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Lesson 1: Define your startup idea
Chapter 1: Define your startup idea
Nathan Monk, a Senior Strategist for MaRS Information and Communications Technology (ICT) sector, opens the course with an overview of E101 and defining your startup idea.
Welcome to our course, Entrepreneurship 101. We're really excited that you're here. Starting something and being an entrepreneur is one of the highest impact things you can do. Can entrepreneurship be learned? Why does it matter? We'll answer these questions throughout this course.
The world of technology and business has never been more exciting. The best time to launch your startup is right now. Disruption and breakthroughs can come from anywhere. At MaRS, we know entrepreneurs. The best of them are equipped with knowledge you'll find in this course. They thrive in today's entrepreneurial world because they can create opportunities, find smart, creative solutions, and move super-fast. Staying ahead of the marketplace takes bold ideas and strong execution.
In this online version of Entrepreneurship 101, we expect the course to take you approximately five hours per week for five weeks. This includes reading and watching the material, researching and writing assignments, and participating with others taking the course.
Now, some of the concepts and milestones introduced in this course will take a lot longer than five weeks to complete. Customer discovery and market validation can take years in of itself. But we'll make sure you're asking the right questions and focusing on what's important. We've based this course on over 10 years of data that looked at over 50,000 different startups. One of our senior advisors here at MaRS, Harvey Coleman, has spent years of applying the data, and lessons learned to help startups succeed. In this video, he shares how we've adapted these learnings to serve as the foundation for this course.
Chapter 2: Course methodology
Harvey Coleman has over 40 years of experience in the IT industry, and has spent the last 10 years working as an independent consultant to a variety of startups and companies. In this video he explains the methodology behind Entrepreneurship 101.
Over the last 10 years, there have been tremendous advances in the processes to help you more successfully commercialize your great ideas. And we've built a course specifically to help you, by taking advantage of these advances. Of particular importance is the work at Stanford University, which, of course, is at the heart of Silicon Valley. They analyzed over 50,000 ventures, creating an excellent database of information, to move what has been considered as an art form into much more of a science, to take advantage of your entrepreneurship. Their subsequent analysis has all been detailed in their Startup Genome Reports, which they subtitled Cracking the Code of Innovation. One of their many findings was that new ventures need to move through a series of stages to achieve the desired success.
In addition, over the last few years, we've been bombarded with a large amount of literature on this subject, detailing various aspects of these stages. We at MaRS have been following the results of the project from the very first report, and have taken both their findings, and the literature, and incorporated the best of both into this course. In other words, we've done all of the analysis for you.
The course has taken the three foundation stages of the Stanford model - ideation, discovery, and validation - together with the literature, to the next operational level, so that you can ask the relevant questions of yourselves, focus on these, and take the actions you need to complete now. You can leave what is not necessary until the appropriate time, but also make sure that you've not missed something important along the way. And you can do this with a picture of the whole process in your mind.
And we've added another vital element to the course. Obviously, we'll help you produce the best possible product to solve the problem you've identified, find the right initial customers in the right segments of your market, and help understand how they'll purchase from you. But in addition, we'll also help you understand the funding that's appropriate at each stage, and how to obtain it, the right team and their roles. And we'll help you avoid one of the major causes of failure: premature scaling, sometimes referred to as the money trap.
And finally, we've included the business requirements you need. This is an oft forgotten area. Everyone knows that they have to develop their solution, be sure of the market for it, fund their operations, and recruit the right team, but there's a whole business-related area that you also need to implement at the right time. From setting up your business properly, to having a shareholders' agreement, to creating your financials and your initial metrics, setting up your back office system, etc. But what's important is that as you start to grow, you have everything in place for your expansion, and subsequent success. For some of these items, you cannot go backwards. Failure to have implemented them could impact the quality of your results. Whilst doing everything right cannot.
Chapter 3: What problem do you want to solve?
Nathan Monk briefly outlines the need to identify the problem your solving, find your solution and build your business model to achieve success.
There are so many questions you have at the beginning. You’ll need to understand why you’re starting this business, what is your big idea, and what you’re really passionate about. Remember that in the early days of your business, you have the freedom to make these decisions while it’s still easy to do so.
Later on, it becomes more difficult. To start, you need a business idea. It could even be just a side project you’re working on, or something you’re passionate about. The first step in getting a startup going is to build a business model. And this course will help you get well on your way to doing that. Developing a business model is scalable, repeatable process in and of itself. Basically you need to work out how your offering creates value that someone else will be willing to pay you for.
