Likes & Launch
Month
January 2013 Data Summit
A large part of my role at Union Square Ventures is to work with our 50+ portfolio companies to make sure they are getting the resources they need. Through the USV Network and Summits, I’ve found a common theme among CEOs, data scientists, community managers, HR, marketing, business development, legal, engineering and more: they all want advice on scaling their organization.
From Etsy to Kitchensurfing, Foursquare to CircleUp, we have companies that range in size from 10 – 1000+ team members. There are different pain points companies face when growing from 10 to 30, 30 to 50, 50 to 75, 75 to 100+.
I’ve seen patterns in a few of our organizations going from 15 to 50 that lead me to believe that preempting problems with best practices can help companies overcome organizational challenges faster or bypass them altogether.
I plan to share stories and best practices here in an effort to distribute what we’ve learned. I also hope to learn more about challenges startups face outside of the USV network.
In the coming weeks, I’ll cover organizational topics that fall into the following categories:
At USV, we share stories from our network to kickstart a conversation on a given topic. I hope to create that same back and forth here. If you have questions in these areas or have stories to add, please add to the comments, share on Twitter @br_ttany or ask through this blog.
@br_ttany Here’s a good one. VC’s prefer C-corps. Is it best to start with one or just convert your LLC to finish the round?
— Jared Steffes (@JaredSteffes)
July 23, 2013
Yesterday, Jared Steffes asked about how a startup should incorporate if they plan on raising financing down the road. For gtrot, it was started as a C-corp from the beginning due to the Harvard I3 first prize package that included free incorporation from Gunderson Dettmer. This made closing our first round of institutional capital much easier.
So how should you setup your startup?
- If you plan on raising institutional money down the road, you should incorporate as a C-Corp off the bat. Flipping to an LLC down the road is a bit of a pain.
- If you plan on building a cash flow business and don’t plan on raising institutional capital, you should incorporate as an LLC.
- Now, as of August 1st, if you are a social mission-oriented business you can incorporate as a Benefit Corporation, or a B-corp, in Delaware. On Albert’s continuations blog he outlines why this is a huge move in creating a legal structure to align investors and entrepreneurs around social missions.
- If you are extremely concerned about taxation but hope to eventually raise capital, S-Corps can be converted to C-Corps. This may just add an extra step (and legal fees) if you plan to eventually convert to a C-corp to raise institutional capital. S-Corp’s restrictions on corporate ownership make it a less attractive legal structure for multiple investors.
The main differences between C-Corps and S-Corps come down to Taxes and Corporate ownership. Biz Filings breaks it down as follows:
C corporations. C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends.
S corporations. S corps are pass-through tax entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.
Corporate ownership. C corporations have no restrictions on ownership, but S corporations do. S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. Also, S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes. C corporations therefore provide a little more flexibility when starting a business if you plan to grow, expand the ownership or sell your corporation.
One last caveat, if you are only at the idea stage of your business and haven’t building it yet, you should start off as a ‘sole proprietor’. Once you’ve started building, hiring employees, and gaining momentum you should invest the time and money to properly incorporate.
Disclaimer: I am not a lawyer or a tax accountant. Please consult with both professionals before incorporating.
What questions do you have about venture capital or scaling a startup? Ask me here, in the comments, or on Twitter @br_ttany.
This post is part of this week’s Startup Edition to answer the question: What advice would you give young entrepreneurs?
Are you wrestling with an idea that won’t escape your mind? A startup you can imagine yourself running and growing into something real?
How many people have given you feedback on this idea? Have you told your closest friends about it? Your family? Have you sought out experts in your chosen field to get input?
One of the biggest mistakes I see new entrepreneurs make is not asking for feedback on their early ideas. Talking about an idea will help it mature into something real. You can have an idea your entire life and never execute on it. Don’t let fear stand in the way of making it a reality.
Don’t be too afraid of thieves. If you are really concerned about a competitor being able to beat you at your own game, you’re doomed from the beginning. It can be scary to put an idea out there but the experienced entrepreneur is already doing it.
Find peers in your chosen field. Approach the conversation from the standpoint of curiosity, “What do you think about X?” Odds are, someone has thought of your idea before and have a reason they did not execute. They probably have enough going on, don’t see it as the right fit for them or don’t think it’s a good idea. By asking their thoughts you’ll be more knowledgeable as to why not. This should help further build confidence in why you should do it if you see things differently.
Don’t allow a fear of rejection stop you too early. What if they think your idea is stupid or crazy? Phrase your idea in terms of: ‘I’ve been thinking about …’ or 'what if this existed…’ or ‘would you use x if it were offered..’ to help make the conversation about the idea and not just you. Truth be told, not everyone is going to like your idea. Even if you become a giant like Twitter there will be people who don’t understand it and criticize it. But continue getting feedback even if most disagree with your vision. It will make you stronger.
Execution above all else. Getting early feedback on your idea is important, but don’t allow on-going discussions to keep you from executing. You should be utilizing Lean Startup methodology to get your idea moving but collecting feedback as it grows.
What business ideas have you been hiding? Share with me in the comments or on Twitter @br_ttany.
Want to read more advice for young entrepreneurs? Check out this week’s Startup Edition.
Photo of Valiyaparamba Island.