Startup Law 101 Series - Tips From a Business Lawyer Becoming a Founder

Introduction

Why become a founder? What are some things you can do to become a successful founder?

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

Tips on Why You Should Become a Founder

Why become a founder?

1. If you succeed as a founder, you will make far more than you would as an employee. Obvious, but worth repeating.

Founders want the large upside that will come from a successful venture. The goal is very hard to achieve but the rewards can be great.

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

As an employee, you will get hit with ever-increasing taxes on your compensation.

Forget about the rich. It is the average employee who gets soaked. You pay, say, up to a third of what you earn for federal, state, and local income taxes. Add another nearly 10% for payroll taxes. Now assume that inflation bumps you into higher tax brackets. Rates are then raised for those brackets. Then payroll tax rates go up. And the social security cap lifted. And new taxes added to fund future health benefits. You will be left with an ever-diminishing net amount from your pay. Welcome to being the employee of the future.

As a founder, however, your largest reward by far will come not from salary but from a liquidity event at which you cash in your chips. At that point, you pay a one-time capital gains tax for the vast part of the economic reward you derive from your venture. You pay less income tax because the capital-gains rate is lower. And you pay no employment taxes at all. With capital gains, you also control timing somewhat and this can further help minimize what you pay.

It all comes from the same effort. You sweat for what you earn. You can take your reward as ordinary income or, as a founder, convert a big part of it into far more advantageous equity gains. With success, you not only earn more but you keep more as well.

3. Being a founder can be not only financially but also psychologically rewarding.

When you venture out, you get the chance to realize a vision for your company and to benefit not only yourself but also your co-founders, your investors, your employees, your customers and the public generally. You get to watch your enterprise grow and prosper. You get to watch it have an impact on others for good.

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

4. Finally, being a founder gives you the independence of being your own boss. You will rise or fall by your own merits. This is a great opportunity and a great challenge. This is the one advantage that most entrepreneurs will ultimately say they value most.

Tips for Becoming a Successful Founder

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

1. Above all else, build from strength.

Be prepared before you venture out. Get a strong education. Work with the best to get excellent training in your field. Master your craft. Build relationships. Take what you do best and improve upon it. That is the key to innovation. And this is the best path for most founders.

Or you might build on the strength of exceptional entrepreneurial talent alone. Or a specialized skill that lets you team with others who supply what you might lack. Nothing formulaic here. But you do need to build on some form of strength.

This also means that you do not venture out based on a bare idea. Try this one from the bubble era: "I have worked one year in manufacturing and know how to revolutionize that field through an idea I have for a website." Sorry, but abstract ideas get you nowhere.

It also means you do not do something just because you are tired of something else. Think twice about that romantic little tea shop. That is, unless you know about the business of tea shops. Others do, and they will make you pay. Know what you are doing before you step into something.