Founders Agreements

I was reading a question on Answers OnStartup from someone who was not happy with his founders agreement, and wanted to know his options for renegotiating. The agreement made was as follows:

I early on pushed for getting an operating contract agreed to by all three because I intuitively believed “make things explicit” would prevent heart-ache in the long run. My one big mistake was not doing due diligence, that I’ve now done, on how things should be done for a startup. The agreement that we are currently under is each founder gets a third, but we log our hours and get paid an hourly wage (significantly less than my contract rate but significantly more than A’s salary rate) which will be paid when when the company starts making money. The wage was a concession to me because I knew I’d have a lot of up front labor (but its now not seeming worth the risk its supposed to offset).

Partnership Agreements

The meeting of partners

The issue with this arrangement is simple – there’s no vesting, and the contributions being made by each of the three founders is not going to be equal in terms of time (although the value of the contributions may be equal in other ways).

First, what’s vesting?

Vesting in terms of a startup is the granting of partial ownership in the company (that is, shares in the company) that the employee gets over time. What this does is ensure that the employee will do their work (or they will be forced to sell the unearned component of their shares), while guaranteeing to the employee that they will, in fact, get their shares if they do the work required.

This is important in a startup in which the various people involved will have different levels of contribution, at least in the early stages. However, an assumption is made that the idea, IP, or company is initially owned by a single person (or company) which is recruiting others. In order for the initial founder to guarantee his investment in other people, he can vest their portion of the company.

In the case of the question above, however, the company was founded with three people, each with an equal share. Vesting was not actually an option, since no one owned the company beforehand (that is, who is the current owner of the company if not all three founders). Therefor, what this person needs is not a vesting schedule, but a solid founders agreement.

A founders agreement can be as simple as a single sheet of paper called a Statement of Understanding. The first lines of the paper would be something along the lines of:

This document is informal, and is intended to be the basis for a formal Memorandum of Understanding between the parties named below. It is meant to be interpreted as plain English as understood by a reasonable person. It is not a contract, but is intended to define the parameters under which a company may be formed.

The rest of the document outlines who the various people or companies are subject to this statement, what each one will be contributing to the partnership, and what each will get in return. Over time, this document can be expanded to include things like payout options, buyout options, dividends, reinvesting profits, and so on.

Regardless, it is critically important that any partnership have such a statement at a minimum, in order to prevent misunderstanding later. It should be easy to understand – it’s not about creating a complicated legal document that covers all contingencies. It’s to make sure that each of the partners understands what is expected of them and what they will stand to gain from the arrangement.

If you are looking to get into a partnership with someone, whether you are initiating the arrangement, or the other person is, make sure that you have such an agreement, and that any concerns you might have are outlined in it.

A Newspaper's Saviour: E-Readers

With costs on the constant rise, and convenience becoming one of the most important factors for consumers, newspapers are facing hard times. Managing the cost of creating, printing, and distributing content is becoming more difficult. On top of that, a newspaper at your doorstep no longer represents convenience, especially when the same content is available online, often for free.

Fortunately, there’s a new way to distribute content – portable e-readers such as the Kindle or the Nook, and there are rumors that Apple will be releasing an iTablet (although Apple has yet to confirm this). Newspapers can now reduce (and, in theory, eventually eliminate) the costs of printing. They can put a cap on distribution costs. There’s no waste in terms of extra copies being printed. The customer gets total convenience by having content sent to them automatically (no more soggy newspapers on the front step). You can keep up with the news while on vacation.

With this in mind, it’s not a surprise that many newspapers have eagerly signed deals to distribute via the e-readers. The selection available is staggering (the Kindle currently supports over 75 newspapers and 35 magazines) in addition to the books available.

Personally, though, while I own a Kindle, I haven’t signed up to get my newspaper that way. The reason? It costs too much.

The cost for my newspaper (I subscribe to The National Post) is $10 per month on the Kindle. My subscription, sent to my door, is about $6 per month (I get a special because of some other products I subscribe to). Since I can get all the content online, I’m perfectly happy to stay with my printed version at the lower price. The convenience is not worth $48 per year.

I tried to figure out why it costs more to get the paper via the Kindle than it does to get it delivered. First, I am aware that $10 per month is significantly less than the normal cost of the paper, or $20 per month. Second, Amazon is going to take a cut, which I understand to be up to 50% of the price.

In the long run, however, I think that the price of subscriptions will drop significantly as people start signing up for the digital versions of the publications. At least, they’ll drop relative to the increases in the cost of the printed editions.

Product Review: Amazon Kindle

I was recently given two Kindles by a client as part of a project, and in the process, was able to play around a fair bit with both the large and small Kindle. (For those who are aware, only the smaller of the Kindles is available here in Canada right now, and I had to get the Kindles shipped to me from the US.)

I’ve had the readers for about 6 weeks now, which is more than enough time to discover the joys and, unfortunately, the flaws in the product. However, I’ll let my experience speak for itself.

