Rupert Murdoch, the 78-year-old CEO and chairman of News Corp., just gave a revealing interview to The Street’s Dan Freed. In this interview, Murdoch argues that the latest head-count reduction at MySpace was necessary because the number of employees at the company had grown out of control. In addition, he also told Freed that he wants the site to be very different from Facebook, which, in his eyes, is nothing more than a directory, while MySpace is a place “to find common interests, share music, that sort of thing.”

In the same interview, Murdoch also says that he has no idea how to monetize Twitter and that nobody has actually figured out how to monetize “the Web today to any extent other than search.” Micro-payments, in the eyes of Murdoch, are also not a good alternative to advertising revenue, though he still thinks that subscription models for his papers along the lines of what the Wall Street Journal currently does might be a solution for monetizing news content.

Facebook: Just a Directory

With regards to Facebook, we can’t help but think that Murdoch must be willfully oblivious to the fact that the service’s users are abandoning the company in favor of Facebook. Just a simple look at the current traffic stats for both services tells a very clear story about the abysmal state MySpace is finding itself in today. While Facebook is growing rapidly, MySpace’s traffic is, at best, staying flat. And to think of Facebook as nothing more than a directory just ignores the reality of how users are using the site and what Facebook’s management team envisions the service to be.

Maybe before Facebook turned into the platform it is today, that statement could have held true, but today, to imply that users on Facebook don’t go to the service to find others with common interests is simply wrong.

Micro-payments: Not a Solution

We have to agree with Murdoch, though, that micro-payments are probably not a viable solution for monetizing news content on the web — though we would argue that some people have managed to make a living off the Internet from doing things other than just monetizing search.

So far, users have also resisted subscription models for online newspapers. The only exception here is the Wall Street Journal, which is really a special case, and only time will tell if readers are willing to buy online subscriptions to their favorite papers.

Image credit: Wikimedia Commons

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

First, the good news: building a website today is ten times cheaper and faster than it was 10 years ago. Now, the bad news: building a website today is ten times cheaper and faster than it was 10 years ago.

You are entering an incredibly crowded marketplace. You have to get and keep people’s attention extremely fast, because hundreds of other services are just a click away. The bar is set very high, and knowing exactly how high does help. If you reach too low, you will only catch air and crash to the ground.

Six Milestones from 30 Seconds to 3 Years

Here is what an insanely great Web product looks like to the average user right now and through the next 3 years:

• 30 seconds: “I get it.”
• 3 minutes: “I’ve used it and still get it, and it has not annoyed me yet.”
• 3 days: “I find this really useful or fun.”
• 3 weeks: “I am raving about this to other people.”
• 3 months: “I couldn’t imagine not having this, and I’m boring my friends telling them about it.”
• 3 years: “How weird to see this on Oprah.”

The 30-Second Milestone

You can moan all you like about what attention deficit disorder has done for user engagement, but it won’t help you one bit. Get over it. People don’t automatically care about your product and won’t invest any time to find out if they should care. This rule is as old as consumer markets. This is what those guys on Madison Avenue with their jingles and insipid ad slogans have always known. Political sound bites live in this same reality.

Does this feel fake and insubstantial to you, the engineer, schooled in solving big, hard, complex problems?

So, study this like you would any other big, hard, complex problem. Making a product or service look totally simple and obvious is a big, hard, complex problem.

In 30 seconds, a user who comes to your website should be able to say:

• “I get what they are offering.”
• “This might help or amuse me.”
• “I know what I have to do next.”

There is a science to achieving this; it has been documented. You need to look at great examples and understand how they did it. Then you need to test and change, test and change, test and change, test and change, and then test and then change, until you go crazy!

The 3-Minute Milestone

After using your website for 3 minutes, the user should be able to say:

• “I still understand what they are offering, and it does help or amuse me.”
• “This has not annoyed me yet.”
• “This could be even more fun or useful than I thought.”
• “I know what to do next to find out if this could be even more fun or useful.”

The 3-Day Milestone

Now is the time to worry about stuff like performance and reliability. If you get to the 3-week milestone and bomb, your fanatical users will cut you some slack. But at this stage? Zero slack.

Have you been planning for this milestone since the design stage? Are you running on a cloud service with auto-scaling and recovery? No. Whoops! You had better hope your product is not insanely great, but rather just reasonably good and will grow steadily. Hint: build on a cloud service (like Amazon AWS) from the start.

The Three Remaining Milestones

• 3-week milestone
  You’ll know you have hit this when VCs return your calls and VCs you have never heard of call you out of the blue. Close fast to leverage your hotness. Don’t get all arrogant and believe you can do it alone. With this kind of traction, you can raise capital cheaply (and thus have less dilution), so do it.
• 3-month milestone
  If you reach this stage, you can skip ahead to the chapter on “How to Scale Without Losing Your Shirt.”
• 3-year milestone
  If you reach this stage, skip ahead to the chapter on “Planning Your Exit.”

