Setting up a business can be a challenging task even for someone closely associated with the industry and even more so for first time business owners or startup founders. It is not just setting up the business that needs doing, but raising funding, redefining your business model, interviewing customers and putting together a dedicated team.
What is startup founder? A startup founder is someone who begins market valuation by problem interview followed by solution interview to build a Minimum Viable Product (MVP) in order to validate their business.
Every startup founder in India should beware of the advantages and risks of the startup business and should be prepared to encounter them along the way. One of the most important elements to consider is startup financing. Getting the founder’s finances right makes you look credible to investors and enhances your fundraising chances and therefore the speed at which your business will grow. It also sets you up for personal success and allows you to reap the profits of the funding unlike a large number of founders who don’t make any profit when they take money from venture capitalists and finally, it gives you quantifiable guidelines to back your own decisions such as should you keep your full time job or quit it in order to manage the business?
Understand the mechanics of equity: One of the most important financial decisions you will need to make is how much equity you and the other stakeholders will have and at what stage in the business. This is important because equity provides financial rewards and motivation for co-founders, employees, service providers and advisors. It also determines who has decision making rights and control of the company. Getting this balance wrong could not only result in unhappy stakeholders and feelings of resentment but your own termination from the company or even dilution to an insignificant level.
Splitting equity with your Co-Founder: At some point in the journey, you will recruit a co-founder, if you have not already begun the journey with one. The broad factors that determine how equity is split are:
- Who came up with the idea and/or owns the IP?
- Contribution to the company and the relevance of the role played
- Opportunity costs – how much would each founder earn?
- At what stage of the company does the co-founder join?
- Is there going to be a simple 50/50 split?
Whatever model you choose to use is your call but ensure that it should be forward looking and reflect the future value of the company. In short, with regard to equity consider the following:
- If you are the CEO you need to hold > 50% of the equity.
- If you take on a senior role you should have >25% equity.
- You need to be prepared for the founder’s departure – either your own or a co-founder’s departure. That’s when plan B comes into play and you need to ensure that there is a clause that compels them to sell x% of shares to a new co-founder for quitting.
- Even if you wait and see to determine the final amount, you should have co-founders sign a non-binding co-founder agreement.
Take budgeting seriously and have a long term view: Budgeting sounds boring but doing it right ensures that you make rational decisions right from the word go and do not allow your biases to cloud your decisions.
A robust first year budget will ensure that you don’t waste money. It is important to have a clear estimate for the budget. The cost items on a startup budget should include:
- Company registration and incorporation
- Accounting
- Legal
- First employees -bring them on board only when necessary
- Other – travel expenses, office equipment etc.
- Founders living expenses – if you are working full time and not drawing a salary
Have a three year financial model to plot future milestones: Focus on major items and document them.
- Major milestones – what are they and when will they hit?
- Key Metrics – the number of users, full time employees or regulatory approval
- Cash burn rate – what you have to pay to keep the business going?
- Revenues – estimate by the number of customers
Consider Valuation: It is necessary to build valuation models as it allows the business owner to estimate the expectations placed on themselves. Most importantly as an early stage entrepreneur, they can use the exit valuation to steer the business forward towards:
- Charting the strategic roadmap according to their vision. The model should tell a founder what milestones need to be hit and when.
- Providing confidence for investor pitches.
Take a view of exit scenarios and build towards them: If exit valuations are done properly they can help you to plan the path the business will take on. Here are few critical assumptions that will drive valuation, commercial strategy and exit valuation:
- What metrics do you have to hit to exit?
- At what point can you hit target metrics?
- How can you exit, IPO or M&A?
- What industry valuation approach is applicable to your business?
Consider your own potential: Money isn’t always the most important factor for starting a business but you will still want to be rewarded for the hard work that you put in. Once you have projected your expected equity ownership at exit and you know what your target valuation is, you can calculate your return. Before starting a business, it is imperative that you compare the projected figures with your own opportunity cost of earning potential. This will ensure that you start the business without any regrets and with a clear insight into what you aim to achieve.
Thoughtful planning of internal aspects: This should be done as soon as you are confident about your startup idea and co-founder selection or at the least, before raising external funding. Most startup founders prefer to build a great business first and then worry about the housekeeping but this can be disastrous and cause the entire business to fall flat resulting in time and money being wasted. It is better to deal with these factors at the right time or get professionals in to help if you are unsure. This will allow you to focus on building up the business and expanding the customer base.
As a startup founder in India you might not always know what to do when it comes to startup financing but you should know that help is at hand. The team at CoffeeMug.ai will assist an entrepreneur to establish whether his innovation is marketable, do market research to establish the best combination, receive feedback, and produce a market-ready archetype. CoffeeMug.ai streamlines the fundraising process for startups by connecting them with the right people. The platform often works with entrepreneurs at an early stage, assisting them in achieving product-market fit and scaling beyond the first point of scale.
FAQs
Q.Do startup founders get paid?
A. Founders get paid if they are working for the company, whereas non-working founders are eligible to stock and dividends, but not to a fixed monthly or weekly income.
Q. What’s the difference between entrepreneur and startup?
A. While entrepreneurship includes all new firms, including self-employment and businesses with no plans to register, startups refer to businesses with plans to expand beyond the founder’s single location.
Q. Who is a business founder?
A. A founder is a person who establishes their own business. They’re the ones who came up with the business concept and put it into action. For example, Jeff Bezos who is the founder of leading e-commerce business “Amazon”.
Q. How do I start my own startup?
A. One can easily start their own company by following the below steps:
- Register your company with Startup India
- Create an account by visiting the website of Startup India
- Get DPIIT certification
- Fill the Recognition Application Form
- Complete the documentations
- Get the Recognition Number
