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daily articles for founders

Here are 10 quality posts from the Founder's Library:

How to choose a cofounder  

Excellent article by Elad Gil, outlining many points that are worth thinking about before deciding to work with someone. As I've mentioned in an earlier article, starting up with someone else can be fraught with peril, particularly if they're a friend. Together with my article, this checklist of questions could save you a lot of pain.

Here are the high-level points, but please read the full article to get the substance:

Key criteria for selecting a cofounder:

  1. Ability to communicate with each other. Can you have an honest and frank conversation with your cofounder?
  2. Alignment on key questions. What are their objectives? Why a startup? What do they care about in company culture? Who do they want to hire? How do they view investors? How ethical are they? What is your role versus theirs?

Elad also points out that you should be clear about who's in charge, or else your disagreements will freeze the company, that you should avoid starting up with someone with strongly overlapping skills, and that it's a big bonus to have known them for a few years and even worked together before.

Register a business today

I want to start this new year with an admonition, for all those who are still working at a day job, and thinking that at some point they may want to run their own business, but who haven't decided to do so yet.

Register a business, today.

Why?

When selling to people directly (whether you're selling services, or selling products to large companies), people will, as part of their due dilligence, often check when your company was registered. If your company registration date is 2 months ago, you will be at a disadvantage in negotiations about price, up-front payments, and other similar things.

If your company was registered five years ago, though, this point will not be brought up.

In addition, many potential bits of business may come your way over the years. If you have no registered business, you may discard those opportunities because of the perceived difficulty of setting up a business to take advantage of them. Having the business already there may give you the necessary push to grab opportunities.

Finally, simply having a business will change your mindset ever so slightly, and make it more likely that you do some day take the jump. This is simply because of the way our brain works. By taking this extremely easy and minor step towards running your own business, you will make it easier for yourself to take the more difficult, future steps in that direction. Consider it a minor brain hack.

Why not?

There are no really good reasons not to do this. In most places like the UK and US, a dormant business costs very little to register and keep dormant. Prices in the US should be around the $100 mark. In the UK, it can be as little as £50. It can be done online, quickly, without much hassle.

How?

Choose a name that is generic enough. If your name is Joe Bloggs, you might want something like Bloggs Consulting. If the name is taken, find something else that is reasonably generic (John Smiths will have to be creative...). You don't want the name to tie you down to a specific activity. Bear in mind most places allow you to rename your business later if you need to.

In most places, you can just find a website that will automate the filing processes for you. You will need to decide where to locate your business (in the US, different states offer different situations), and what type of business to start (aim for the equivalent of a LTD in the UK, or LLC in US).

Set yourself up as the sole shareholder and director, and keep the company dormant until you need it. The yearly costs and responsibilities should be minimal (the only filing required is to confirm that your company is still dormant).

When?

Websites are open 24/7. Do it now.


How to: deal with your Corporation Tax (UK)

Following on the success of last saturday's post about how to register a business in the UK, I've decided to switch the "simple and practical How-to" to Friday. So, today, let's look at how to make sure you don't fail at Corporation Tax and end up with big fines, in jail, or worse: barred from running a company again.

My experience of the matter is both as an observer - seeing how others do it - and personally, both succeeding and failing at actually getting this right.

1. Make sure you understand Corporation Tax

The biggest problem with all these accounting concepts is that because they sound like accounting, people think an accountant should handle them, and they don't want to learn about them. That's a mistake. First of all, unless you're doing some very complicated stuff (in which case you should have a competent accountant or CFO advising you), CT (and VAT and PAYE) are simple. They're a pain in the ass, but they're simple.

Effectively, Corporation Tax is all about profits. The UK government taxes you based on... well, everything they can, and one of the obvious numbers to tax is your profit. Whether that's the right approach or not might be debated, but it's the reality.

Let's say your turnover is £100k (meaning you are taking in £100k of revenues each year), and out of that you're paying £50k of costs. That makes your "taxable profit" £50k. At a CT rate of 20%, your "tax burden", as accountants like to call it, is £10k. That's it. That's how you calculate CT, fundamentally. Profit x tax rate = CT liability.