Concept vs. Execution

We have reached the point that almost any website can be built quickly and cheaply. Money to scale awaits only for sites that actually gain traction. Management teams take care of the basics when you have traction and money. So, in the age-old debate about which is more important, concept or execution, concept is currently winning. You have to have something that meets a real need or is addictively fun.

The area where concept and execution intersect is usability. A concept that does not grab users within 30 seconds and move them through those other milestones is totally useless. Basecamp is all about usability. Twitter is about usability. Gmail is about usability. The concept in each case is simple.

New Concept vs. Doesn’t Suck vs. Fast Follower vs. Niche

Your website falls into one of four categories:

1. New concept
   If you fall into this category, your product or service type does not have a name yet. It has no market space, category, or even articulated need yet. In a decade, the number of these concepts that actually gain traction is tiny. The number of them that get through the early-adopter phase to the mainstream (i.e. reach the 3-year milestone) is even smaller. In other words, good luck!
2. Doesn’t Suck
   This one is easier. This is a service you can describe as “[something] that doesn’t suck.” Google first offered “search that doesn’t suck,” and then followed it up with Gmail, which is “email that doesn’t suck.” In other words, don’t be afraid to go after mature markets in which the current services are not that good. Spend a couple of days browsing online and you will see plenty of such opportunities.
3. Fast Follower
   This applies to a new concept that makes your jaw drop and you think “OMG, this is so cool.” And then you realize that doing something similar would actually be pretty simple. The first one to market with a new concept is not always the winner. It just looks that way because the originator gets lost in the dustbin of history when the better venture out-executes it. You need access to capital to do this right, because you have to move fast, which means hiring an A-Team. And A-Teams like to be paid a lot.
4. Niche
   There are thousands of these. Your niche might be geographic or a user type. Most niches are limited in scale and so do not require much capital. These are ripe for bootstrapping. But don’t think niches are easy. Users will still be very demanding.

Google is moving into the mobile ad market with AdSense for mobile apps. Over the past few months, Google has been testing both text and graphical ads with ten mobile app developers, including Shazam and Urbanspoon. Today it is opening the private beta to more developers who meet certain criteria.

These are contextual ads for iPhone and Android apps. They can be targeted by “applications, locations, categories, or keywords,” according to Google’s Mobile AdSense information page. To qualify for the public beta, the apps must be free and generate at least 100,000 pageviews per day. The program is only for iPhone or Android apps. Developers must be ready to go live with the ads in four weeks and participate for three months.

Developers with 100,000 pageviews a day is still a limited set of the top free apps, but Google is serious about competing in this market. Mobile ad startups such as AdMob and Greystripe are now officially in Google’s direct line of fire.

Google is keeping things small right now to test out different ways to target ads inside apps, but it can pull out the big guns any time it wants. It already has more advertisers than any startup ad network and thus has a clear advantage when it comes to filling up mobile ad inventory. Although it is separate now, when marketers can check mobile apps as part of their overall AdSense campaigns, there should be a lot more bidding for those mobile ad spots within iPhone and Android apps, and those mobile ad rates should go up as a consequence.

Mobile app developers are going to sign up whichever ad network can give them the highest CPMs, and will swap out the ones which can’t keep up. Already, we are seeing some jostling for position among the mobile ad network startups. AdMob just kicked out AdWhirl from showing ads within its platform. I wonder if AdMob will allow Mobile AdSense ads on its network. Update: AdMob responds that it will work with any mobile app developer on a non-exclusive basis and that developers which have established a direct relationship with AdMob can work with competing ad networks.

In an announcement today at Ford’s research center in Dearborn, Michigan, the U.S. Secretary of Energy will be giving details about the first loans to come out of the government’s $25 billion program to help auto manufacturers. Ford got a $5.9 billion loan, but Tesla Motors, Silicon Valley’s electric car manufacturer, is receiving $465 million from the program. The money will go towards completing the development of its Modern S sedan and its electric power trains, which are being licensed by other car makers such as Mercedes. Last month, Mercedes’ parent company Daimler also invested $50 million for a 10 percent stake in Tesla. That brought the total debt and equity invested in the company to more than $200 million. Now, with the government loan, that brings the total capital raised to $700 million.

If the government is going to be giving out loans to help car makers produce more fuel-efficient vehicles, it is good to see some of that money trickle down to helping electric cars get off the drawing table and into driveways. Tesla plans to use $365 million of the loan to accelerate the production of its Model S sedan, and the remaining $100 million for its electric power train manufacturing plant in California, for which its is in the final stages of negotiating a lease.