Specifically, business strategist Alexander Osterwalder says, “A business model illustrates the capabilities and resources required to create, market and deliver value, and generate a profitable and sustainable revenue.”
The business model is your north star guiding all assumptions in your business as you get started. So how do you find a good startup idea? Finding a real problem to solve is hard. Solutions on the other hand, can come fairly easily. Write down the top ones people have in the space you’re focused on. Within your list, circle the top problems. What’s the main problem you want to solve? What’s the second and third problem you want to solve? Those top problems will allow you to hone in on a solution that you want to build and are passionate about. Develop a hypothesis – it’s the statement you will use to validate that this is a problem people really have.
Simple problems can have simple solutions, and often those are the most scalable solutions. As author Peter Drucker says, “The purpose of a business is to create a customer.”
Lesson 2: Product basics
Chapter 1: Product basics
Nathan Monk gives an overview of product management and the basics of what a product is.
No matter what stage you're at in your entrepreneurial journey, it's important to understand the full range of skills required in building and managing a product or service. Taking this course is a great start to building a company and a product, and there are hundreds of other excellent resources to follow up with. We make some recommendations at the end of this course on that.
Whichever framework of product management you start with, keep in mind that people drive the process. Even if you start out with a textbook implementation and best practices, it's inevitable that you'll have to tailor the process to match the needs of your company, market and product. Test a lot. Adapt, evolve and learn as you grow.
Different situations and products will all call for different approaches. As a company founder you need to focus on the fundamentals. Understand your customers, and their problems, and solve those problems with a commercially viable product or service that you are passionate about building. Think about the many types of products you could build. It could be software, hardware or simply a service. Will you target consumers or the enterprise market? B2B or B2C.
Chapter 2: What is a product?
Balaji Gopalan, the Co-founder and CEO of MedStack, breaks down product management and the difference between a product “feature” and “benefit.”
Product management is the study and discipline of how creators develop solutions for problems people have. The most ideal way is to actually understand what a product is. And I like to think about this in a very, very expansive way. To me, a product is anything that somebody chooses
to use or employ, which is often what people think about products (in contrast to other alternatives) to solve a specific problem that they have. Thus, that can encompass lots and lots of different things. It can be software; it can be hardware; or it can be services. It could be something physical, or virtual. High-tech or low-tech. But at the end of the day, you're measuring the change of impact on someone's life, because they've chosen to elect the thing that you're offering.
Why do you, as a product manager, need to be speaking and listening to your customers? That's actually the most important role for a product manager. It's actually kind of hard to do sometimes, because you also get pulled into the functionalities and operations of managing the delivery of the product. But, especially in the world of technology, things change every single day and very quickly.
Which is why product managers have such an important role to play in more technology-oriented products. Like software, for example.
There are new innovations being created every single day, from scientists to people working in their garages. There are new competitors coming into the fold. With software tools, it's easier than ever for anybody to enter a market; so the barriers to entry are very, very low. And customers mature and change very, very quickly. Just because they told you they wanted something, they might actually want something different the next day, or they might have learned a little bit more of what their actual needs are. It's like addressing the core issue versus the symptoms. So you need to constantly be playing back to them every opportunity you can get. Go back to your customers and say, “Okay, this is what you told me, let me reframe it and play it back to you. It's fine for you to tell me I've misunderstood or you've changed your mind, that's okay. That's why I'm here.” And then, “Here's what I'm thinking we might do to address that one little thing. Am I moving in the right direction?” Obviously, if that's the framework, doing as little as possible to get enough information to ask that question becomes absolutely critical from a cross-management operational perspective.
When I talk to people who are new to product management, there's often this thinking that the field of product management is the field of managing “features,” and that's actually not true. There's an operational aspect to make sure the features being built meet the benefits that you intend, but it's the articulation of the “benefits” that's the really, really important part of the job.
Features are just things that exist, but they don't matter if they don't change somebody's life. And there's multiple avenues in which that actually changes. We often talk about product management as this balance between three things, and I love that model, because the triangle is the strongest shape in nature. So you need three to have a solid foundation. Those three things are number one, that you're changing the way somebody does something, so there's business value. Whether or not they're paying for it, is kind of separate from that. Number two, that the person, actually interacting with the product, they want to interact with it. So it's a great
experience. And finally number three, that you're offering something different based on your own skills, or your company's skills and functionalities that are different than what other people can offer.