2. The Corporation Tax rate

Is the tax rate 20%? It depends on your size and the year we're talking about. The full rates are listed here. If your profit is less than £300k, which is likely to be the case if you're reading this article, your rate is just a straight 20%. If it's above £300k, then it progressively rises to 26% - but this upper level is dropping each year.

You can get the rate to be effectively lower, by using various tax breaks... but we'll get back to that later.

3. What about losses?

If you're not making any profit, then you don't have to pay any Corporation Tax. In fact, any losses you make this year can be offset against future years.

So, if you made a £50k loss last year, and you make a £50k profit this year, you can offset last year's loss against this year and not pay any CT this year either. Such losses can be carried over from year to year until you've used them up.

4. Keeping track of expenses

The main difficulty that any new entrepreneur faces with respect to correctly calculating their CT is simply keeping track of all the expenses. This is the kind of thing that really hurts if you don't do it properly right away, particularly if your business is quite active.

Unless you're only planning to have a few dozen transactions per year (which was the case for one of my businesses), keeping track of expenses can become a nightmare. One of the reasons for that is that you not only need to keep track of the numbers, but also the receipts.

HMRC generally states that it takes a "lenient" approach investigating small businesses. They understand that small businesses often don't have the right systems and advice in place to do their taxes perfectly, so as long as you look competent enough and you don't seem to be defrauding them, they will probably not be bothered about small mistakes here or there. However, if your accounts are a total mess and it shows (for example because amounts don't add up), you will draw attention that could end up costing you a hell of a lot of stress and time.

Having tried both manual and automated expense systems, I come strongly in favour of the latter. I use FreeAgent (referral link included), because the interface is simple and easy to use, it automatically generates all the tax reports I need, and it keeps track of receipts in the system itself. Other alternative systems I looked at were KashFlow and Xero. In this day and age, I would not consider offline accounting systems, or even uber-complicated ancient relics like Sage, to be appropriate for a small business.

We'll cover how to classify expenses, and how to systematise expense-tracking so it's not a nightmare chore, in a later article, but for now, it's enough to say that you should keep track of all your business expenses in whatever system it is you choose, so that you can:

  • accurately calculate your profit for the year; and
  • justify the calculations if HMRC asks - including being able to produce receipts (electronic or paper) if asked.

5. Filing the Corporation Tax return

The first thing to note about Corporation Tax is that it is only due 9 months after the end of your financial year. You may decide to file it earlier (for example to collect some tax credits), but you don't have to. So, as long as you keep records properly, you don't need to worry much about CT for the first 18 months or so of your business.

Then again, you won't know if your records are proper until you start using them (for example to get your CT filed). So it might be worth filing a bit earlier, especially if you're unprofitable anyway, to properly "test" your expense-keeping system, and make adjustments if you find it wanting.

The form which you're looking to file is called CT600. It can be downloaded from HMRC's website after you log in and "Enroll for Corporation Tax online". This, like all of HMRC's online processes, takes a while, so don't leave it to the last minute.

In an ideal world, HMRC would have a nice, secure online form. And that's what they claim they have. The reality is, HMRC's so-called "Online filing facility" is a gargantuan PDF file that can only be opened with Adobe Acrobat Reader and which takes a whopping 15 seconds to open up on a Macbook Air (Adobe Photoshop takes less than 5 seconds), and which you'll need to set up custom SSL certificates for. It's insane, it's stupid, it's the way HMRC decided to make your life harder. That doesn't mean you should pay an accountant £1,000 just to handle Adobe Acrobat Reader for you and fill in some fields.

If you're using something like FreeAgent for your accounting, you should be able to generate all the key figures via one of the reports there, and just fill them into the form, and hit submit. It will still take you an hour or two because Acrobat Reader is so slow, but it's a pretty straightforward process.

It's worth adding that you can (and should) also submit your accounts via the same PDF (and various other attachments), but we'll cover accounts in another article.

6. What if I'm late? What if I can't afford to pay?

If you're a little bit late in filing, ok. But don't wait any longer! If you're very late, HMRC will fine you, with the fines growing if you keep ignoring them.