At the tail-end of a long blog post yesterday responding to allegations in a lawsuit by Tesla co-founder Martin Eberhard, Tesla CEO Elon Musk reveals that the company is on track to hit profitability next month as it ramps up production of its all-electric Roadster sports car. He also writes that the company has received more than 1,000 pre-orders for the Model S sedan, up from 500 in the first week. At about $50,000 after a tax credit, the Model S will be about half the price of the Roadster. In the post, he explains how the Roadster made possible the sedan:

Tesla is sometimes criticized for the fact that our first car is relatively expensive, implying we thought there was a shortage of sports cars for rich people! Obviously, the transition to electric cars can only occur if they are affordable. However, a low volume and fairly costly product like the Roadster is the only realistic initial option for a small startup trying to create breakthrough technology. New technology in any field takes a few versions to optimize before reaching the mass market and in this case it is competing with 150 years and trillions of dollars spent on gasoline cars.

I want to be clear, though, that we are trying to get there as soon as possible. My main reason for putting so much time and money into helping create Tesla is to speed up the transition to electric cars. This was not a case of rank ordering likely return on investment and concluding that the auto industry was the easiest way to make money! While I’m confident that Tesla will turn out to have a good return for investors, building a car company has to be one of the hardest ways to make a buck.

That $465 million loan should help.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

Should you set up an LLC, C Corp, or S Corp. And in what state should you register? These are some of the questions we’ll consider in our overview of company registration choices for your startup.

Three warning notices. The first is the obligatory IANAL (I Am Not A Lawyer) statement, with “Be sure to seek legal advice” advice tacked on, which ensures that no lawyer will sue me for bad advice. The second is that this is considered a boring subject by most engineers and entrepreneurs. If this is your instinctive reaction, note that the only thing more boring and time- and money-consuming than getting this right at the start is the nasty mess you’ll find if you get it wrong. The third is that this is US-specific. We don’t have the time to explore legal and tax options in other countries. However, if you are currently not based in the US, we look at the pros, cons, and constraints of setting up your company in the US versus where you live.

Turn Boring into Learning

Here is advice from Alex Iskold, an engineer and entrepreneur:

“You have to take care of legal and financial aspects of the startup, so why not turn it into a learning experience? The legal and financial aspects of your company are important and interesting, and there are a lot of new things and ideas that you will encounter that will likely impress you.”

Learning these aspects also saves you legal fees. If you understand the basics and have a clear set of objectives, you end up only having to say to the lawyer, “Check this.” That is way, way cheaper than asking, “What should I do?”

Breaking Down the Decision

When you have more than two options, a decision gets complex. The way to simplify is to reduce dependencies and break them down into a choice of two, with a subsequent set of additional decisions — a decision tree, in other words:

• Step 1: LLC or Inc?
• Step 2: If Inc, then C Corp or S Corp?
• Step 3: Which state?
• Step 4: All of the other pieces of information you’ll need to fill in when registering a company.

LLC or Inc?

When you see CoolSite Inc, it is usually referred to as a Corp (corporation); the “Inc” is short for Incorporated. Otherwise, you’ll see CoolSite LLC, which stands for Limited Liability Corporation. So, an LLC is also a Corp. Confused already? You wouldn’t be the first!

Many lawyers advise startups to go for LLC for two important reasons:

1. It is much simpler to administer; less paperwork. This may sound minor, until you find that you’re the one doing the paperwork at the expense of real work (building your product, selling to and serving clients, etc.).
2. No double taxation. Profits for an Inc are taxed twice, first for the corporation, and then the dividends are taxed at the individual level. The members of an LLC (the equivalent of shareholders in an Inc) are treated by the IRS as individuals.

An LLC provides the liability protection of an Inc corporation. In plain English, if someone is owed money by your company, he or she would be able to go after the company’s assets, but not the personal assets of the company’s owners.

An LLC incurs one cost that an Inc does not: the annual franchise tax (about $800 annually in California). But that should be minor compared to the advantages noted above.

LLC Is Better for an Asset Sale

If you bootstrap and sell the company quickly, your buyer may want to buy your assets (the website, users, technology, etc.) rather than buy the whole company by buying all the shares. Buying the shares is more complex for the buyer. This really matters if you are selling to a big company. Managers of large companies have to follow rules, and the rules for acquiring companies are very, very lengthy. This can be a real deal-stopper. They may simply say, “Asset sale or no deal.”

Here is why this matters if you have an Inc: double taxation. Say the buyer is willing to spend $1 million. If the Inc sells the assets, that money is regarded as revenue. So, if you had $100,000 in costs, then $900,000 would be taxed at the corporation level (around 35%). Then the after-tax amount would be given to shareholders (you and your partners) as dividends, and you would pay tax on the dividends (currently 15%, but historically the same rate as income tax: i.e. higher). In other words, ouch!

So, setting up an LLC makes sense, right? Not so fast. Venture investors (VC funds and most angels) need an Inc before they can invest.

