying entity that can accept outside investment and can issue multiple classes of stock. Owners are not personally respönsible for debts and liabilities, and losses are not passed through to owners.

If your goal is to create a small business that isn’t going to seek venture capital and you don’t aspire to go public, then consider an S corporation, limited-liability corporation, or sole proprietorship.

INTELLECTUAL PROPERTY.

A startup should unequivocally own or unequivocally have licensed its intellectual property. This means that there are no ‘lawsuits, or any risk of lawsuits, by former employers and no charges that the intellectual property infringes on someone’s patents.

Also, the intellectual property and licenses should belong to the startup, not the founders. This is because you never want a situation where a disgruntled founder leaves the startup and takes the intellectual property with him—crippling the startup.

CAPITAL STRUCTURE.

This refers to the ownership of the startup. There are four warning signs; they all belong to the If-I-Knew-Then-WhatI-Know-Now-Hall of Fame:

A few founders own the vast majority of the startup, and they are not willing to extend ownership to other employees.

A small group of investors that doesn’t want dilution of ownership has dominant control of the company.

Dozens of small investors make managing shareholders a burdensome and slow task.

Overpriced previous rounds of financing make investment unattractive to new investors.

EMPLOYEE BACKGROUND.

Areas of concern include executives who are married to each other and executives who are related to one another; unqualified friends in high-level positions; and high-level employees with criminal convictions. These issues may signal that the startup isn’t a meritocracy.

REGULATORY COMPLIANCE.

This refers to issues with state or federal laws and regulations, nonpayment of taxes, and solicitations of unqualified investors. Typically issues with regulatory compliance indicate clueless or crooked management—both are unacceptable and will hinder progress.

Experts have written entire books about these five topics, so don’t make decisions based on my brief explanation of such complex issues. These are areas where you only need to learn that you don’t know what to do so that you can find an expert who does. 

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