mechanics As an entrepreneur, design, components and mechanics of a startup are very important questions to me. How should we build-up a startup? What should be the foundation stone of the startup? What are the factors to make it successful? Do we need cofounders? How should we choose a cofounder? These types of questions are often challenging our brains during the process of startup design. Following pivotal factors should be kept in mind, if you are planning to start a startup. These are formation, equity, fundraising, hiring and finally doing business. In this article, I would focus on the formation process and equity.

Formation deserves to answer the questions like Why, When, Where and How? A startup is a separate legal entity which is taxable, auditable, suable and accountable. It is alike an individual. Company, corporation and a firm are the synonyms of the startup. Investors usually feed the startups which are incorporated. Incorporation builds trust of investors. In other words, a startup protects the personal liability of the cofounders and investors.

Idea is the foundation stone to start a startup. Timely execution of the idea is vital to make the endeavor successful. However premature execution of the idea is pretty lethal. Suitable incubation time of the idea followed by execution is key to success. Timely execution generates funds and develops intellectual property (IP).

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Suitable place of execution is another factor controlling the success rate. Easy access for the customers/clients must be taken into account. The access could be physical, through webpages or both. Incorporation and other legal registrations must be handed over to a reliable and renowned advisors. This would save the time and money.

Final content of the formation process includes post incorporation modalities. Startup should adopt and follow the bylaws. Founders should assign IP to the company to get confidence of investors. Appointment of directors and staff officers must be done on merit. Right man for the right job principle should be followed. Merit-less inbreeding is the confirmed ticket of failure of the game. I suggest, avoid it. Evasion of merit-less inbreeding would become one of the factors which guarantee the success of a startup.

Equity, a second parameter, usually deals in assigning the roles to cofounders, purchasing the assets which help in setting the financial goals and finally the vesting or fixing the preferred shares for the cofounders. The process of assigning the role to the cofounders should be very transparent. It should depend on open and frequent discussions among cofounders. Cofounders should spell out each and every bit related to the business plans. Hiding the facts is the major cause of cofounders’ breakup. Cofounders should cap their shares in the equity before they step in the stock purchase agreements. On the other hand, if directors of the company manage the investment from other sources for a startup then they should agree on a formula on how to get permanent ownership of the shares. They should fix the time which is usually 3-4 years including a buffer period. During the buffer period which is usually one year, the cofounders have no share in the equity. If a cofounder left in the buffer period, he/she must go without any asset in hand other than salary. After one year, the share will go up by fixed percentage as agreed upon by cofounders and investors. It would develop the sense of protection for cofounders as well as for investors. Dilution of equity is another factor which comes up when the startups move towards a log phase of their growth curve. At this moment priced share must be allocated to new investors. This would help to expand the business. I would suggest to manage the startup wisely, transparently aligned with your professional strength and skill. It would strengthen the growth of a startup.

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This article is written by Dr. Shahid Waseem Co-Founder & Managing Director Alpha Genomics (Pvt) Ltd.

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