Startup Law 101 Series – Tips from a Business Lawyer on Becoming a Founder


Why become a founder? What are some of the things you can do to become a successful founder?

Having worked extensively with founders as a Silicon Valley startup lawyer for many years and having built my own business as well, I have some advice to share on these points.

Tips on why you should become a founder

Why become a founder?

1. If you are successful as a founder, you will earn much more than you would as an employee. Obvious, but it bears repeating.

Founders want the big advantage that will come from a successful company. The goal is very difficult to achieve, but the rewards can be great.

2. If you are successful as a founder, you keep more than you earn.

As an employee, you will be affected by increasing taxes on your compensation.

Forget the rich. It’s the average employee who gets soaked. You pay, say, up to a third of what you earn in federal, state, and local income taxes. Add another almost 10% for payroll taxes. Now suppose that inflation drives you into higher tax brackets. Rates are then raised for those tranches. So the payroll tax rates go up. And the cap on social security was raised. And new taxes were added to fund future health benefits. You will be left with less and less net amount of your salary. Welcome to be the employee of the future.

However, as a founder, your biggest reward by far will not come from salary, but from a liquidity event where you cash in your chips. At that point, you pay a one-time capital gains tax on the bulk of the economic reward you earn from your business. You pay less income tax because the capital gains rate is lower. And you don’t pay employment taxes at all. With capital gains, you also have some control over time, and this can help minimize what you pay.

Everything arises from the same effort. You sweat for what you earn. You can take your reward as ordinary income or, as a founder, convert a large portion of it into much more advantageous capital gains. With success, you not only earn more, but you also keep more.

3. Being a founder can be rewarding not only financially but also psychologically.

When you venture out, you have the opportunity to realize a vision for your company and benefit not only yourself but also your co-founders, your investors, your employees, your customers, and the general public. You get to see your company grow and prosper. You get to see how it impacts others forever.

The satisfaction you can derive from success is a great intangible reward.

4. Finally, being a founder gives you the independence of being your own boss. You will rise or fall on your own merits. This is a great opportunity and a great challenge. This is the one advantage that most entrepreneurs will ultimately say they value the most.

Tips to Become a Successful Founder

What does it take to be successful as a founder? Here are some thoughts.

1. Above all else, build from strength.

Be prepared before venturing out. Get a solid education. Work with the best to get great training in your field. Master your trade. Build relationships. Take what you do best and improve it. That is the key to innovation. And this is the best path for most founders.

Or it can be based solely on the strength of exceptional business talent. Or a specialized skill that allows you to work as a team with others to supply what you may be missing. Nothing formulaic here. But you need to build on some form of force

This also means that you do not venture on the basis of a naked idea. Try this one from the bubble era: “I’ve worked a year in manufacturing, and I know how to revolutionize that field through an idea I have for a website.” Sorry, but abstract ideas get you nowhere.

It also means that you do not doing something just because you are tired of something else. Think twice about that romantic little tea shop. That is, unless you know about the tea shop business. Others do, and they will make you pay. Know what you’re doing before you get into anything.

No one will charge you when you go out alone. So be prepared to build on something you do exceptionally well. That is your main key to success as a founder.

2. Count the cost before you venture out.

You need the right temperament to start your own business. If you crave security and certainty, being a founder is not for you.

Don’t idealize the process either. Business is tough. You will lose the certainty of a regular paycheck. You will have bills to pay whether you are making money or not. You will face a relentless array of challenges, from people issues to financial pressures, competitive challenges, legal disputes, enormous psychological pressures, and all sorts of other obstacles. When you get through all of this, or at least most of it, you will have built “goodwill”—that is, going concern value for your company. Goodwill is nothing more than the advantages you get from the blood you have shed. It is a great advantage that makes your business better than others. But you Will blood must be shed on her. Understand this from the beginning and be prepared to pay the necessary costs.

It follows, of course, that if you’re not willing to pay the costs, you should stick with the steady job.

3. When you pitch, try to pitch with a multi-talented team.

There is no fixed rule here. However, experience confirms that a team is much more likely to succeed than a single founder. This can be just another way of saying that if something is really good, others will be drawn to it. This is most likely another way of saying that launching and building a successful company is hard to do and that it takes a multi-talented team to make it happen. Where you cannot supply everything, others will supply what you lack.

4. Make sure you have a solid business case.

Technical innovations are great, but on their own they usually can’t sustain a business. Sometimes they can be sold or licensed to a large company. Nothing wrong with that. In most cases though technology will not be enough.

With or without key technology, for a company to be successful, it must should have a solid business model that allows you to build and maintain a significant competitive advantage that makes you consistently profitable.

Without it, you will not go anywhere, no matter how innovative this or that element of your company is.

5. Watch your spending.

Waste is perhaps the biggest flaw of early-stage companies.

Small business entrepreneurs have much less difficulty with this than startup founders. Why? Because they are usually dealing with their own money. If you know what it cost to earn it in the first place, the chances of you being wasteful with it are greatly reduced.

One aspect of wasteful spending is simply extravagance. You get funds and you go out and get the best that money can buy. Expensive offices. Extravagant salaries. luxurious parties. And so on. In early-stage businesses, you’ll regret such an expense when you hit bumps in the road where you wish you had that cash. Inevitably, you will run into those potholes. Plan accordingly.

However, another side to wasteful spending comes from not focusing your efforts properly in the early stages. You have ten big things you want to do as a company. You don’t make good judgments about which of these to focus on. You spend on all of them. Before long, your funds are dissipated before you can generate a reasonable income stream.

Use your best judgment about where you can best use your limited funds, and use them wisely.

6. Carefully plan your legal implementation.

Don’t charge unnecessary legal fees up front. However, when you’re ready for a significant release, get the setup right.

If you have a founding team, be sure to seriously think about using restricted stock rather than direct stock grants when making grants to founders. In other words, keep chains on the action until it is won unless there is some exceptional reason not to. Use cheap stocks to avoid tax problems. Obtain the IP in the company. Obtain employment and consulting agreements, making sure that all intellectual property from those agreements goes to the company. Review your trademark issues in connection with any marks you make. File provisional patents as appropriate. When you’re ready to onboard a larger team, set up an equity incentive plan.

Work closely with a good business attorney to get the legal steps right.

7. Fund your business incrementally when possible.

The worst trap an early-stage company can fall into is one where it stretches itself too thin. Plan smart to avoid this trap.

Work with early stage investors or have a reserve of your own funds to get you through the phases before you have significant income.

Don’t put yourself in a position where you run out of options, except to buy your venture capitalist opportunity. You will either not receive funding (the most likely outcome) or you will be butchered under the terms of the funding.


Think carefully before venturing out as a founder. The rewards can be great, but you must be ready to face the challenges. If you think you are, a great open world of opportunity awaits you.

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