Startup companies in Colorado and throughout the country have long been the darlings of the tech and innovation worlds, catching the eye of investors and entrepreneurs.
In fact, according the Startup America Partnership, Colorado startups achieve about $260 million in annual revenue, helping the state consistently rank in the top five nationwide for startup growth. Colorado’s positive business climate continues to attract more startups and entrepreneurs.
But these new businesses also face legal and business hurdles as they launch and grow. Company leaders can focus on three key areas to overcome the most common source of mistakes and headaches for startups:
1. Entity Formation: When forming the company, seek and work with legal counsel so that you use the appropriate documents and follow the necessary steps. This will ensure that your business is in order for future investors and your company’s future, too.
For startups in the formation stage, the biggest issue and decision involves choosing the best business structure. Many companies may not be profitable at the beginning. As a result, it is often best to operate as an LLC, or limited liability company, as a tax pass-through entity. An LLC can combine the pass-through taxation of a sole proprietorship with the limited liability of a corporation, meaning your personal assets aren’t exposed to the debts and liabilities of the entity if you follow the entity formalities. As startups grow and investors join, it’s often practical to convert to a corporation to continue expansion.
2. Intellectual Property: Tap your legal counsel to prepare the right documents to protect your company’s intellectual property.
For many startups, intellectual property – including innovative ideas, products, services or names – can be the foundation for their entire business plan. Even for company leaders who don’t think they have something that needs a patent or trademark, they often do or at a minimum have trade secrets, proprietary information and know-how to be protected. Many times, initial concepts, designs, coding and even brainstorming ideas can and should be considered intellectual property.
In addition, a major mistake by new businesses is a failure to enter into appropriate agreements with employees and contractors regarding ownership of the company’s intellectual property and protection of confidential and proprietary information. This can often be remedied by putting the correct contracts and paperwork in place ahead of time.
3. Clean Structure: For companies looking to further appeal to investors, it’s important to remain as clean or streamlined as possible from the standpoint of both capitalization and structure. By limiting the number of options, warrants or convertible securities granted to outside parties, new companies are more likely to attract the type of investor that’s right for their growth plans.
For example, many companies today are using popular, online crowdsourcing tools to help launch a product or business. Sites such as Kickstarter and IndieGoGo allow individuals to fund and support a new product or service. Crowdfunding by investors is on its way to Colorado, with the new law slated to go into effect in August. However, startups need to be careful with this approach.
Crowdfunding doesn’t have the potential to raise large amounts of capital typically needed to successfully run a startup business, and it often makes a company less attractive to potential investors because of the sheer number of investors now involved in investing in the business. In keeping a cleaner capitalization table, new companies can avoid dealing with too many shareholders and balancing varying priorities that may distract from getting the business up and running successfully.
In conclusion, entrepreneurs looking to launch a new company must prepare and plan for success from the start. Along with a smart business plan, the right legal structure and protections will get the company off on the right foot.
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