Money, Power & Fame

Tough questions for startup co-founders

Introduction

Some years ago, I partnered with a couple other local software devs to create a startup around casual games for the newly introduced iPhone. We had good reviews from our players, a few nice press mentions, downloads around the world and even a brief email of potential investment interest from a billionaire that would later become a “Shark” on ABC.

A few months later, the partnership ended. I got hit with an enormous tax bill and went back to the drawing board.

A few startups later, and now a few years out of the startup world, I thought I might pass along some advice on how to avoid the partnership, accounting, and legal fiascos I’ve waded through in the past six or so years. But rather than offering a prescription, I’ve instead collected the questions I wish my potential partners and I had discussed.

Money, Power, and Fame is a planning guide for those hoping to take an idea and turn it into a successful product or business.

Answer the following questions with your founding team. Don’t jump ahead to criticize or debate the idea itself. That is a separate process — the creative, fun part that we all get so excited about.

Money, Power, and Fame is about the details of making the idea into a business, or at least a viable product. The process forces you to face difficult decisions now, before success clouds judgement or failure tarnishes relationships.

The beginning of a project, when everything is fresh and new and exciting, is the time to spend a few hours thinking about the choices your team is making. How the money flows. Who does what, how often, at what cost. Who gets credit if this thing works? Who gets rich if this thing sells?

The process boils down to an easy to remember drama familiar to anyone that has ever purchased a movie ticket. Starting a business is a story of Money, Power, and Fame.

Simple, really, but many of these conversations are exactly the ones many founders avoid until their next big thing is either:

… worth suing over (i.e. early Facebook and the lawsuits that became modern and glamorous folklore in The Social Network).

or…

… was a flop and the finger pointing begins (i.e… many, many other startups… a few of mine included).

This document is meant to be a flexible starting point. It is meant to start meaningful conversations that avoid future disputes. The important thing is that you shine a light on your business decision making and avoid potential conflicts before they waste valuable time and resources.

Basic Info: Who is this startup?

Before you start, document your founding team members, their contact information, along with your primary attorney and accountant for this project.

In case of fire, call… who?

If your startup lasts longer than a week, there will be fires. Make sure everyone on your team has this information.

Settle on how you will present yourself to the world, right now. If you use your personal email addresses and cell phone numbers and tell people you are just starting out, that’s fine. If you use Google Apps to setup domain email and book a virtual office with a receptionist, that’s fine too. Just don’t have one team member trying to look like the Fortune 500 and another sending clients email from dorm420@community-college.edu. It’s bad form.

This formality behind you, its time to answer more pressing questions.

What would you say… you do here?

You just landed in Austin for SXSW and share a cab with a decision maker at a venture fund or an influential journalist in your industry.

In one sentence, what does your product do and who is the customer?

In one more sentence, why is your team uniquely qualified to create and offer this product?

If anyone can do what you do with skills, background, and talents that can easily and inexpensively be acquired, you have a very tough road ahead. The more unique your advantage, the more you have a chance to stand out before you are copied.

Tip: “Because we know Rails better than anyone else here in <your town>” is a poor answer to this question.

Tip #2: Compare backgrounds with your team and learn about past work and experiences. It is always frustrating to find out someone is a great artist after firing several game artists, or find out someone is an Excel wizard after working on financial projections alone until 3am.

Background

Does your product have a past? Did you work on it years ago and now you are getting back to it?

Why does this matter? Well, because your lawyer will ask. I’m not an attorney, but any credible potential acquirer or investor for your business will want to make sure they own the rights to what you do.

Document anyone — employees, contractors, outside firms, family members — that worked on a previous iteration of this idea. This is especially important if you pursue patents later.

Chapter One: Money

If you hired skilled labor to produce the initial, minimum viable version of the concept, what would it cost?

Make sure you note what firm or contractor provided this quote and the list of deliverables, especially if this is work not within your direct expertise.

Using the labor and resources of the founding team, how long will it take to produce the minimum viable product?

