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

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


Why become a founder? What are some things you can do to become success founding father?

Having worked extensively with founders as a startup business attorney in Silicon Valley for many years now, and having also built my own business, I have a few tips to share on these points.

Tips Why You Should Become a Founder

Why become a founder?

1. If you are successful as a founder, you will earn far more than as an employee. Obvious, but worth repeating.

The founder wants the large profits that will come from a successful venture. The goals are very hard to achieve but the rewards can be huge.

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

As an employee, you will be exposed to ever-increasing taxes on your compensation.

Forget the rich. The average employee is drenched in sweat. You pay, say, up to a third of your income in federal, state, and local income taxes. Add another almost 10% for payroll taxes. Now assume that inflation bumps you into a higher tax bracket. Rates are then increased for those brackets. Then the payroll tax rate went up. And social security limits were lifted. And new taxes were added to fund future medical benefits. You will be left with an ever-decreasing net amount from your paycheck. Congratulations on becoming a future employee.

However, as a founder, your biggest rewards by far will not come from paychecks but from liquidity events where you cash out your chips. At that point, you pay a one-time capital gains tax for most of the economic rewards you derive from your efforts. You pay less income tax because the capital gains rate is lower. And you pay no employment taxes at all. With capital gains you can also control your time and this can further help minimize what you pay out.

It all comes from the same effort. You sweat for what you earn. You can take your prize as ordinary income or, as founder, convert a significant portion of it into a much more profitable equity return. With success, you not only earn more but also save more.

3. Becoming a founder is not only financially rewarding but also psychologically.

As you explore, you get the opportunity to realize your company’s vision and benefit not only yourself but your co-founders, your investors, your employees, your customers, and society at large. You can watch your company grow and develop. You can see it impact other people once and for all.

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

4. Finally, being a founder gives you the freedom to be your own boss. You will rise or fall at your own pace. This is a big opportunity and a big challenge. This is the one advantage that most entrepreneurs will eventually say they value most.

Tips for Becoming a Successful Founder

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

1. Above all, wake up from strength.

Get ready before you venture out. Get a solid education. Work with the best to get excellent training in your field. Master your craft. Build relationships. Take what you do best and improve on it. That’s the key to innovation. And this is the best way for most founders.

Or you might build on an extraordinary force of entrepreneurial talent alone. Or a special skill that allows you to work closely with others who supply what you lack. There are no formulas here. But you need to build a number of form of power.

It also means you do it No exploring based on naked idea. Try this one from the bubble era: “I’ve worked for a year in manufacturing and know how to revolutionize the field through an idea I have for a website.” Sorry, but abstract ideas get you nowhere.

It also means you do it No do something just because you are bored with something else. Think twice about that romantic little teahouse. That is, unless you know anything about the teahouse business. Others do, and they will make you pay. Know what you’re doing before stepping into anything.

No one will carry you when you go out on your own. Therefore, be prepared to develop something you do really well. It is your main key to success as a founder.

2. Calculate the cost before you head out.

You need the right temperament to go into business for yourself. If you crave security and certainty, being a founder isn’t for you.

Don’t romanticize the process either. Business is tough. You will lose the certainty of a fixed salary. You will have bills to pay, whether you make money or not. You will face a relentless array of challenges, from people problems to financial pressures to competitor challenges to legal disputes to immense psychological stress to all manner of other obstacles. When you get past all of this, or at least most of it, you will build “goodwill” — that is, the going concern value of your business. Good intentions are really nothing more than the profit that you get from the blood that you have spilled. This is a big plus that makes your business better than others. But you will have to shed blood on it. Understand this upfront and be prepared to pay the necessary fees.

Therefore, of course, if you are not prepared to pay the fees, you will have to keep working full time.

3. When you’re starting out, try to do it with a multi-talented team.

There are no standard rules here. Experience confirms, however, that a team is much more likely to succeed than a single founder. This might just be another way of saying that, if something is really good, other people will be attracted to it. Most likely, this is another way of saying that launching and building a successful venture is hard to do and you need a multi-talented team to make it happen. Where you cannot provide everything, someone else will provide for what you lack.

4. Make sure you have a sound business model.

Technical innovation is great, but, on its own, it usually doesn’t sustain effort. Sometimes, they can be sold or licensed to large companies. nothing wrong with that. In most cases, though, technology won’t be enough.

With or without key technologies, if a business is to be successful, go for it must has a sound business model that enables it to build and maintain a meaningful competitive advantage that makes it consistently profitable.

Without it, you’re not going anywhere, no matter how innovative this or that element of your endeavor is.

5. Watch your spending.

Extravagant spending is perhaps the single greatest mistake of early-stage companies.

Small business entrepreneurs have much less trouble than startup founders. Why? Because they usually deal with their own money. If you know what it takes to get it from the start, the chances of you going extravagant with it are greatly reduced.

One aspect of wasted spending is simply wastage. You get funds and you go out and get the best that money can buy. Expensive office. What a salary. Fancy party. Etc. In an early-stage company, you’ll regret spending like that when you run into trouble down the road that you wish you had that cash. Inevitably, you will hit a bump like that. Plan accordingly.

However, the flip side of wasted spending comes from not properly focusing your efforts in the early stages. You have ten great things you want to do as a company. You’re not making good judgment about which to focus on. You spend everything. In short, your funds run out before you can build a reasonable stream of income.

Exercise good judgment about where you can best use your limited funds and use them wisely.

6. Plan your legal launch carefully.

Don’t charge unnecessary legal fees. But when you’re ready for a meaningful launch, get set up right.

If you have a founding team, make sure you really think about the use of restricted stock as opposed to an outright grant of stock when awarding founder grants. In other words, hold on to the stock until it is acquired unless there is an extraordinary reason not to. Use cheap stock to avoid tax issues. Get the IP to the company. Get employment and consulting agreements, make sure all the IPs from the arrangement go to the company. Review your trademark issues in relation to any branding you will be doing. File provisional patents as applicable. When you’re ready to take on a wider team, set up an equity incentive plan.

Work with a good business attorney to get legal action right.

7. Fund your company gradually if possible.

The worst trap an early-stage company can fall into is that of stretching too far. Plan smartly to avoid this trap.

Work with early stage investors or have your own reserve fund to get you through the phase before you have any meaningful income.

Don’t put yourself in a position where you have no choice but to buy your shot at VC. You will either not be funded (most likely outcome) or you will be slaughtered when it comes to funding.


Think carefully before venturing out as a founder. The rewards can be great but you have to be up for the challenge. If you believe, a huge and open world of opportunities awaits you.

George Grellas