How to Set your Company Up for Funding
Before you start winning people over with your ideas in exchange for funding, you need to make sure that your company is set up for success before that cash passes hands.
Be sure to cross these four items off your checklist before you start collecting capital:
1. Draw up the co-founder agreement
The Social Network is a modern-day fable for what happens when you don’t clearly outline expectations with your cofounders.
To avoid conflict and disrupting business operations, form an agreement between your cofounders that states what your company goals, missions, values, and metrics of success are.
You also want to sort out details such as who receives equity, how much, who gets what role, etc. to ensure alignment.
2. Register your business as a corporation or LLC
Once you think your business can start earning revenue, it’s time to determine its legal structure. Depending on how you want to pay taxes on your business, you can either register as a corporation or LLC.
Typically, you will want to select a business entity depending on how much flexibility, complexity, and liability you want. If you want to retain most of the control, an S corp or LLC might be a better option whereas a C corp is excellent for structuring more complicated partnerships and for wooing investors.
3. Research your securities laws before issuing stock to shareholders
If you’re planning to sell debt or equity of any sort, you may need to register those securities with the SEC and state securities commissioners.
This is required in order for federal and state governments to keep track of your securities and prevent and fraudulent behavior. If you don’t comply with these laws, you and your principals can face hefty fines and even civil/criminal charges depending on the severity of your violation.
4. Consider tax laws and other incentives when structuring your cash flows
Nobody enjoys paying taxes, which is why the government created certain tax laws and incentives to push certain economic activity.
If your business happens to meet certain criteria (such as advancing social policy or benefit specific industries), it may be eligible for incentives that help ease the burden of paying taxes. Big name brands like Boeing and Nike take advantage of tax incentives, so there’s no reason why you shouldn’t either!
And of course, the last step is to make sure you have excellent legal counsel.
Everyone gets touchy when it comes to the subject of money, and there’s no reason that you should sift through all the tax codes, regulations, securities law, and paperwork on your own.
Consulting an attorney can help you navigate the complicated legalese and advise you on what is the optimal funding structure for your business.