For Most Investors, You Need to Be an Inc

You can get investors with an LLC, but they will need to become members, which is a bit like what common shareholders are in an Inc. You won’t be able to sell “preferential shares,” and you will need to sell preferential shares if you want to get venture capital. Don’t worry for now what preferential shares are: we’ll cover that in a later chapter.

Okay, still simple. If you plan to bootstrap with only money from friends and family, go for an LLC. If you want venture capital, set up an Inc. But what if:

• You want to bootstrap for a couple of years and then raise money? Then an LLC is probably the right choice. You can convert from LLC to Inc later. It is not as easy as some people will tell you, but it can be done. By that time you will be making money and can afford a lawyer to get it done right.
• You don’t know whether you will be able to raise money. You can set up an Inc very fast, much faster than you can convert from LLC to Inc. So maybe you should defer incorporation until you are close to raising money.

In these gray areas, when you are not totally sure whether you will be bootstrapping or raising venture capital, the choice of Corps (C Corp or S Corp) may help.

C Corp or S Corp?

There are two types of corporations:

1. C Corp: This entity pays a corporate tax, and the shareholders pay income tax on the distributed profits/dividends. This is called double taxation.
2. S Corp: This entity does not pay a corporate tax. As in an LLC, earnings and losses are passed on to the shareholders, and then they pay personal income tax. The drawbacks (for some people) are the limits on shareholders: no more than 100 of them, they must be individual US citizens or residents, and only one class of stock is allowed.

At first glance, S Corp sounds like the ideal solution: no trade-off required. But remember that only one class of stock is allowed. That means no preferential shares and no venture investors.

So, the choice is really back to Inc versus LLC. Keeping it simple, if you aim to bootstrap with only simple debt or common equity from friends and family, go the LLC route. If you plan to raise venture capital, set up an Inc.

Which State?

The choices here are:

1. The state you live in,
2. Delaware,
3. Another state like Delaware that allows out-of-state shareholders to set up companies. Nevada is an alternative.

Brick and mortar startups (retailers, for example) set up in the state where the owners live and do business. For Web startups that do business nationwide and globally, location is less relevant. What matters is which states make it easier to set up and administer a company, and which states are better if you have to go to court.

Delaware is the most logical choice. If you want to explore this issue further, check out the differences between Delaware and Nevada. But most entrepreneurs are probably saying by now, “Enough already! Let me get back to the real work of building my venture.”

Conver
ting from LLC to Inc

Let’s say you decide to bootstrap with only simple debt or common equity from friends and family. But a couple of years into your venture, you find that you do want VC funding after all, and a VC wants you. You will need to convert from LLC to Inc. Presumably, by then you will be a bit more established and able to hire legal help to get it done right. So the only considerations now are:

1. Is it possible to convert from LLC to Inc? Short answer: yes. How hard is it to do? Not very hard.
2. What can you do now while setting up and running your LLC to make this process simpler.

How hard really is this conversion? The answer is, it depends, and you should consult a tax professional. Converting from LLC to C Corp can usually be accomplished without triggering any income tax for the owners or the company, but issues may arise.

If the conversion keeps ownership exactly the same — five LLC Members becoming five Inc shareholders with the same ownership percentage — then the conversion will be quite simple. If you intend to do “a little restructuring,” then you’ll need to speak with a tax professional.

But these are issues to think about closer to when it happens. You cannot really plan for it now. We’ll revisit this in the chapter on “Planning Your Exit.”

Company Administration Basics

This list assumes your company is an Inc. An LLC is similar, but a bit simpler and with different terminology.

You can do this online for a few hundred dollars. You would be wise to have a lawyer check that nothing specific to your venture requires a change. But this is almost always an off-the-shelf job, not a custom project.

Find online firms that do this by Googling “Incorporate your business.” Do a dry run, print out all the forms, and make sure you know how you will be filling in the details. You will be asked for such information as the number of shareholders, their names and addresses, and who will take jobs such as Company Secretary (you or your buddy: who is better at performing boring admin tasks?).

You will get standard forms for:

• Corporate bylaws and maintaining board minutes,
• Shareholder agreement.

Give these to your lawyer for a quick once-over. If you don’t have a lawyer buddy who will give you a couple of hours of free time, find a lawyer who specializes in tech startups. Most will do a bit of basic work for deferred compensation.

More important are the:

• Employment agreements,
• Stock options plan.

Again, the forms are standard; get a lawyer to quickly review. But read Building Your Team Pre-Financing to make sure you’re clear on what you want to do first.

Get an Accountant and Bookkeeper

The legal stuff is mostly a one-time deal, but finances are ongoing and require continual attention. Being attentive to these details will make money-raising and exiting a lot easier. And if you never raise money or sell the business, it will make tax preparation easier.

You’ll need two types of people:

• Accountant. You’ll need this expensive expert once a year (like a lawyer) for an audit and tax preparation.
• Bookkeeper. This lower-cost clerical person makes sure your basic income and expenses are recorded properly every month, making the accountant’s job simple (and inexpensive).