I first tried reading a normal book on the devices, and found it to be a joy, especially while commuting. I’m not a big fan of writing in books, so the annotation feature and the fact that it’s a tiny, difficult to use keyboard don’t really matter to me. Even while wearing gloves, I could still navigate smoothly, and found that the device does live up the expectation of easy reading in all lighting conditions.

The smaller device is more compact, and therefor my first choice while commuting. However, with only a 6-inch screen, not much text can fit there at once, meaning that you need to scroll constantly to the next screen. The larger version is much larger, and therefore fits more text, but I didn’t like holding it the whole time. (What can I say? I’m lazy, and find the extra few ounces to be too much. Plus, there’s the jostling on the train to deal with, and I’m worried about dropping it.)

What really bugged me, though, is the lack of foreign language support. I wanted to load a text with a mix of English and Hebrew in it, but found that the only way to do that would be to generate a PDF from it, which are not as versatile as generating content in the Amazon format. To me, this one point pushed me to look at other options. Unfortunately, though, Amazon is not alone in its lack of support for foreign languages, and my guess is that it’s only a matter of time before the devices get a software update to support this as well.

For the curious, the screen uses something called digital ink, which means that it’s not affected by ambient light conditions. The larger Kindle can hold about 3,500 books, and the smaller can hold about 1,500. The battery is pretty good, lasting about a week when reading for several hours a day (sorry, I can’t get more specific, as I have not measured it). It connects to the 3G network for downloading content, and you can shop for additional material directly from the Kindle, or order material from the Amazon website and it will be delivered to your Kindle.

Importance of Happy Employees

Building a business on loyalty

Building a business on loyalty

In my recent posts on questions to be constantly asking yourself as the owner of a small business (10 Questions to Keep Asking About Your Business and  Readers Respond: Questions to Ask About Your Business), the area I seemed to miss was in regard to employee satisfaction. Yet, this is a critical component to the success of your business, and deserves a significant amount of attention.

As a small business owner, you have few employees, and know each and every one of them by first name. They are, in essence, the family of your business. However, unlike your biological family, who are always part of the family, these people can come and go as they please. As a result, it is up to you to ensure that they stay around. The most effective way to do that is not to pay them more.

Money will only buy you so much loyalty. Think about the recent recession, in which businesses were forced to cut costs in order to survive. At times like those, a business that has been buying the loyalty of its employees will find that this is an expensive endeavor, and attempt to cut expenses. If money was the only incentive for loyalty, then the employees will leave at the first opportunity.

As a small business, then, loyalty must be earned. This is done by providing each employee with what makes them truly happy. While a nice paycheck helps, other factors can come into play.

If you have an employee who is creative, are you providing an environment in which they can express themselves?

If another employee likes challenges, are you constantly pushing them to expand their horizons?

Each person has a different issue that they find to be important. As the owner of the business, it is your responsibility to determine what those issues are (if you aren’t sure, you should ask each employee what is important to them in a workplace besides for salary). If your employees are happy and motivated, then you will find their loyalty to hold strong through the thick and thin.

Changes for 2010

The year has barely begun, and this is my first post here. I actually wrote this several days ago, which is the biggest change that will be seen on this site.

The last year has been a learning experience – I’ve set up this blog, tried a wide selection of topics for articles, and settled on providing interesting articles on subjects relevant to business owners. In that, I hope I have been providing you with quality content over the course of the last several months, and will continue to do so in the upcoming year.

What will be different?

In the past, I wrote articles as the fancy struck me, as I discovered a new topic to talk about. For that reason, if you look at the distribution of posts, you may notice that some weeks I post more than others. Some days I post several articles, and then silence for a couple weeks. Going forward, however, while I will continue to write the occasional off-schedule article, you will begin to notice regularity in the posting schedule.

Every Monday and Friday, there will be something new here, whether discussion of a news item, a hot topic in the social media buzz, or something else entirely. But it will be there.

On Wednesday, there will be a post from one of the following categories:

  1. Guest writers – I will be inviting people to post articles here, and there’s no telling who may show up. If you think you might be interested in writing an article here, please contact me with a summary of what you might like to write about, and where I can read some of your previous postings.
  2. Book reviews – as an avid reader, I cover about 3 books per week, and some of these books may be of value to you. I will select a few of the more useful books for a detailed review.
  3. Product reviews – no, this isn’t about affiliate marketing. This is about telling you, my readers, about some product or service that I personally find useful, and you might benefit from as well. If I’m getting paid to write the article, though, I’ll be sure to let you know.
  4. Site reviews – I come across a variety of sites during the course of the week, and whenever I come across one that would be of particular benefit to you, I’ll write about it and direct you there so you can enjoy it too.

So that’s the plan – 3 articles per week, with two of them being information-based articles, and the third being from a particular category. Of course, I’m always interested in hearing the feedback from my readers, so if you have any additional suggestions, please let me know!

A Novel Idea

A question was recently asked on answers.onstartups.com as follows:

How novel does a startup idea need to be?