So when you think about it that way, the most important thing to realize is what is the actual change that you're making for that person and how does their day become different? This is why we often say that when you're building out a product strategy there's an important nuance between "I think this would make your life better," and "You've actually told me you have a problem." And people gloss over that, but it's really, really important to realize the best product opportunities come about when the customer has said "I've got a problem. I care about solving it, I want to solve it and I'm so hosed without it, that I've hacked a solution together myself."
I've had the benefit of working with some amazing product managers in my career. I've been doing this for a decade and a half now, even longer if you think about my work before tech. This job is, like entrepreneurship as well, very, very soft skills oriented. It's interesting, because the more we focus on technology, the more we actually realize it's the interaction of people that make technology work. People in your organization. People in your customer base. People in your channels. People in your partnerships. So, the management of those relationships is the number one skill. You can't be shy. You have to be gutsy. You have to be humble. You have to be always listening, and you have to be always learning.
It's worth noting, because the question comes up (especially in software): How technical do you need to be to be a product manager? I would like to address that specifically. Especially for people that may be picking up on this, that are sort of thinking to themselves, I'm not a software developer. Can I be a product manager? And the answer to me, is absolutely yes. In a large company, the most successful product managers, are those that understand the language and needs of each function. Because the functions are focused on what they do. As a result, they don't have as much time and focus on what everybody else is doing. But you're the steward. You're the operating officer. You have to make sure that everybody's marching to the same drum, and that's not just engineering. That's also sales, support, marketing and finance, and you've got to be able to be equally skilled at talking to all of those people.
So to say that the best product managers in the world are those that have come from engineering, that's often true, but it's not necessarily true. Because you just as well can have as much to bring to the product management role if you come from support, where you're talking to customers first hand and hear their problems, or sales where you're trying to sell the proposition and hear the feedback from the customers. So the common thread amongst all those things, is an ability to be gutsy, synthesize information from multiple sources, play it back in a language that your audience understands, and a hunger to constantly learn and change things.
Chapter 3: The product canvas
Balaji Gopalan explains the merits of the “product canvas” and how to effectively utilize this important tool.
So when product managers and product entrepreneurs are building out their idea, they need a tool to track all of the information they get every single day. One tool that's often used is something called a “canvas.” It goes by different names. There's “product canvas,” there's “business model canvas,” there's “lean canvas,” but they're all kind of the same thing.
There isn't really one prescriptive formula, but rather a list of questions and a place to answer them. Cross off with your pen, or pull out your white-out - that we used back twenty years ago - and write something new that you've learned. For example: Who is your customer? What problem do you have? What's your vision statement? For this customer, we're delivering this, because we can do this differently. Ask yourself: What are the experiences that are going to define your product? And then: What's the next thing you need to do?
As we get into lean product development and agile software development, this details section in the canvas is where you record things like your product backlog. In this section you attach things like mockups, and recordings of interviews you've had with customers. The canvas is essentially a list of questions that you need to always keep in mind. Such as: Who's your customer? What's your goal? What's your metric for success? And what is the description of your value proposition to the market?
Chapter 4: Workbook exercises
Nathan Monk closes this lesson directing you to the workbook exercise regarding the product canvas available in the E101 Google Drive folder.
One of the most important parts of your role is to understand the customer’s fundamental needs for the product. The ability to spot these needs is an important skill. The product will almost always fail if it's not needed. At the same time, your product needs to have a real-world benefit. There's a difference between a product feature and a benefit. You need to describe what real-world impact the product would have on your customer. Features of a product or service are the way in which the customer realizes the benefit. Features are the capabilities or the characteristics of a product. Who specifically has the problem and does it affect many people.
Lesson 3: Build your team
Chapter 1: Build your team
Nathan Monk outlines the best practices regarding finding a team for your business.
Are you still with us? Good. Let’s talk about your founding team, including ways to find a co-founder and characteristics of the ideal start-up team. One approach would be to have a blend of technical business design and social skills, shared between two or three co-founders. You would each have shared goals and priorities in life and business, and a shared purpose and passion for the problem you want to solve.
We had the good fortune to bring in Jonathon Nightingale of Hubba to share his insights on building a successful founding team. He knows what he's talking about.
Chapter 2: The founding team
Jonathon Nightingale, Chief Product Officer at Hubba, describes the benefit of having a dynamic founding team.