What If I Am Not in the US?

Then you have two choices:

1. Set up your company locally. The process is different, and you will need a manual on how to do this. Many concepts are similar, but the forms, terms, and details are different.
2. Set up your company in the US, probably in Delaware.

So, how do you choose? Look at these parameters:

• Are you based in a big country that has plenty of local customers, VCs, and angels? If so, you may want to register your company locally.
• Are you based in a small country that has very few prospective customers, VCs or angels? Cross-border deals scare off most investors, certainly American ones. Check that the laws of your country allow you to own a foreign company. US companies can have foreign shareholders, so no problem on that count.

Don’t even think about complex structures, with the parent company in one location and subsidiaries in other locations, unless you already have a lot of capital and can get proper advice.

Photo credit: Gregory James Walsh.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

This is part of your pre-financing team-building. The term “Board” may be confusing here. This is not a Board Of Directors: that is the subject of a later chapter. Nor is it a couple of your buddies. Nor is it someone who gives you one specific bit of advice. Also, don’t look at this as a brand-building exercise by throwing big names on your website. Look for people who really complement your skills, really believe in what you are doing, and, as a by-product, open doors and bring some credibility.

Set Some Good Objectives

You want people who:

• you trust and who trust you,
• know stuff that you don’t and who know what you will need,
• are excited by your vision and mission,
• will be reasonably responsive to your requests for help.

Using an Advisory Board as a Promo Tool Will Backfire

Have you seen those ventures with a long list of “brand name” advisers? Are they there for show or for real? Do you think investors are convinced by them? Do you think customers or users care a hoot about them?

It just looks amateurish. It is an old, out-of-date trick that has lost all credibility.

Advisers worth getting give real time and attention to the ventures they advise. So they limit how many they work with. They don’t “spray and pray.”

Advisers and advisers

You may have any number of advisers — friends and family — who you turn to informally for advice and who expect nothing in return except your friendship. But we use Advisers here with a capital “A” to denote someone with an official, compensated relationship with the company.

How to Get the Best from Your Advisers

Don’t try to “get your money’s worth” by asking unnecessary questions. Wait until you really need help. Make sure you don’t ask dumb questions when a simple online search for the answers would do the job. Know enough about each of your advisers to know who would most likely be able to help in a particular situation immediately. Give them reasonable notice, no “I must know today” stuff.

But when you’ve covered all of the above, be demanding. They took on a job and are getting paid for it. (See below.)

How Many and What Type?

Don’t have too many advisers. That is an unnecessary expense in time and money. Get advisers, like anything else, in the right time. The quality of advisers you can get will grow as your venture grows, and your compensation (equity) will look more valuable.

One rule of thumb: don’t have more advisers than the number of people on your management team. Two to three should be the max to start with.

Seek a balanced team. If the founders are strong in business or a particular domain of business, then seek a technically oriented adviser. Or seek somebody with domain skills in your entry market. Somebody with financial chops is always useful. You always want entrepreneurs who have gone through what you will go through.

How to Compensate

Compensate with the only currency you have: equity. Don’t even think of compensating in cash until your venture is spinning off a ton of cash.

Their equity should vest over a four-year period, just like the founders’.

The price of the stock will depend on when you bring them on. If the venture is pre-financing, sell them founders’ stock; i.e. at nominal value. If they come on after a round that values the business, give them options to buy at that valuation.

How much? If you get advisers at the earliest stage, offer them something in the range 1 to 2% of the company. Yes, that is a real commitment, so limiting your number of advisers and getting only really good ones who contribute is all the better advice.

Give them anti-dilution rights. For example, if they have 2%, and an investor comes in and dilutes everybody by 30%, the adviser should have the right (but not the obligation) to invest their own money at the same valuation as the investor to maintain their 2% stake.

If they come on after the first round of external financing, you’ll have additional things to consider:

1. The adviser should be compatible with the investors and comparable in level of experience (so that the adviser can work with the investors as a peer). Having an adviser on the board of directors who is neither an entrepreneur nor an investor but who only wants the venture to succeed is a good idea. Post-financing, you won’t have the same freedom of action (hint: so get them pre-financing).
2. Their equity options will be part of the management team’s option allocation. So, they won’t get the same 1 to 2% that an adviser would get pre-financing.

Transactional or Deliverables Compensation?

These are tempting but usually a bad idea, They are something along the lines of, “I’ll give you X% if you get Y,” Y typically being securing financing, but sometimes development or obtaining customers. Treat these people as vendors and pay them on a deferred risk basis (see Building Your Team Pre-Financing). These are short-term, tactical relationships. Advisers should represent a long-term relationship based on trust.

What About the Investor’s Pre-Built Networks?