You should always be able to pay, because if you use a proper accounting system and keep it up to date, it will tell you how much you're going to owe to HMRC at any point, and you can make sure not to touch that money. I like to put it in a separate account so it can't be spent (I do the same for VAT).

If you can't afford to pay because you screwed up your cash flow (I've been there and done that, before I learned better), then what you should not do is ignore the problem and hope it will go away. Pick up the phone and ring up the number on those HMRC reminder letters. Your mileage may vary, but in my experience, so long as you make a case for why you can't pay now (even if it's basically your fault) but you will be able to pay as soon as such-and-such invoices are paid to you, they will take a lenient attitude. I think the general idea is they have no interest in forcing you into bankruptcy if there's a reasonable chance that you will pay. They'd rather have the money. Try not to do this every year, though. Also, if you're reading this from another country, don't count on this leniency. I hear that Holland is more "fuck you, pay me", for example.

That's it for today. I hope you find this as useful as the previous article.


The series so far:

1. How to register a company in the UK

2. How to: deal with your Corporation Tax (UK)

3. How to: track your expenses (UK)


Start-up vs consulting vs corporate vs all three  

One of the great fallacies of the corporate world is that you must have a corporate job to have any kind of security in life. The corporate world is exceedingly good at brainwashing people who work there into believing that, to the extent that most people are (quite rightly) terrified of what will happen once they step out of the jumbo-jet of corporate life into what they perceive to be as free fall.

The natural reaction, once you realise that most of us are born with a solid pair of wings that will allow us to fly around the consulting and/or small business universe without anywhere near the level of risk that corporates thought was there, is to oppose the original lie. And there's some truth in that opposition. Flying in a plane is itself terrifying, because if something goes wrong with the plane, you'll be dead quickly, horrifyingly, and with no control over your destiny. Having your own wings (running your own business/consultancy) is far preferable from that point of view: you have control over your own fate. If you run out of money, it's your own fault, and was entirely predictable months in advance.

But, as I've mentioned before, one should not go too far in this direction either. The sensible, wise perspective is, as usual, in the middle. In large corporations, you can rise high up in the ranks if you work hard, are lucky, and play the careers game right. And so with startups or small businesses: if you work hard, are lucky, and play the game right, you can build something solid and rewarding. Which one you pick is really a matter of personal preferences.

So, in that context, here's an inspiring article by Vlad Lokshin, who refuses to settle for the accepted wisdom of either crowd, and carefully balances all three options. He arrives at his own conclusions of what the best fit is for him: a combination of a steady, 40 hours a week corporate (but independent) job with time on the side spent either consulting or working on his own ideas, as he sees fit. It's an appealing goal (though not so easy to achieve). Have a read for his full thinking.

I'll finish with one final piece of advice, which goes slightly contrary to one of Vlad's points:

No matter where you are, make sure you're always growing on a personal level. Never sacrifice your personal growth for some "I'll make it if I only throw everything into it" martyrdom delusion. Successful people start successful businesses, and successful people are always growing.

Swinging for the fences  

Dan Shipper on swinging for the fences:

For a long time I accepted the "leave school and raise money" argument because I assumed that "swing for the fences" and "scale as quickly" as possible were inviolable tenets of company building. But it turns out they're not inviolable. They're not even tenets. They're just a common way of thinking about how to do a startup.

Common (and successful) in the valley. Almost everywhere else, it's deadly. Paraphrasing Paul Graham, "Somehow, it's as if most places were sprayed with [swinging-for-the-fences] startupicide."

Dan continues by analysing why he's not interested in homeruns:

And so my goal is this: to be able to do those things sustainably, for the rest of my life.

[...]

Now let's get back to homeruns. Homeruns by definition aren't sustainable. They're not predictable. Sometimes you hit one, but most of the time you don't. That part of things is mostly out of your control.

And:

What I'm spending my time doing now is this: learning how to build a real business. And by real, I mean a business that has money coming in the door from day one. Businesses that make money can be started in any investment climate. They don't go out of style.