Co-founder relationships are a really tricky one to get right. I think the essential thing you need to focus on is this question: Is this someone you can really see building a business with over the long term? They should complement your skill set, because you don't really want to be stepping on each other's toes too much. You need to be really clear about division of ownership as well, so if one of you is going to function as the CEO, the other ones got to be comfortable with that. But generally I think you want people who are going to project into the organization, the skills that you lack, and the values you both think are really important.
It's possible to build a company with only one founder. Just like it's possible to build a company with five founders. But consistently I believe, having someone to counterbalance you in the early days, having a shared vision, and someone who can pull on it in different ways than you might, is really valuable and a good predictor of success. You just need to look at the companies that have grown and flourished, almost all of them have multiple founders, and that tension is really healthy. A founding relationship can also wreck your business. But if I had to bet, I would always bet on having at least one co-founder.
Chapter 3: Hiring process
Jonathon Nightingale outlines the basics of hiring team members in the early and latter stages of a startup, particularly highlighting the need to be proactive.
I think an ideal hiring process really has four pieces to it. The first thing you have to remember, particularly when you're a small company, is that it’s your job in that hiring process - from start to finish - to close the candidate. You need to help them understand why it's worth bringing their talents to your organization, particularly when they don't know anything about you, and when you haven't established a reputation yet. Once you got that in mind, then you can focus on your screens.
The technical screens are essentially an opportunity for you to understand how they approach the work. I'd focus a lot more on what they've built than on the tools they used to build it. Languages can be learned. Platforms can be learned. You really want to know what their strategies are for solving problems and building technology. But on culture fit I'd encourage you to be careful. It's really easy to screen for culture, and accidentally screen for homogeneity. It's really possible for someone to come from a different place to approach problems differently, but still support the values that you care about. If they pass those two screens, the last thing you really have to remember to make time for, is their questions. It helps close them, but it also sets up the right relationship for you and hopefully the new employee.
If you don't hire a great team the company is not going to go anywhere. It's really just the most critical thing. Both founders should be spending a big chunk of their time, on pulling in the kind of people who are going to help them build that. What I see a lot of founders do for the first couple of hires, is hire people they've worked with before. I think that can be a great strategy because you know how you work with those people. You know you can get to productivity very quickly. The thing to watch for is that you don't build a really homogeneous team off the get go. You want to make sure that some of those hires reflect the diversity of skills, values and backgrounds that you're hoping to see when your company is 100 or a 1000 people. That makes the hiring job more complicated, but that's the gig, you have to do it.
You want a balance between hiring senior people, who are deeply skilled, have worked other places and absorbed a bunch of knowledge, and junior people who are going to need mentorship, but are going to help give you output, because they can pick up a lot of the work that you don't want to distract your senior people with. I think that back-and-forth between senior and junior is part of how you build a really dynamic team, and set yourself up for good growth, because those juniors will become your next generation of seniors.
For a young company, you have to be out there. You have to be meeting people. You have to be telling your story. If you're doing interesting technical work, blog about it, give it away, give talks about it. Anything that helps lift the status of your company as an employer relative to the people around you. And when you see someone who is doing great work, approach them, connect with them on social media. Send them a message. Don't be a pain, but anything you can do to be really overt about the fact that “Hey, I'm not waiting for you to come to me, I'm working at this. I'm trying to build something amazing.” And I'm willing to put myself out there, be vulnerable, potentially hear a lot of no’s from people who are happy where they are, who aren't willing to bet on your company
yet. Because that's how you're going to find some of the people who are willing to make that bet and are going to help you build.
Building a hiring culture is really about being creative. Nobody knows what your company is, what you do. They don't know anybody who works there yet. The first investment you've really got to make is getting out there. You know if you're building interesting tech, write about it. If you are engaged in communities already, don't be afraid to promote the work you're doing, and talk to other people about it. It can be exhausting to give the same speech a hundred times, but that's part of being a founder. And the nice thing is, the more people that understand your story before an interview process, the more willing they are to engage in one once you’ve got an opening.
I think the other thing I'd say is, for the staff you do hire, make sure they’re all involved in the process. Particularly when you're small, it's possible for a candidate to meet every member of the team, and that's a huge benefit. Eventually that'll be too much. You don't want a person doing 14 interviews before they get hired. But having them meet the first five employees, having them meet the founders, is a great way for them to feel like they understand what's going on and they’re willing to make that leap.
Chapter 4: Develop your mission and vision statement
Nathan Monk drives home the idea that you must develop your company’s “vision statement” before you can build a core team that will push that vision forward.