Cash is fungible. A dollar from investor A is exactly the same as a dollar from investor B. Investors don’t like offering a commodity, so they stress their value as advisers and the quality of their networks. That is true; they do offer a lot more than cash, but note the following:

1. An adviser from the investor’s network will tend to favor the investor (if there is ever a conflict),
2. You will get better terms if you bring your own network rather than rely on their network.

But you do pay for your adviser, so like any early team decision, don’t take this one lightly. It is a defining one.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

There are three ways to get a great URL. The first is with magical inspiration: that perfect and available name comes to you in the shower. The second is with a ton of money, by buying an existing domain. The third (if inspiration and money are lacking) is with the process outlined below, which may yield a workable name. These days, you start with the URL and then check that some variation of the company name is available (for registration purposes). That part is relatively easy.

Relax (But Avoid Really Horrible Ones)

URLs matter a lot less than it would seem when you are starting out. One can think of plenty of terrible names that did great and vice versa. We are now moving away from destination sites. Search engines and browser capabilities, such as Firefox’s awesome bar, will help people find you.

If you are relying on a great name to build traffic… don’t. Unless you have a lot of money to buy an existing domain — and that is probably not a good use of your cash — there are cheaper ways to build traffic.

So then, “okay” is good enough. Don’t obsess over the URL. Save your obsessing for usability design. But avoid the real stinkers, the names that make people laugh at you and then ignore you. We live in a global world, too, so do check that your great URL does not mean “Your mother is a mangy dog” in Chinese, French, or whatever.

Process for Getting a Great URL

Here is the three-step process:

1. Go for a run (or whatever exercise you enjoy doing).
2. Have a double espresso.
3. Do something totally relaxing, like petting your cat, to clear your mind and let inspiration set in.

Did that do the trick?

No? Try the longer process:

1. Choose some “themes” that relate to your biz.
2. Brainstorm with some pals to come up with a really long list of words that vaguely relate to those themes.
3. Use bulk registration to test a lot of them. Make a shorter list of what is available with .com.
4. Check that shorter list against:
   • a trademark search on uspto.gov,
   • some people who will give you an honest response,
   • a few major languages for the “mangy dog” test.
5. If that cut leaves you short, go back to some of the names you like and try them out with .net. In some cases .net is okay, particularly if the .com name is owned by someone small and non-competitive whom you can buy out later.
6. Still coming up short? Try country extensions. For example, if you want rabbit.com, try rabb.it (Italy). This is risky. It sounds clever and occasionally works, but mostly confuses people.
7. Once you get a viable list of three that check out, buy all three and then test, test, test. And test with as broad a community as you can get. Use Twitter, your blog, whatever connects you to your network quickly. And go outside your network.
8. If all three fall short of this last hurdle, start from the top: go for a run, double espresso, etc. Allow time for this. The best ideas come at the oddest times and usually when you are thinking of something else.
9. When you find your chosen one:
   • Register the trademark at uspto.gov.
   • Protect major country extensions, .net, .info, and other extensions that a squatter or competitor may try to take if they see you get traction.
   • Create a logo that works.
   • Ensure the company name is available. In the worst case, CoolSite.com could be run by Boring Company LLC doing business as (DBA) CoolSite.com.
10. Go, baby, go!

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

In our 10 Things to Be Clear About Before You Start, we suggested that you decide whether to build a team of partners or fly solo. If you have decided to build a team of partners, even a small team of two, you’ll need to also decide how this partnership will work. Your only currency will be equity in a company that has not been formed and a venture/Web service that is no more than a gleam in the eye.

Create a Small, Balanced Team

Here is the advice of Naval Ravikant, serial entrepreneur and angel investor. His advice is directed at other angel investors, but that is a good context in which to look at this as an entrepreneur:

• “Invest in teams of two to three founders. Five is unstable, one is too hard.
• The best combination is one founder who can sell and one founder who can build.
• The team matters more in enterprise deals, traction matters more in consumer deals”

There is a reason why people talk about “putting the band together” and “rock stars” in this context. Solo artists can do great (think Bob Dylan), and when they get some success, they can bring in session musicians (contractors). But the history of pop music is more about the great combos: Lennon and McCartney, Simon and Garfunkel, Jagger and Richards. Those bands may have had four people in them, and the other two members in each may have been talented and driven, but it was clear who the stars were.

One Leader Might Emerge

But business is different from music. A great band like the Rolling Stones ends up becoming a corporation, but the skill-sets are different. Typically in a business, one founder emerges as the leader and CEO. Think Bill Gates rather than Paul Allen.

There are instances of two partners staying together and really building a big business together. Hewlett and Packard are great examples of this. But this is unusual because it does not fit the need of a company to have a CEO/leader who is recognized as such by employees, customers, and investors.