There were several answers provided, and I obviously like my own the best:

Even if your idea is novel, within days of your site going live, there will be several imitators out there hawking a similar product. You have to do the best job you can to make your product provide as much value as possible. Thus, the issue of being novel is [almost] irrelevant, since even if it is novel today, it won’t be tomorrow, so why worry about that? Instead focus on being better than whatever competition is out there!

Thinking of a novel idea?

Thinking of a novel idea?

However, in looking at the question, there really is more that can be said about this. An idea for a startup needs a few components in order to be eligible for success, and novel is not one of them:

  1. Is there an unfilled demand for this idea?
  2. Who will pay for developing this idea?
  3. Can I do this, or can I recruit someone who can?

Is the idea original? It doesn’t really matter if the demand is not being filled currently (question 1). If I can fill the demand (question 3), and someone will pay for it (question 2), then my idea has the potential to be a success. If any of these questions cannot be answered satisfactorily, then it may be a good idea for someone else, or it may not be a good idea at all.

As a hopeful startup founder, what you need to do is be aware of how unique your idea is, because it will help you pay attention to the appropriate competitors. If there aren’t any at the moment (which in general demonstrates that you haven’t done your research properly, but occasionally might be true), then as soon as you launch, find out who started right after you. There is not a single niche market for which there is no competition – and I challenge you, my readers, to show me an exception. No, the competition may not be exactly the same as you, and they may not be at the same level as you. But they exist.

If you can understand who your competition is, and how you and they differ from one another, then you’ll understand the being novel is not that important. What is important is to be as good as possible at whatever it is you do.

Fiscal Year End

December 31 in most countries (I would say all, but I know that if I do so, someone will point out that some country no one has heard of before doesn’t fall into this group) is the fiscal year end for individuals. That means, as an individual or as any non-incorporated entity, you close your book for each year on December 31. This means that you are trying to get as much processed in December as possible, in order to have your year-end statements look as good as possible, and give you another year to worry about next year.

You may also be ramping up your charitable donations, to help reduce your taxes for the past year. You might be sending out invoices for work done so that you can declare the income as part of the past year. Alternatively, you may be deferring sending some invoices so that you’ll have another year to pay taxes on that income.

Paying Taxes

Paying Taxes

If you’re incorporated, then you have some other options. A corporation, at least here in Canada and in the United States, can declare a year end any time it wants, although generally corporations will stick to the last day of a month. For an individual, what this means is that your dividends are declared against the year in which the corporation announced it would pay those dividends. If the corporation had a year-end on November 30, you would have to pay those taxes immediately in April. If the year-end was on January 31, however, you would have 15 months to pay those taxes.

You can take this a step further. You can own a holding company, which is jointly held with someone else (for example, your spouse). This company owns shares in another company, which pays dividends. Your holding company could then have a year-end in January, letting you defer taxes for 15 months. If the company paying the dividend has a year-end at the end of February, then you would have 26 months before taxes were due on that income.

Naturally, you could have a dozen such companies, each letting you defer paying taxes for another year.

There’s a catch, however, called GAAP – Generally Accepted Accounting Principles, and the Anti-Avoidance Provision. What these two rules state, in essence, is that you can’t do certain things which might follow the letter of the law, but serve no purpose other than to avoid paying taxes – that is, there is no other reason for you to be doing whatever it is you’re doing.

If you’re a relatively small operator, you may want to set up a holding company to allow you to share your income with your spouse to some degree. Setting up additional tiers, though, could spell trouble in the event of an audit. As you get larger, and set up relationships with other people and companies, however, you may be able to create additional levels as a way of organizing your income.

Warning, however – don’t even think about trying any of this without consulting your accountant. The tax laws are constantly changing, and what holds true today might not be true next year, or next month. At the end of the day, if your accountant is not comfortable with your strategy, it’s their advice that should hold, not mine. After all, they know more about your situation, and the laws that apply where you live.

Holiday Season Activities

Working holiday

Working holiday

Christmas and New Year’s fall on Fridays this year, which means for many people, they are not working from Thursday afternoon on December 24 until Monday morning, January 4. That’s 10+ days of not working. Even for those who do go into the office in the week between Christmas and New Year’s, there is little work getting done, as people are in the holiday spirit.

As a small business owner, though, you may not have the luxury of being able to take off 11 consecutive days. My own plans include a significant amount of work to get done while everyone around me is in party mode. No, I’m not being a party-pooper, but when I have some time to spare, I’m getting projects advanced, meeting with what clients are available, and setting myself up to have an easier January by being prepared.

If you are able, then you might want to consider joining me in this. Sure, you can’t work with your suppliers (they’re on vacation somewhere warm), nor with your clients (they’re busy closing out the books for 2009). But you can work to figure out where your business is going, and how you can adapt to changes. The good thing about getting a break like this is that it lets you catch up, while the world around you slows down to party.

It’s a once-a-year opportunity to get ahead. What are you doing to help yourself for next year?