As you build your core team, you need to start thinking about the vision of your company. That vision must motivate, inspire and be the north star of your organization. Get together with your co founders and begin to articulate the beliefs and principles that will drive your organization. Core values will help you with your decision making. They’re often centered around concepts like quality, creativity, innovation, collaboration, learning, honesty and customer service. There are of course many more that you can add to this list.
Developing a boring vision such as, “We want to be the dominant player in the market,” will fail to motivate your team. The goal is to have your team aligned to a common mission, and the benefit to the customer. Listen to these perspectives on developing company values.
Jon Worren, the Senior Director of Venture Programs and Entrepreneur in Residence at MaRS Discovery District, guides you through the fundamentals of the mission statement. Including different examples for illustration.
In the beginning startups have nothing. You may not even have an office. You may not even be incorporated. So everything is missing. What you have is a whole host of really good intentions. And what you need to do, right early on, is to try and capture those intentions in a “mission statement.”
Essentially the mission statement itself talks about the purpose of what you're doing. It's not necessarily super specific, but it helps you (or potentially your co-founder) to craft a shared statement of intent about why is it that you are starting this business. What is it that you are bringing into the world, and what's the purpose of it? You want a mission statement to have a strong sort of motivational aspect. Not in the form of a sort of cheerleader type, “let’s get up and jump” around type quality, but it's more about the positive contribution that you're going to make to our society, to your community or to the world at large. A good mission statement is a really, really powerful tool. Not only to help level set between the founding team, but it can also bring your first employees. The same thing with customers. The same thing with partners. So it's a way of aligning the interest of many, many critical stakeholder groups for you. And you can go about using the mission statement in really powerful ways in those very, very early days of your startup.
In terms of what it needs to cover, other than your intention and sort of your reason to be, you don't want it to be locked down too much. You may talk broadly about the area that you're in. Maybe you'll mention a technology area, or the broad industry of your marketplace. Maybe you even want to talk about the type of customers that you're there for, but knowing that the startup is an evolving organization in its early, early stages is important. A lot of things will have to change. So, it (the mission statement) has to be broad enough to facilitate iterations and pivots as you go along.
I just want to go through a couple of examples to illustrate what I just talked about. Interaxon is another company that we work with here at MaRS, and this is their mission statement: “Enable people to live happier, healthier and more connected lives with leading brain-sensing technologies and experiences.”
Again, it doesn't say anything about product, but states really good intentions that a lot of stakeholder groups would find motivating, would want to participate in, and would want to help bring to life. And it's really effective as a gathering point, as sort of a north star for the startup, and especially in the early days when they’re still figuring out what the product should be, what the market should be…figuring out a lot of things. Before you got anything, this is what people can gather around and agree that this is what we're trying to do. This is our purpose. This is why we get out of bed every morning. And that's exactly the role that you want a mission statement to have.
A mission statement and a vision statement are different. Some people only write one statement. But it might be helpful to have two statements in sort of the hierarchy of statements that you have. Again, a “vision statement” is a fairly broad statement. But at this point instead of talking about the why you exist, you talk a little bit more about what you're trying to achieve. So, you're trying to project, in time, what it is you see as the ideal world, and what your contribution is to that world. So you're on a trajectory. You're building something. You know you’ve got a purpose - that comes from a mission statement - but now you might be a little bit more specific in terms of the technology, or the market or the type of customers that you're trying to impact. It's a little bit more directional. The vision statement is very future looking. And again, it serves some of the same purposes as the mission statement that it's a gathering point, but it's a bit more directional. It can actually help a startup early on and a team set a direction that everyone agrees on. That you align in terms of making a decision. What falls within and what falls outside a vision statement?
I've been in situations where we have had to resort to our vision statement, as part of a founding team, when we had an opportunity we decided whether-or-not it was inside or outside our vision. I
can tell you we didn't always agree on that, but that's the nature of a startup. Sometimes opportunities are going to thrust upon you, that you hadn't necessarily thought about. And it's these kind of processes where you talk about your mission and you talk about your vision, that might help you as a team to stay focused, to stay aligned and to make sure that you share the same kind of overall ambition on what you're doing.
So let's take a look at Interaxon's product vision: “Become a valuable part of people's daily lives to allow new degrees of freedom, connectivity and happiness never imagined.”