This is why drawing up some kind of buy/sell agreement is a good idea. You don’t even need a lawyer. Download the terms from the Internet. As long as the terms are mutual, nobody will get screwed. The buy/sell agreement simply acknowledges the fact that people change: their needs and motivations change. You might be the one who wants to get out of the partnership and move on. Or you might be the one who buys your partner out. Either should be possible.

But don’t get too hung up on the buy/sell agreement. Plenty of founding partners cross that bridge when they get to it. It is a bit messier doing it that way, but something can usually be worked out.

Dividing Up Something that Does Not Exist

We’ll cover the basics of creating a legal entity in a later chapter. Most ventures start without being incorporated. You may have heard legendary stories of founders getting a check from an angel first and then having to set up a company and create a bank account.

If the founding team is of two people, it’s pretty simple. If you have three or more, you will need to define the founders’ agreement one way or another. Here are four options:

1. Purely verbal. “We’re all buddies and understand each other, right?”
2. Each of you hires a lawyer and lets them hammer away at each other on your nickel. Hm, now where’s that nickel?
3. Document what you have verbally agreed on via email exchanges, and the next time you’re all together, print it out and sign it.
4. Download a legal template, put in the terms you have agreed on, and sign it, possibly after getting one hour of legal advice from a buddy at law school.

Somewhere between three and four partners is recommended. Even buddies can misunderstand each other. When there is nothing to fight over, there are no fights. But when it looks like the venture might take off, greed sometimes kicks in, and one founder develops a case of “selective amnesia” regarding something that was verbally agreed on. Even an email record prevents that danger.

The reason to be careful about the legal agreement between the founders is that it helps with the next stage of your startup: bringing in external investors.

Get Your Due Diligence Ducks in a Row

The earliest-stage investor will be looking at just the team and the website. That’s it. If your site sucks, sorry. If one of you has a criminal record, whoops. In other words, due diligence (the step after the term sheet and before the contract and cash in bank) is simple.

There is one show-stopper you want to avoid. Anybody who has worked on the website or helped with the venture in any way should sign something that acknowledges the venture’s Intellectual Property (IP). If someone comes out of the woodwork and says, “They stole that from me,” most investors will be scared off.

You can and should do this even before you form a legal entity. You simply want what in the old days was called a “paper trail,” and is now an “email trail,” which records what was agreed on. This trail could include:

• The two to three founders saying that each of them owns X amount of Newco (your to-be-established company) and assigning all of their IP related to this venture to Newco.
• A buddy who writes some super code just because they’re a friend confirms that they have no financial expectation and assigns all of their IP related to this venture to Newco.
• Somebody who provides a service in return for equity and assigns all of their IP related to this venture to Newco.

Paying with Equity

You may not be able to pay in cash for the things you need done. So, you could agree to pay in equity. Don’t do this as a percentage. Use a formula along these lines:

1. What cash rate would this person normally charge? Check that this is normal for the market.
2. Agree to pay twice that amount in equity. The doubling is to cover the risk that they never see anything.
3. Convert the cash into equity at the valuation of the first round.

Don’t treat this person or vendor like an investor or partner. They are not. They do not know how to evaluate the venture, so don’t waste your time trying. They are a vendor whose payment is being deferred. KISS.

Note: a long-term adviser is a special case that we’ll deal with in the next chapter.

Vesting

This comes down to the actual term sheet with the first investor(s), which is covered in a later chapter. But this item is worth considering at the beginning. When somebody invests in a founding team, they invest in the work that the team will do in future. So they want to invest your founding shares over time.

You can haggle about vesting some founding shares from the start if you have already built a lot and gotten some traction. But this is really “at the margin.” Don’t obsess over it.

You also need this protection with your partners. Say you have a team of three founding partners, each with 33% of founders’ stock. You don’t want one of them to leave just after funding comes from another venture, or to go off to play music, or whatever. All three of you need that same protection. Build your own partner vesting schedule, typically four years, and present this to the investor(s). They will appreci
ate that you have thought this through and that your interests are aligned.

Source: ReadWriteWeb

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

Surfing sure sounds like more fun than work, but when you catch a technology or market wave just right, it seems almost as good.

But you need the right-sized wave:

Post from NewsGator.com:

Creating Your Vision, Mission, Strategy and Plan

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

This was a hard chapter to write. It feels like a chapter that would work better in the final book. You have to have a mission and strategy and plan, right? So why does writing them feel like one of those make-work projects you have to do to keep investors happy? Come to think of it, you could outsource the production of your vision, mission, and strategy via Mechanical Turk?

Seriously though, when Lou Gerstner, one of the great business leaders of all time, took over the (at the time) highly troubled IBM, he proclaimed, “The last thing this company needs is a vision.” He was right. IBM needed a cultural transformation, and he provided that, as memorably recounted in Who Says Elephants Can’t Dance. Nothing is worse than those scripted vision and mission statements that sound like they came from a corporate-speak random buzzword generator.