If more startup founders subscribed to that philosophy, I think everyone would win - more businesses, more jobs, more value creation, more opportunities fulfilled, and so on. Of course, that's not the Valley philosophy, but then that philosophy is not the only game in town, and shouldn't be.

Don't answer questions, tell a story  

Here's an interesting comparison of good and bad pitches in a specific context, that also applies to other context. By Andrew Peek:

My recommendation for any startup reading this, is to shift your mindset ever so slightly. Prepare like you would, but when you walk in that door, have a 4 or 5 minute story to tell, instead of 25 answers to 25 commonly asked questions. In fact, take this approach on every occasion where you get to pitch your business.

The next time someone asks you, "So what does your startup do?", lay it on thick. Tell a story. Get them to empathize.

Accounting 101 for US startups  

I've argued before that it's important to understand company regulations, and even included some advice from Brad Feld and myself about how to set up your accounting system.

My experiences are much more focused on UK accounting, since I'm based in the UK. I understand that the US system can be even more painful in many ways, depending on which state you register in. Tim Raybould, a former PWC accountant and now CFO at TicketLeap has published a series of articles explaining his view of how to set up an accounting system for a new startup. It's split into 4 parts:

  1. Key concepts
  2. Picking your accounting software
  3. Financial statements
  4. The monthly close

From a UK point of view, this seems a tad heavy. I feel like most startups don't need to go into such depth (e.g. having a monthly close) to function. However, being aware of what will eventually be "business as usual" in your company's finances is certainly good, so have a read if you're US-based.

Focus on the power users  

Jason Cohen from A Smart Bear:

Ignoring most of your potential market, how are expert, power-users doing this today, without your software?

Jason suggests focusing on the power-users first, because they're the go-to guys for the industry. Solve their problems, in their terms, and market it directly to them. Then, later, expand the scope of your marketing as your user base shifts.

This is in contrast with the typical fly under the competition strategy many people follow, but Jason makes a good case for why this works, in both a consumer and a b2b context. The article is long, but worth your time.

Corporations and companies are a responsibility  

Hamza Siddiqui:

My dilemma started when my co-founder and I had to split and the startup we were working on pretty much died out. About a month ago, I decided to finally close the corporation. But I quickly realized that closing a c-corp was not as easy as opening one.

"So in total, you owe about $89,000 to the State of Delaware"

Unlike what the title of the post suggests ("Why incorporating my startup was my worst mistake"), the correct lesson to take from this experience is that registering a company is a responsibility. It's not something you do without knowing what regulations will apply to you.

Earlier in January, I advised people to register a business today as a new year resolution. This admonition deserves a follow-up.

Most governments treat businesses as "responsible" entity. They give you very little slack when it comes to following the laws and regulations of business, because they consider business owners to be capable of following a few simple rules. For example, in the UK, if you fail to file your accounts on time, you will get fined. If you file your accounts wrongly, it's your fault, too (not your accountant's, interestingly). Nobody cares that your dog ate the accounts - it's your responsibility as a business to keep records, keep copies of the records, prepare the right pieces of paper and file them at the right times.

Those regulations are, at least in the UK, nowhere near as complicated as they might sound on the surface. Any reasonably diligent and intelligent person (and someone who can learn and apply multiple programming languages definitely qualifies) is capable of learning everything they need to know over a few hours. And the government gives plenty of reminders, too. But you do need to go into this type of venture with your eyes open.

Registering a business is for grown-ups.

How to scale a development team  

Here's an interesting article by Heroku founder Adam Wiggins on managing the expansion of a startup's development team through its life, using Heroku as an example.

Some thoughts:

  • The light touch approach early on feels right to me based on my management experience. More formal processes are more likely to hurt a small team than help it. That said, that depends on the team, and also on whether that team is distributed. If you don't get to be in the same room every day, even with just 3 people you probably need to put in place some kinds of processes to keep everyone in sync.
  • The split into functional streams in "stage 3" is just one option. Many other companies find that cross-functional teams focused around specific features or subprojects work better as an organisational approach. Being a very technical product with very heavy infrastructure demands, a functional split may have worked well for Heroku, but be sure to consider cross-functional teams too.
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