Just think about that last little statement - “never imagined.” That's a pretty powerful thing. And it talks about the fact they’re breaking new ground, and it makes it clear to everyone both inside and outside the company, that they’re trying to do something that there is no blueprint for. Nobody has done this before, and they’re trying to figure out what that is. So it gives freedom to explore, but also freedom to innovate, and it opens up for creativity inside the company. So it's certainly motivating. But again, it doesn't lock you down in too much detail in terms of what that product is necessarily going to be.
Right now, Muse is a headband. But it doesn't say headband anywhere here. That's how it's manifested right now. But Interaxon has a very, very powerful product development team that are involved in groundbreaking neurological R&D. So, it may look different going forward, but this vision allows for that to happen. It doesn't lock you down. It doesn't preclude opportunities to be explored, if that's the right way to go.
Murray McCaig, Managing Partner at ArcTern Ventures, briefly explains his understanding of the differences between the vision and mission statements.
I think vision and mission a lot of companies get mixed up in my opinion. To me, a vision is how you expect a market is going to unfold. For example, we know we have a company in our portfolio that has a technology for measuring energy flows on circuits. And their vision is that every single electrical circuit on the planet will be measured, monitored and controlled. Now, how will they play in that space. That's their mission. So, their goal is to be the leading forensic energy management company in North America serving commercial buildings. So that's the kind of difference between vision and mission. And then out of that would flow their annual strategic plan. And so they’re aware of the strategy for how they’re going to outsmart competitors in that sector on an annual three year…five-year basis.
You know, good companies do this well. They're able to really create a compelling vision and mission for their organization that drives motivation for the employees. Really connecting it to a higher level goal. Allen Lau who's a good friend of mine…we worked together for many years…was able to, instead of just being another smartphone app, their (Wattpad’s) vision was to bring reading and literature to the masses…to the developing countries around the world. They've done an amazing job at that. And I think employees really connect with that, and that's more motivating than any financial rewards system can ever be.
Lesson 4: Set up your startup
Chapter 1: Set up your startup
Nathan Monk introduces incorporation and the legal considerations integral to making that decision.
After you've formed your team and delivered on a few key milestones together, you might want to consider incorporation. As a startup, it's important to know when and why you should incorporate. The first question is should you form a legal entity with these folks you've been building a business with? If you don't form a legal entity, but you're performing a service or selling your product, then
that's called sole proprietorship. You don't have to file any legal forms or pay a fee. That said, you should look at your local laws to avoid any issues at this point. What we'll be talking about in the course is LLC or a limited liability company, better known as a corporation. Forming an LLC or incorporation of your business will require drafting and filing specific forms. In Canada, you can do this through the online filing centre quite easily. Let's check in with Shane Murphy from Law Scout to get the strategy behind incorporation for the new business.
Chapter 2: Incorporation
Shane Murphy, Co-founder of LawScout, guides you through incorporation and what you should consider before incorporating your company. As well as the internal structure you should build.
People often ask us, "When should I incorporate "my business?" And there's no specific answer that will apply to every business. It will really depend on your goals and your long-term plans to grow the company, but the factors to consider are really the three reasons you would have for incorporating your business. First of all, there's tax reasons to incorporate. So if you are incurring a lot of expenses or earning revenue, that's a sign that it's probably time to incorporate. The second reason would be
liability concerns. Are you operating a business that has a lot of risks involved and the legal risks of getting sued? It doesn't mean you're doing anything wrong, but there are certain industries which are more prone to risk and are more likely to encounter difficulties, so you would set up a corporation to limit the risks, and limit your liability. The third reason to incorporate would be for investment purposes. So are you the type of business that's going to be - at an early stage - looking to raise money from investors? If so, investors are going to want to ask for shares in exchange for investing funds in your business, so to get shares, you need to incorporate. Again, that would be a sign that you want to incorporate if you're looking for money.
When you incorporate your business, the first thing and probably the easiest thing to decide is you'll need to give a name to your corporation or if it's not a business that's going to be public facing, if it's more of a private company used for holding assets, you can consider using a numbered company. But most companies, if you're going to be operating a business, you'll want to name your business. That's easy, you register a corporate name.