Dig a bit deeper, though, and you’ll find that vision, mission, and strategy are essential. They don’t even have to be clearly articulated. They just have to be real and executable. Lou Gerstner probably did have a vision, mission, and strategy; he was just so focused on the urgency of the execution that he did not have time to articulate them.

Vision, Mission, and Strategy

Vision: “I see a world where…”

Mission: “In that world, we intend to…”

Strategy: “We will achieve this mission by…”

Finding a Real Vision Thing

There are four types of startup visions:

1. Fantasy. This is more like hallucination; it does not relate to reality. It may sound fun, but is not useful for starting a business.

2. An extrapolation of current trends. A vision is really about seeing into the future. This is not totally impossible. The trends are visible today, even if the timetable is uncertain. Moore’s Law was a reasonable predictor of everyone having a PC.

Distinguishing between #1 and 2 is hard. The next chapter, “Finding the Right Wave to Ride (Secular Trends),” is designed to help you think this through. But in the end, you will have to trust your gut, which is sometimes right and sometimes wrong! Extrapolating trends can go totally wrong. So, agility is a prized trait among entrepreneurs. Startup success stories are full of entrepreneurs who start with one vision and mission and then change them when they discover the reality of the market and find that the real need is different.

3. Inspiration for your stakeholders (i.e. employees, investors, clients, partners, etc). This is really about the mission based on the vision. “Come on, folks. Charge! In this direction…” This is a polished version of the rather hazy vision and mission of the original founders.

4. Lipstick on a pig. A company stranded on the wrong side of a trend (e.g. buggy and whip manufacturers when the automobile came out; gas guzzlers and print magazines today) will often attempt to devise an inspirational vision and mission statement… because “Squeeze as much cash out while we still can” is not inspirational.

Most people can instinctively tell the difference between #3 and 4.

The idea has to be one that just won’t leave you alone. Such ideas often seem totally out of sync with current reality and are dismissed as crazy. That is because in the current environment they are crazy. The idea that everybody would own a PC was crazy in the 1970s, when Microsoft was starting out. People who are driven by these ideas very often feel doubt. On all sensible levels, the idea is crazy.

Insanely Great Products

“Insanely great products” make your jaw drop and make you shout “Wow” and believe in magic.

Insanely great products create their own markets. They have to key into real needs, and the products are enabled by technology changes, but the creators sidestep the whole vision, mission, and strategy thing. They just create an insanely great product and launch it, and it catches fire. In hindsight, this is labeled “genius.”

Great Companies Without an Articulated Vision or Mission

There was once a highly successful entrepreneur who met with investors. His business was already a big success, highly profitable and growing like a weed. He had done it without a dime of external financing, but had taken 10 years to do it. This was no overnight success story. One of the investors asked him to describe the vision and mission that drove him in the early days. The entrepreneur replied, “I wanted to buy lunch.”

He was actually not trying to be funny. He had arrived in the US without any money or connections. He was simply doing the one thing he knew how to do so that he could earn enough to live. As it happened, that one thing he knew how to do was part of a huge trend, and so he was perfectly positioned. He was also super-smart, hard-working, and tough.

There was another great entrepreneur who built a business over the course of 20 years and sold it when his market turned out to be “hot.” He would joke about how smart he was 20 years ago in seeing how hot his market would become.

These entrepreneurs did have a vision and mission that guided their actions. They simply did not articulate that vision and mission because (a) they were not that way inclined, and (b) articulating a vision and mission did not serve any useful purpose.

Mission Without Strategy Is Just Bombast

Strategy: “We will achieve this mission by…”

You could fill a library with books about strategy. In the startup game, the simplest way to think about strategy is as leverage. Not debt leverage (although that may be appropriate, even if currently out of fashion). Think rather of a lever.

“Give me a big enough lever and I can move the world.” — Archimedes

Startups need a lever to compete with big entrenched companies. That lever may come from software or people or something else. The other way of thinking about the lever is by looking at what VCs call “unfair advantage.” You have to be able to clearly see your unfair advantage.

Some ventures start with a clear view of their lever, but without a clear view of how to use it. They have faith that if their vision of the future is right and the lever is real, they will figure it out. Google launched a better search engine (the lever) without a view of how to use it to make money, and it is now the poster child for this approach. As with most poster children, though, its massive success eclipses the countless others who have tried the same thing (i.e. started without a clear view of how to use their lever) and failed.

Strategy – Plan = Hot Air

Building a company is like building software: it is an iterative process. Once it is all complete, then the architecture and design are clearly visible. But it did not start out that way. Nor is the progression linear. The progression from vision to mission to strate
gy looks clear. In reality, it is a creative process and therefore messy, chaotic, and non-linear.

However, the “planning” bit is separate. The type of people who are good at creating a vision, mission, and strategy are often not good at planning and executing them. Which is why we’re keeping that for a separate chapter.

Image credit: Michelle Ho.