by Cristian Rennella, founder of Mejor Trato
As the title suggests, we are talking about basic knowledge that we should keep in mind from the very beginning when launching a business in order to avoid huge headaches later on as our business grows. It is not necessary to know the details of all the legal and accounting procedures, but it is essential to understand the most important and general aspects.
My personal aim in this article is to share the most significant points so that everyone launching a business can build an adequate structure for their company and thus, in the future, can be 100% focused on the business and not on some accounting and/or legal inconvenience.
To start off, we should understand something very simple, and it is that the reason for creating a new entity four our business venture is to protect ourselves as people/individuals. In other words, if the company happens to suffer a loss in a trial, the business answers with its own resources and not our personal ones.
Secondly, if we are for example, launching our business venture in the United States, then we should think about where we should be incorporated, and there the best option is Delaware. If we are in another country, it is best to make an assessment with accountants and lawyers who are dedicated specifically to the creation of new companies (and not the friend who is an accountant or the family lawyer but their work specialty is in some other category).
Another crucial reason for searching for the right place to incorporate our business is because the investors must be confident of our legal and accounting structure. If they are used to investing in corporations in Delaware because they know them and have experience with them, then the best thing is to join in this form of working. Again, I insist that if we are in another country of the world, a good idea (that we implemented in our own project in Latin America, MT) is to ask well known investors in the specific local economy where those business for which they had previously invested were commonly located. We also asked them if they had an accounting or legal advisor to recommend us.
Most importantly: We should keep these aspects as simple as possible and standardized with what has been used frequently by other business ventures and investors in our own country or region. We do not attempt to innovate here.
Various online tools exist which allow us to incorporate our business venture without the need for taking on huge lawyer expenses, but in our experience this works very well in the United States, for example CorpNet or LegalZoom can be used. In other countries, I strongly recommend that we use and invest in lawyers wholly dedicated to the creation of companies, and if they are specifically technology companies, even better.
This is the point that we would all like to go around, but I want to emphasize this as much as possible: that we be extremely tedious and organized with all our paperwork, from the first page that we sign to the latest contract.
In the future, when we have the possibility of receiving an investment (or some other opportunity for acquisition), and the corresponding controls are performed by the law firm representing the investors to check that everything is as it should be, absolutely nothing can be missing and everything must be in order so that the process can go ahead (commonly known as “due diligence”) with success and on time.
My recommendation is to store each document chronologically in a safe place in one file and before physically filing it, take a clean picture with a cell phone and store that as well, for example, in a Dropbox file which everyone in the company has access to.
I will be very direct for this point. For me, each new business venture should have between 2 (two) and a maximum of 4 (four) founders for optimal operation. The division of the shares, meaning, what ownership each founder has in the company, should be equal (or as close to equal as possible).
When I see that this does not happen, it is a big red flag. An idea is not worth anything, what has value is the execution. For this reason if two people are starting a company and the division is 50% each, or at the most 40% and 60%, this is acceptable. An un-proportionate distribution does not lead to a happy ending.
For this to be agreed upon correctly, it should not just be talked about and agreed upon based on word, everything should be documented on paper and signed by all the investors.
Lastly, always use “Vesting”, meaning that if one of the investors loses interest in the project (for whatever reason), while the others decide to stay and keep working so as to come out with success, it makes it so that individual that leaves does not take with them an important piece of the business, but just a small part based upon the amount of time put into the company.
And this is important for the investors, they do not like it when any founder can back out when they choose with an important part of the business. The final goal is that everyone is 100% committed to the business for the time that it takes in order to achieve success.
The first thing to know is that we should look for professional investors. What I mean by this is that it is recommended, as much as it is possible, not to seek out investments from friends, neighbors, and acquaintances (even though this goes against what one may frequently hear and incline to). This is due to 2 basic problems: a) investing in start-ups is something that is very risky and not everyone understands the consequences (such as losing all their money) and b) it is a long-term investment, their savings will hardly be returned in the timeframe that they wish.
On the other hand, it is important to use standardized documents (simple ones) for investments, so that the process is not further complicated for neither the investors nor ourselves.
Terminology that we should learn from the beginning:
Participation on the board: This should be a person in who we are 100% confident will add value. What we frequently must say to the majority is: NO, you cannot be on the board.
Advisor: This is someone who wants to help us in our business venture and possibly seeks shares in the company in exchange for their collaboration. Here we must say NO almost always. If a person already invested in our company, why would they want additional shares for their knowledge? They are seeking out free shares and this is not a good idea.
A piece of advice: Even if our company value was successfully negotiated, coupled with the total sum at the moment of receiving the investments, this does not mean that everything is ready and that we should sign the forms. It is our duty as founders to read and be informed of every single detail of the contract before receiving the investment funds.
To start, as I indicated at the beginning of this article, the business venture is a separate entity from ourselves (the founders). Consequently, we should be paid employees of the company.
Important to keep in mind: Working without pay is against the law and should not be done. Furthermore, as a company, we should pay all the taxes for our employees on time and in correct form.
Adding to what has been mentioned, there is another problem, and that is if in the future there is a separation amongst the founders and one must leave the business venture, if this person is not a monthly paid employee, they have the responsibility for seeking out a lawyer and request that the process of “Vesting” that we mentioned before be accelerated and thus resulting in them being owner of a big part of the company who will no longer collaborate in order to achieve success.
Lastly, when we hire our first employees, we should always do it with the appropriate documentation, in which there should not lack the specification that everything they create while working for us, on the level of intellectual property, belongs to the company.
It is our responsibility as founders to carry out the payment of taxes, insurance, and everything that is necessary when it comes to the law and new employees. I recommend hiring a specialist who can do this successfully on a monthly basis so that we do not lose focus on our business.
Cristian Rennella is the founder of Mejor Trato, a tool for online loan comparison in South America, including Colombia, Argentina and Brazil. Currently a university professor and investor in various business ventures focused on health.