As you go through the incorporation process, the other factors to consider would be the structure of the company. Each company needs to have directors, shareholders and officers. The shareholders are the owners of the company, the ones that hold the shares. The directors are essentially the ones in charge of the overall direction of the business. Think of the directors as not necessarily being involved day-to-day in the business, but we always speak of the board of directors as like an oversight body for your company. And then the officers are things like the president, vice president of the company…the ones who are really going to be more on the ground looking at things day-to day. But in most early-stage, small businesses, the same people will be shareholders, directors, and officers, so you have to give consideration to who's going to hold each of those roles in the company. It's perfectly acceptable and actually quite common for one person to be the sole shareholder, the sole director, and the sole officer when you start your business.
After you assign those roles to certain individuals - the tricky part about incorporating, and the part where legal advice often comes in handy - is defining the share structure of the business. And what I mean by the share structure is certain shareholders can have voting shares, certain shareholders can be non-voting shareholders - meaning they own some of the company but they don't get to vote or have a voice in the business of the company - and then there's other types of shares which can get more complex. For example, priority. If the company stops operating, you might have a share class, and the holders of those types of shares get the first priority over the business' assets and the money in the bank when the company shuts down. That's something to give some consideration to, and if you're getting involved in a business with more than one shareholder to start, you're going to have to think about: "Are you all equal partners going into this, or are you going to hold different types of shares with different powers associated with them?" That's really the discussion you'll want to have at the time of incorporating.
There's really two stages to incorporating, and the first part is just filing documents with the government and getting a registered corporation on the books. The second part is really structuring the company, setting out your share classes, appointing the various shareholders, directors, and officers and actually giving the shares out to the shareholders. Too many companies end up registering with the government, which is step one (they do that themselves to save money), but they never get around to actually structuring the company properly and issuing the shares to the shareholders. This becomes a massive problem if you're ever trying to sell a portion of your company or get investment because companies have built their business without ever being properly structured from the start. So they go to investors looking for money and looking to really sell their shares to investors and they have no proof that they ever received their shares because they never structured the company right from the start. It's a common problem. A lawyer can often fix that later, but the amount of money you're going to incur on legal fees to get this problem fixed when you're in the middle of an investment round is much, much more costly and more difficult than getting it done right from the start.
Chapter 3: Equity ownership
Andre Garber, Director of Dentons Canada Startup Program, explains the importance of determining “who-owns-what” in your business to prevent future, legal issues.
It's really important to always understand what people own in the company, so who owns what? If you sell the company today, who owns what? How much does one person get over the other person? So having a cap table is just an illustration of ownership. There's a couple things that are really important around equity ownership in a company and how, as a founder or the directing mind of the company, you're representing other people's ownership. One thing to never say is, "You own 5% of this company." Obviously, get it in writing, but instead of attaching it to a percentage, attach it to a number of shares because that number of shares is going to change over time. You're going to add more shareholders, more stakeholders to the company, so there's a concept of dilution that comes into all of this. It's really important that, especially in startups that are poised for venture capital, that everybody from day one when they become a shareholder, they're subject to the same restrictions on transfer or the same principles of dilution. So when you bring on this new shareholder, that person can't own 5% anymore. They own a little bit less because now you've brought on that new stakeholder.
Let's say you're at the point where you're a sole founder, or there are two founders and the company's up and running. How do you bring on that first employee? What do you give them to make them feel like they're a part of the business, like they're an owner in the business? Whereas, when you're a founder, you may have your stock outright. When you're an early stage employee, there's this concept of a stock option which allows the company to control how much equity the employee would get and at the same time, give them this feeling that they have to earn-in to get the equity, so that the equity isn't just there because they signed the contract. They have to earn it over time.
Typically, what we see is somewhere between a three and four-year vesting schedule, which basically means that that early employee will have their shares free and clear or have that option to buy their shares at the end of the period after about three or four years. So they really have to stick around to earn their equity. Just like that concept of employees earning in, founders need to sort of earn to keep what they have. The idea behind founder vesting is that the founders should be held honest to the other founders. So if these three or four founders leave their current posts or salaried positions, to go start this new company - where they're going to take drastic hits on their income and sweat equity is going to be their key motivating factor - if one founder decides to leave after a month, is it really fair that they own, let's say 25%, of that four-person business? Having a really good founder agreement with vesting is really important.
Let's say when you incorporate the business on day one, each founder holds a million shares and there's a four-year vesting schedule. Each year, the company would have the right to re-purchase 250,000 shares, so that would go down over time.
Chapter 4: Intellectual property
Eric Sophir, a member of Denton’s Intellectual Property and Technology team, discusses the benefits and drawbacks of forming an Intellectual Property strategy (IP) early on in your startup.
