Incorporation

Thoughts on when to incorporate

Update: I originally posted this article with the title “Incorporate your startup only when you’re forced to” and I had amazing feedback, particularly from Andrew Payne and David Hauser who have been through incorporating startups many times and know this domain much better than me. The original title wasn’t a great representation of my views in this post so I’ve adjusted it. Thanks for all your comments!

I previously wrote that I believe you should be very hesitant about incorporating an idea, and instead you should maintain focus on what matters in order to take your idea to something that could be a real business: users and a product that solves a problem.

However, what happens when things start to work? When your product starts to gain traction and you have many users and perhaps some paying customers. Clearly, it’s important to incorporate a startup at some point in time. With this article, I want to explore: when is the right time to incorporate?

You don’t need to be incorporated

With Buffer, we were fully focused on product and traction for a long time before we thought about incorporating. The thing is, you can run a business without being incorporated as a C-Corp in the US, or a Ltd. company in the UK and other places.

You can run a startup simply by being registered as self-employed, and you can even register this long after you have been running.

In short, you don’t need to have incorporation in your mind at all, and I believe it shouldn’t be in your mind. There are much more important things to do.

If you will raise funding

If you plan to raise funding for your startup, then I think it is a great idea to wait until that point in order to incorporate.

If you reach the point where you can seriously consider raising investment and believe your startup is fundable, then that is a good time to incorporate, since you’ll need to be incorporated to formally close the round and investors will ask you if you about company structure.

If you apply for an accelerator program such as AngelPad, YCombinator or TechStars, you’re generally in a better position if you apply without being incorporated. In fact, YCombinator strongly prefer it if you’re not:

"Don’t incorporate, though, if you can avoid it. It’s easier to start with our paperwork than to transfer an existing LLC or S-Corp to a C-Corp."

The thing is, once you get into one of these programs they will put you right through to the very best lawyers, accountants and anything else you need.

If you incorporate too early, you risk doing it in a less than optimal way, which could actually put you in a worse position. I’m very glad we didn’t incorporate Buffer in the UK before we got into AngelPad, since when we came to raise our seed round many investors asked us “are you delaware incorporated?” and we had an easy “yes” answer. It’s one of those checkbox questions you want to avoid trouble with.

If you won’t raise funding

If you won’t raise funding, I think it is still a good idea to delay incorporating. Again, you can run a business without being incorporated, and you have too many other things to focus on with the startup without the hassles of incorporating.

I think incorporation is one of those aspects where it is best to stay lean and do activities which will take you closer to becoming a solid, lasting business with a brand, users and revenues before you think about incorporating. When some of these important milestones start to happen, then perhaps it is a good time to consider incorporating.

Asides from fundraising, I see a few different scenarios during the process of building a startup, which may be good trigger points to incorporate:

  • you get a government grant and need to be incorporated
  • you hire a full-time employee
  • you’re setting up an office and need to be incorporated for the lease
  • you give equity or stock options to employees or founders
  • you want to formalise a founders agreement (vesting, etc.)
  • you need to set up a company bank account

Some of these things are good milestones which generally correlate with building a meaningful business, and therefore will be better times to incorporate than simply with an idea.

Incorporate when you’re forced to

This brings me to my current stance on when to incorporate. With the personal experience I’ve had of incorporating too early with a previous startup, and incorporating at a good time with Buffer, as well as speaking with many other founders.

I believe the best way to choose when to incorporate is to simply wait until you are forced. With Buffer, we had $120,000 of funding from AngelPad and needed a bank account to put it in. For that, we needed to be incorporated, so we got set up as Buffer Inc.

If you wait until you’re forced, there’s a much higher probability that you actually have something that could become a lasting business. If you don’t wait, it will most likely be a hangover going forward with whatever you do. I have a previous, dormant business with no revenues and it’s a hassle that it’s incorporated.

When did you incorporate? I’d love to hear your thoughts and experiences on this topic.

Photo credit: AgriLife Today

Don't register your idea as a company

When to incorporate is one of those topics which comes up time and time again, and there is much conflicting advice out there. I’m lucky enough to have a number of different experiences and perspectives with this, and I now believe that by far the best option in almost all cases is to delay registering a company for as long as possible.

Don’t incorporate a hobby

I’m no lawyer, so it’s probably best not to take too much of my advice on this. One of the lawyers who I have a lot of respect for, especially when talking about scalable tech startups, is Ryan Roberts, who runs the Startup Lawyer blog. His advice is this:

"Don’t incorporate a hobby. Incorporate when you are serious about making your startup a business."

I think that’s pretty sound advice.

Being serious about your startup idea

I’m sure if you were to talk with someone else about the idea for your startup, you probably wouldn’t want to call it a hobby. You’d be very serious about it, this idea is the one. Right?

I think that’s great, it’s definitely good to be determined and ambitious. However, when it’s still an idea I think it’s perhaps good to think about it as a hobby.

As an example, I spoke yesterday at Leancamp Dublin and one of the things I mentioned about when I first had the idea for Buffer was this:

"The idea came from a personal need, and I knew I’d find the product useful for myself. However, for it to be more than just a hobby, I needed lots of other people to find it useful as well."

This is the point in time when I decided I needed to go through a validation process for Buffer before I launched it. I needed to find out if lots of other people would find it useful. Over time, this worked out well. With 230,000 users and good revenue, we’re most certainly a startup now.

However, realistically, it remained a hobby - an experiment - for quite some time before it became a true startup.

Don’t launch a company, launch an experiment

Vinicius Vacanti, the co-founder and CEO of Yipit has a great way of phrasing the benefits of framing your startup idea as an “experiment”:

"by thinking of it as a quick experiment, that fear tends to go away. The beautiful thing about experiments is that disproving your hypothesis isn’t thought of as a failure. It’s thought of as progress. And, getting early user feedback, even negative, is definitely progress."

I think that’s a great way to think about it. Each assumption or hypothesis which is disproved is very real progress, since the measure of progress for a lean startup is validated learning.

What matters? Product/market fit

One reason that it is great to think about a fresh startup idea as an experiment is described very well by Marc Andreeson’s definition of “product/market fit”:

"Product/market fit means being in a good market with a product that can satisfy that market."

When you reach product/market fit you essentially have built something people want. You naturally get traction, and things unfold very quickly. Reaching product/market fit is perhaps the most important thing for a startup. Andreeson puts it this way:

"Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to."

The pre-product/market fit phase is one of the biggest challenges of creating a startup. You have to get out of the building and face those assumptions. You need the flexibility to make drastic changes. The best way is by thinking about the process as a series of experiments, with the eventual goal of arriving at something people want.

When you manage to achieve product/market fit, you’ll know it. This was the key difference between Buffer and my previous startup. Andreeson was right:

"you can always feel product/market fit when it’s happening"

Delay incorporating to stay flexible

With a company registered, and perhaps the name related to the idea, it can be very difficult to let go of an idea in pursuit of succeeding as a startup, rather than with the particular idea. Being too attached to the idea or a particular solution could kill the startup.

Therefore, I believe that it is best to delay incorporating our startups. In this pre-product/market fit stage, we should be focused completely on reaching product/market fit, as Andreeson has told us. This gives us the best chance of finding something that does get traction (it flows when you hit product/market fit). Once you’re there, it’s becomes worth incoporating and giving it the focus as a startup rather than a hobby or experiment.

Have you incorporated your startup? How early did you do it and what were the reasons? I’d love to hear from you in the comments

Photo credit: Juli