As importantly, how can you reduce this time period? Speed is critically important to startups. Not only are competitors building similar products, but the longer a project takes to build, the more likely your startup will burn through available cash before you have paying customers.

These first two questions show something that founders often overlook — even if you have a technical background, you may be better off hiring out the building of a prototype and focus on the hard part — finding someone that cares enough that your idea exists to pay for it (either as a customer or investor).

Who will create the product?

Regardless of whether you assign one of your founding team or an outside contractor, be clear up front who is responsible for each critical piece of the project. Leave no assumptions.

Good things to know include… Names, skills applied, cost per hour or week or month (even if no actual cash is changing hands yet) and estimated number of hours.

Tip: If any non-cash compensation is promised, from equity in your new company to “we’ll buy your lunch every Friday” — write it down.

For each person that participates in the project… is he or she an employee or a contractor?

Either way, stop and do the proper tax and legal forms. Do not proceed without these items in place or you may cause yourself serious headaches at a later date. Also, do not estimate things like self-employment tax in your head when your head is busy with other things.

Who is providing hardware and software for this project?

This is an easy topic to glaze over, but some projects require expensive gear to accomplish. Make a note of who is paying for this stuff, and who will cover updates and upgrades — if needed.

Is this is part of the compensation for your contractors or the property of your new company? Here’s a test. Only one of these is true for a given project:

  1. Your startup will buy the designer a license to Photoshop CC.
  2. Your startup is buying a Photoshop CC license and the designer will use it for the duration of their work for your company, but that is all.
  3. The designer has their own license to Photoshop CC and its built into her rate.

People quit. Projects fail. Know these answers up front.

How much money will be budgeted to promote the product to the public during development?

If you are developing the product before telling anyone, the answer is zero. But if you plan to generate buzz while you are building version one, that may cost you.

How much money will be budgeted to promote the product in the first 12 months after launch?

Yes, things go viral. People may tell their friends on Facebook or tweet about your greatness. But at some point, products must be marketed to get that process started.

Whether ads on The Deck or a booth at CES or hiring a B2B sales pro, come up with a plan or you may have a well engineered, carefully executed product that no one is aware exists.

What person(s) on the founding team will allocate time to actively promote the product?

Time is often more valuable than money to a startup. If someone on the team actually has free hours to blog, speak, do outbound calls, write emails, or cause a media circus, this is a huge advantage.

How often is this person available? Five hours per week for three months or 40 hours per month for 2 years?

Who will buy or use this product?

Did your answer change from a few paragraphs ago? If so, are your production costs or marketing ideas different as a result?

Go back and reevaluate your answers. Startups are meant to change quickly until you find a profitable, scalable match of product and customer. But that quick change can’t just be the product itself —the messaging, the pricing, the team you need, and even the legal docs may all need to be revised as your social mobile app idea becomes a VR-headset for first class airline passengers, for example.

What will your product cost the end user?

Not all startups are Twitter and Facebook. Most don’t just collect huge amounts of data and turn into an ad network. Some, shockingly, charge money for things of value.

Do you know your pricing model?

  • Pay per unit?
  • Pay per use?
  • Subscription per month?
  • Tiered pricing?
  • Freemium?
  • No idea until, ahem, you file for an IPO?

Have any potential end users seen these prices and supported this plan? If not, stop here and talk to your target market before you proceed with bad assumptions.

How many units can be sold before the costs increase?

Is there a point that you will you need a new factory or outgrow your original technology infrastructure? For example, are you launching on a free hosting account or something that will scale as you grow? Are you making goods by hand and plan to automate later? Are you producing expensive prototypes before signing a contract manufacturer?

Think through the growth points that will change your cost to make what you sell.

How many units must be sold before your costs decrease?

Whether it is automating processes, bulk purchases or other economies of scale, your margins may increase as you grow.

Think through what growth points you need to reach to have these advantages.

After the initial product is released, who will maintain and update the product?

This discussion creates a lot of tension if the product is already finished and in the hands of customers.

Did you plan to use contract help to launch your product? What will maintaining the product cost?

If your founding team built the initial product, can they keep up with support and building new features and marketing it to customers?

