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When an entrepreneur starts a company – they usually fall into one of two camps: Founders who ignore the legal and organizational startup issues in favor of focusing on product development , and founders who focus too much on these ‘setup’ issues.

As noted in this useful article by NY City’s “Entrepreneur in Residence” (who knew cities had EIRs?):

Tax Implications of Founders Stock | EIR for NYC

One of the most common mistakes founders make is to not file the 83(b) election, which can create serious tax problems for the founder personally and delay a venture financing for the company.

 

Entry-Level Obsessions

First-time entrepreneurs often get obsessed with the details of incorporation, patents, stock allocations and similar set-up activities, to the point where they end up building a solid company – that does absolutely nothing. It’s not their fault:  An entire industry of lawyers, accountants and consultants writing articles,  running workshops and seminars imploring entrepreneurs to obsess over the details of IP, patents, taxes and other administrative headaches – all of course requiring help from a professional.  And unless these details are handled correctly they will not only fail as an entrepreneur, but they may also lose their house, credit rating, bank account and 401k.

The dliemma is that these professionals are correct: Patents, incorporation, stock issues and taxes – neglecting any one of them can derail or destroy you or your company. But here’s the thing:  None of those activities can make your company successful.  They are merely ‘defensive’ tools.  Only the fundamentals: A big market, a compelling product – and the ability to create that product and bring it to market – are the deciding factors in your company’s success.

 

A Typical Story

Entrepreneurs focusing too much on those administrative issues reminds me of a conversation I heard between an entrepreneur and investor. The entrepreneur was proudly demonstrating their online sales system – showing how automated it was, and how easy it made it for customers to order the product, and how the system helped to market the product with search engine optimization and other marketing tricks.   The investor agreed that it would save them a lot of time and money having this sales system.   And then the investor asked: “By the way, ‘got any?  Any sales?” Of course the answer was ‘no.’  The product, in fact, wasn’t even ready to ship yet.

Having the killer sales system would make that company highly efficient and competitive – once their product was selling and solving some big problems for large groups of customers.   But working on the sales system has no impact either way on getting the product developed, or on whether or not the product filled a big customer need.

 

J(F)DI

Sure, lawyers and accounts will tell you that making a mistake in patent filings or taxes or incorporating can cause fatal problems for any company.  And this is true.  On the other hand – after nearly 30 years of working as an entrepreneur and investor, I can name hundreds of companies that have failed because they didn’t focus enough on the products and customers.   I would have to think long and hard about a company that started to succeed, only to fail because they didn’t do enough paperwork in the beginning.

Today’s entrepreneurs seem inherently wired with a bias towards action- rolling up their sleeves with the mindset of  “just do it”.  Unfortunately today’s entrepreneurs are also surrounded by a professional community who seems to be giving them the contradictory advice of “just file the paperwork, first”.  For the true entrepreneur, the choice is clear:  Just do it.  Just F*ing Do it.
  
 

Written by CJ Cornell

CJ Cornell

Serial Entrepreneur. University Professor. Software Engineer. Media Executive. Venture Capitalist. Researcher. Marketer. Advisor. Mentor. Author and Speaker. Founded or co-founded nearly a dozen companies in software, digital media and television.

For the past few years I’ve been Co-Director of the Knight Center for Digital Media Entrepreneurship and Professor of Digital Media & Entrepreneurship at Arizona State University, and the university’s first full time Entrepreneur-in-Residence. Currently Visiting Professor of Entrepreneurship & Innovation at New York Institute of Technology and Managing Director at Propel Ventures LLC.

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2 Responses to Founders: Stock & Taxes

  1. Eric says:

    Interesting discussion, CJ. The balance required in pulling things together in such a dynamic environment can be extraordinary, as you point out. The other way I’ve heard it “cut” is that start-up entrepreneurs have to be equally good at evolving their business model (a very strategic activity) and executing each new evolution. (a very tactical activity). All the while they’re being told to make good long term decisions, grab market share, hire the best people, invest in development–but don’t run out of money. Easy.

  2. CJ Cornell says:

    Thanks, Eric. While of course it’s not good to ignore one aspect (legal, taxes, etc) over the other (product, market) – most first-time entrepreneurs tend to obsess over one at the expense of the other. In a vacuum, young entrepreneurs obsess over the product, and almost always get the market wrong. We’re lucky that we live in times when product development and iterations are cheap and fast, and markets are forgiving. Other entrepreneurs are influence by the cadre of consultants and professional services people to make sure everything is set up properly (or else you’re company will implode and you’ll end up sleeping in a van by the river …).

    Yes, an entrepreneur has to juggle many balls in the air – particularly if they are going to build a successful, sustainable organization that scales. But – if they don’t focus on a killer product for the right market – then none of the other stuff matters. It’s like NASA spending $ Billions on building a solid launchpad, spacesuits, and a mission control center – but forgets the build a powerful space shuttle.

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