There are numerous reasons why you'd want to form an IP strategy. The idea is you want to have something proprietary to keep the investors funding your company, to give you a reason to gain market share, and you could use the different IP strategies as tools for gaining more market share. Perhaps it's your strong trademark, perhaps it's your patent.
A patent is a right to exclude others from doing what you're doing. It might not give you a right to do it, because you could be infringing someone else's patent, but you could exclude others, particularly your competitors, from practicing that particular invention and that can be a very powerful tool. The
first thing I would do if I were starting a company is I would look online and see if anyone else is doing something like it. Don't focus on the invention, focus on the business. Does anyone else have a business much like what I'm trying to do? Once you get past that threshold and you say, "Yes, this is still a good idea" or "We could distinguish ourselves from the competition in this way," then you should approach an IP attorney (a patent attorney), and they can help you identify what kind of tools can be used to protect your product…your services.
There are a few ways to protect your idea when you're an early stage company. One thing that people like to do is get a non-disclosure agreement (a confidentiality agreement or NDA) with who they're speaking with. And the idea there is to prevent the person you're disclosing to…to prevent them from taking the idea and disclosing it to someone else. You're basically saying, "Once I tell you this idea, my great idea, you're not allowed to tell anyone." There's often times a period of just a few years and then they're entitled to talk to someone about it or once you disclose it, then they're entitled to talk about it because it's no longer being kept secret by you.
A lot of investors…many people that are going to be involved in this process…don't want to sign it, particularly if they're in the same industry that you're in, and often times deal with similar technologies or products. A patent application is great way to add protection, especially when you're not going to have a signed NDA. A patent is going to protect the underlying functionality. What you're going to gain…although you might not have a patent very quickly…what you're going to gain is the ability to exclude that person should they decide after you disclose it to run off with your idea and go make it themselves. So there are different ways to protect something using a patent.
In the United States, we have a tool called the provisional patent application, which is a bit different than other patent applications and oftentimes, companies in Canada and the US (and around the world) will use that particular tool because it's available and because it's so helpful. Once you file that provisional application, you have one year to get the non-provisional application. It gives us a lot of flexibility though, in how we prepare that provisional patent application. It allows you to say it's “patent pending” and allows you to make changes later when we file the non-provisional patent application. It's not going be examined, it's not going be make publicly available, but it's a great tool with great flexibility. It can keep cost down originally to get you some patent pending protection which will help with investors…will help with competitors. You could label your products and get you going on the patent road at an early stage.
When you're starting a company, you want to tell everyone about it. You want to get that product out there; you want to hire as many people as possible. You want to let the world know what you're doing and tell them how great it is. The problem is, once you disclose it, you're going to be precluded from patent protection in certain countries because some countries have the requirement that once it's disclosed publicly or made for sale, you're no longer going get patent protection. It's important to keep that in mind and actually try to get patent protection before talking to anyone about it.
Not all countries have that strict guidance of once you file, you're no longer allowed to have protection. Some countries like the US and Canada give you some leeway, and say you could have a year before you have to file a patent application before you're precluded from doing so. The problem is, once you disclose it, others can go off and file a patent application on their own if they came up with it, regardless of whether they had ever spoken to you or not. In order to head that off, we really want to get patent applications on file as early as possible. So we want to get them on file because we want to do it before anyone else does, before their (patent) becomes priority. And we want to get it on file because we want make sure that every country is still available. You might only be interested in the US, you might only be interested in Canada, but if you're interested in a place like Europe, even if it's a few years down the road, let's make sure we reserve those rights as soon as possible by getting something on file, protecting it, before you go off and disclose it to someone else.
Once you file a patent application, once you have that initial patent strategy, it's important to remember, it's a living strategy. It's not going to be set in stone and that's your strategy for the next few years, but rather that's your initial strategy. As your product develops, as your competitors come on the market, as you gain competitive intelligence, it's important to go back and look at your patent strategy and figure out how you need to adjust it, how you should tweak it. For instance, if you see that there's a competitor in the market, and you have the patent application pending, perhaps you could redraft parts of your patent application to cover what that competitor is doing. Another example, your product might change.
You want to make sure you have a patent covering your own product, so think about how you can adjust your patent strategy to cover what you're doing and what your competitor's doing. There's going to be numerous opportunities along the way to figure out how to adjust what you're doing - whether it's changing what's already pending at the patent office - or filing a new patent application,
but it's something you'll want to keep in mind. It's something you'll want to keep doing along the way.