Who will answer calls, emails, and support requests from users of your product?

The first email from a user is exciting. Someone, somewhere is using what you built. The second is terrifying, because you realize you didn’t consider what user support will cost. When you are building your product, it is easy to forget that answering a five minute email from a user can add up to 5000 minutes quickly.

Have a support plan in place. Either dedicate time of someone on your team or plan to spread the work around, but don’t just let users wait for days. Great support can create raving fans and great buzz, or least head off negative reviews.

When this project makes a profit, what is the plan to use this money?

You finally made a few dollars more than you spent to make your product. Talk through how profits will be used before they exist, not when they are burning a hole in your pocket.

  • Quarterly distribution to partners?
  • Put the money in savings to build a cash reserve?
  • Reinvest the profits in this project?
  • Reinvest in similar or derivative projects?
  • Invest it elsewhere?
  • Act all Wolf of Wall Street about it?

How much profit should accumulate before any spending takes place?

Will the project require the purchase or rental of real estate, such as offices or manufacturing space?

Work from home or a downtown high rise? Buy a space or rent? Do you need manufacturing and distribution space?

Make sure you and your co-founders are clear on how this cost will be paid and who is responsible for this search and negotiation.

Will this project require the purchase of intangible goods and, if so, what type and cost are expected?

Determine if you need licenses, subscriptions, memberships, or course certifications to create and market your product.

What do these items cost? Who on your team will responsible for acquiring intangibles needed to operate?

How will this project reach cash flow positive?

Determine how much is coming in, for how long, and how quickly you’ll spend it building this product. Ideally, you may have pre-orders that will allow your project to remain cash flow positive from day one. If that isn’t the case, how long will can you survive bleeding money?

Chapter Two: Power

Founder. Principal. Equity Partner. Whatever the title, the original participants in a startup generally act as C-Level executives while also doing day to day work that will eventually move down the org chart.

But that wide mix of roles — often the result of so much work split between only a few, very busy founders — also creates lots of assumptions about who is actually in charge. Founders naturally gravitate towards their strengths, or at least perceived strengths.

The most technically astute starts to act as a CTO. The best salesperson and spokesperson starts to act as a CMO or VP of Marketing. The best financial mind on the team starts to resemble a CFO. But the lines aren’t always neatly drawn, and eventually power struggles can hurt an otherwise functioning team.

In this chapter, we look at questions that help sort out who is in charge before your five person team has four acting CEOs.

Who on the founding team has the ability to work autonomously?

Whether on a rainy Saturday at the office with no one around to bounce ideas off or traveling overseas to a conference alone, the small size of a startup often dictates that individuals make quick decisions to keep moving forward.

Though your project is likely to be too early for formal management roles, determine who on the team has the ability to make important decisions alone — from engineering decisions to negotiating prices with clients.

Who are your advisors?

Determine if your trusted advisors will serve in a formal capacity, such as a board, or informally be called for advice.

Are your advisors compensated for their time? Compensation for advisors is typically equity in your new company, but regardless of the type and amount, make sure that your team agrees as to the value of each person added to the project.

Who is the final decision maker for the most difficult decisions on this project?

Ideally, everyone on your team will find consensus and the project moves along smoothly. But decisions in a startup are made very quickly and aren’t always going to be unanimously applauded.

Before you have the stress of an important decision, talk through who is the person on the team with the final word or how such disputes will be handled.

Who has the right to sell the company you are creating?

The term partner is used frequently in a small firm, but not all partners are actual equity owners of a project. Before you get started on your project, months before a suitor calls to offer you millions to join their portfolio, determine who on the team has the right to enter an agreement to sell the company.

If others have a vote, for reasons such as equity stake or other leverage, now is the time to spell out who has to agree to a sale.

Who has the ability to add persons to the company, either contract or employee?

Adding staff can be time consuming and difficult, but is also one of the most important decisions for a young company. Talk over with your team who can hire (and fire) contractors and employees.

You will want to sort out who has a final approval and who, if anyone, may recommend candidates for consideration but is unable to personally extend employment offers.

