Writing a Business Plan & Protecting Your Idea
Q: I'm a budding entrepreneur, and over the years, I've brainstormed about many different business ideas. What's the first step in getting my concepts rolling? Is it setting up the Web site and launching a direct-mail campaign, forming the company structure or writing a business plan?
A: Unfortunately, there's no magic formula. Successful companies use every combination, and then some. Here's my recommendation, but check with your lawyer and accountant before making final decisions.
- First, create the business plan. A plan structures your idea. It lets you think through your market assumptions, product, distribution, management and financial needs. Even if you never need to raise outside money, now may be your only chance to think through everything from top to bottom and know where and how you're going. You can also work with a lawyer to choose a corporate structure that's most suited to your operational and financial needs.
- Next, incorporate. That way, start-up expenses clearly belong to your business and not to you as an individual. Incorporating early will also start your company's legal history, which can make it easier to get credit and raise bank financing later on. Furthermore, lawyer Joe Volman (firstname.lastname@example.org), a specialist in early-stage deals, points out that incorporating limits your liability once you start dealing with customers. In addition, he says you want as much time as possible between incorporation and outside investment to justify a low share price at incorporation. Your founder's shares are considered income by the IRS, and it's hard to value them at a penny per share two weeks before outside investors pay $1 per share. But always check with your own lawyer who knows your situation and your state's tax laws before deciding when to incorporate. Doing this properly at the start can save thousands (if not millions) of dollars down the road.
- Finally, build your site and market it. Your business plan is your chance to identify your customers, value proposition, financials and the response rates you need to be successful. If you begin building and marketing without the up-front thought, you won't know if your time and money are going toward the right things. A 3 percent direct-mail response rate is incredibly good, but if your business plan requires a 10 percent response to be profitable, it's best to know that before you pay for a direct-mail campaign.
Q: I'm also uncertain about showing my plan around once it's completed. Should I take measures to protect my ideas and concepts at that stage, and if so, what types of actions can I take to ensure my concept stays mine?
A: Protecting intellectual property (IP) is best done early by using a good intellectual capital lawyer. IP protection covers many areas, including the business idea, technology ownership and trademarks.
Entrepreneurs often ask investors to sign nondisclosure agreements (NDA) to protect the business idea. Few angels and almost no venture capitalists will sign an NDA. If one of their portfolio companies is already working on a similar idea, they can't sign it. If they did, you could show up years later claiming they stole your idea.
VCs also say you can trust them anyway since breaking confidentiality would hurt their deal flow. Really? If a VC has track record of making entrepreneurs multimillionaires in 18 months, would you talk with them even if you heard rumors they steal ideas? Probably. Especially since those rumors can be dismissed as sour grapes from unfunded entrepreneurs. Indiscretion might tank a VC's deal flow, but I doubt it would be as devastating as they portray.
But they have a much more solid argument: The idea doesn't make the difference-entrepreneurship is all about execution. And I agree wholeheartedly. Dreamers with good ideas are a dime a dozen. But in my daily work with entrepreneurs, it's the day-to-day implementation that makes or breaks them, not the grand ideas.
Specific technology is easier to protect than ideas. You can apply for patents and trademarks to protect proprietary technology you bring to the table. Patents protect, and they become assets that increase your valuation. Patents may even protect your business models. One company I've worked with has been told that some of their ways of doing business are patentable.
Caution: Don't rely too much on patents or trademarks in a practical sense. If someone infringes, your patent is only as good as your ability (time and legal resources) to prosecute infringements.
If your idea is all you have, as soon as you start sharing it to raise money, hire employees or establish trade accounts, then it's time to start executing for everything you're worth.
As an entrepreneur, technologist, advisor and coach, Stever Robbins seeks out and identifies high-potential start-ups to help them develop the skills, attitudes and capabilities they need to succeed. He has been involved with start-up companies since 1978 and is currently an investor or advisor to several technology and Internet companies including ZEFER Corp., University Access Inc., RenalTech, Crimson Soutions and PrimeSource. He has been using the Internet since 1977, was a co-founder of FTP Software in 1986, and worked on the design team of Harvard Business School's "Foundations" program. Stever holds an MBA from Harvard Business School and a computer science degree from MIT. His Web site is a http://www.venturecoach.com.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.