Who has the ability to enter into contracts on behalf of the company?

Signing new clients, approving significant expenses or entering into partnerships are all very important tasks for startup. Don’t assume that everyone on the team should be able to sign contracts that bind the company to certain terms.

If you have thresholds that will need approval of one or more founders — such as purchases over a certain amount — spell them out now, not when you review the monthly bank statement and try to sort out what went wrong.

Chapter Three: Fame

In any startup project, there are people that become the public image or spokesperson and others that work many hours on difficult problems in complete anonymity. The public image of a startup can be, in some cases, as important as the product itself and effective spokespersons can garner significant media attention.

There is also the concern of who is credited with doing the work on a project. Years after a project is past its useful shelf life, issues can arise over the portfolios and resumes of the persons involved. Much of this is innocent enough, but Google never forgets.

The following questions should be answered to determine each person’s Fame they should expect from the project.

Who on the team should be the lead media contact and public face of the project?

Press is the best free ad your project could hope to land. If the Wall Street Journal, the BBC, or the top blog in your industry asks for an interview, who should take the call? When this person is selected, they should be prepared at all times and know not only what to say about the project, but more importantly what not to say. Public comment requires tact and discipline, and on a young startup team that may not be the personality traits of the visionary brilliant minds that would rather be creating new algorithms.

Is this the same person if the request is for public speaking, such as a trade conference?

If not, who on the team is best suited for this role? Your best speaker may not be the one with the most power, the most skill, or the one that put the most money into this effort. The best presenter should be the one that will most effectively communicate to your audience.

You may also consider that your best speaker may not be on your team — it could be a client, partner, investor, advisor or other polished presenter that can cast your project in a positive light.

Who on the team should be the lead media contact for technical specifics of the project?

If an engineering, science, programming, or related media outlet needs to speak to you about the project, who is the best suited to respond intelligently on these topics?

Again, when this person is chosen, make sure everyone is on the same page on what can be said publicly. This is especially critical if you are working on patentable processes or other work that can lose legal protections if disclosed publicly.

Is this project done as a collective?

Perhaps your startup isn’t a company yet. If so, what is the name of the collective for publicity and media purposes? Are the individuals or niche firms that will create this collective going to be publicly mentioned?

A collective can be a way to test run a more formal partnership, or branch out without risking an embarrassment under the brand name your clients know, so talk through your options with your group (and legal and tax counsel) before creating an entirely new company.

Are any members of the team required to remain completely anonymous?

No public mention, no portfolio or resume updates. Anonymous participation is common, but can easily lead to misunderstandings. Make sure everyone involved understands what is meant to stay behind the scenes and what can be said to friends, family and colleagues.

Are any members of the team permitted to list the project in portfolio or resume form, and if so, at what point in development?

While you are on this topic, take a minute to figure out what each person should be credited with doing and when they can update their resume, CV or LinkedIn profile to reflect this work. A five-person team with four CTOs makes all involved look stupid.

Is anyone else involved in the project — investors, lawyers, contacts at potential clients — to remain anonymous for any reason?

There are any number of reasons why some of the people involved in your project may not want, or be able, to publicly say so. Better to sort this out now before your team talks its way into a PR or legal problem.

Who on the team would introduce themselves as an employee of the project?

Several members of your founding team attend a trade show. Who on the team would list the project or company as their employer instead of their own consulting operation or other employer?

This is worth discussing because there is often a fine line between startup and side project, and many viable businesses start out as a part-time venture or even hobby.

Next: Blood, Sweat and Tears

There is more to the startup story, of course, than Money, Power and Fame.

But I decided the best way to see if this was valuable to readers was to publish half of the original concept. So with enough feedback, I’ll finish and post part two, Blood, Sweat and Tears to include:

  • Chapter Four: Blood (Equity & Investment)
  • Chapter Five: Sweat (Labor & Employment)
  • Chapter Six: Tears (Going Out of Business)

If you enjoyed this and find it useful for your startup plans, please recommend below or share on all the social things. Thank you.

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