It’s funny how when you mention documentation founders go nuts. It’s like you’re asking them to run a marathon or something. It’s tough enough to even get a founder to incorporate their business let alone think about papering the business with what they consider time-wasting activities.
Sure, documenting your business takes time but if it’s not your strong suit hire someone. It still needs to be done. So what do I mean by documentation?
Documentation covers everything from a business plan to that pesky Non-Disclosure Agreement (NDA) that most investors consider laughable. Most founders will tell you that they don’t have time to write even a business plan so they write a stupid executive summary that is meaningless. Founders will say that the business is changing too fast, they need to be agile to pivot so what’s the point in a document that changes faster than it is written. Really?
Documentation will reduce the risks awaiting the founder from lawsuits and unforeseen events, reduce liability, resolve disputes and outline the ownership of the company for investors. Documentation will clearly define the roles of the stakeholders and expectations. It will make it possible to raise capital from investors. In fact, it’s almost impossible to raise capital without some sort of documentation unless your grandmother is loaning you money. More importantly, documentation, particularly in the form of the Business Plan, will give the founder and investor real business objectives and an execution strategy.
Let’s look at the necessary documents that will make or break a founding start-up.
Articles of Incorporation
You’ve probably had a lawyer do it for you so the bylaws are probably from a template and done by his articling student. If it not made specifically for your company then you have just added another document to your must have pile – a shareholder agreement!
The shareholder agreement defines the finances, the relationship the company has with the directors, founders and investors. It’s not supposed to be a mediator in case of disagreements but it provides the framework so everyone involved with the company is on the same page. I became a founder in probably one of the best ideas I had ever seen. I appointed a friend the CEO and he worked on the Shareholder Agreement for more than a year. I gave up on the business because if it took that long for the agreement imagine working the business.
The Business Plan
I’ve said many times to my clients I don’t care if you follow it, rip it up or file it for posterity it needs to be done. Just the process of identifying your demographics, market, financing, objective and strategies is the key whether you live by it or line your birdcage. I’ve seen amazing business plans and terrible ones but in each the vision of the company and the objectives were well defined. Strategic planning is of the utmost importance. By the way, the Executive Summary is not written first – it’s a summary for crying out loud. If you’re dyslexic and can’t write a sentence hire someone to write it for you.
Ah, the replacement for the business plan – not! This may be in addition to the business plan but sure as heck it seems to be the fashion to provide a slick deck with little substance or too much. Some are a delight to see with the problem defined and the solution the founder is hoping to solve with a rationale and plan on how to do it. Simple enough. Usually the founder tries to put everything including the kitchen sink into the deck and then at the representation reads it to the investor. Now I don’t know about you but I usually get up and walk out at that point because I can read ten times faster than that guy can speak. Keep the deck to ten slides and keep the text to the main points. One slide might take three minutes to go over so consider the time you need after the deck to close an investor.
Standard Operating Procedures (SOP)
I like this one because it is difficult but makes you think about how someone else would do a certain task if you were in the hospital after being run over by a herd of geese. I’m on the Board of the International Institute of Business Analysis (Vancouver). These guys live on SOP’s and won’t arrange a luncheon without a plan. I took a workshop from a friend who asked everyone there to write out the steps to baking a cake. Sounds easy! I had 25 things on my list. It was around a hundred. An SOP is a guide for others to do a task the same way every time. Ask MacDonald’s about SOP’s.
Otherwise known as Non-Discloser and Non Circumvention agreements (NDA/NCNDA) these are often the hardest to deal with and the hardest to enforce. I always ask people that if someone rips off their idea or tells someone they shouldn’t do they have enough money to sue? If you are referring someone to another for financial gain a NCA is a good idea but in the end it relies on the honesty of the dealmaker. It is mainly used to remind others that your word is your bond and honesty is expected. Sadly, some people are not honorable. You may have heard the phrase, ‘those with the deepest pockets wins’.
If someone is considering investing in one of my companies I send an NDA to gage their interest because it takes time to read it, and sign it. If they get back to me I take step two and send them more detailed information.
Intellectual Property Right Protection (IP)
Investors expect a unique selling proposition and a design or utility patent fits the bill. Patents are tough as usually like Confidentiality Agreements they are hard to enforce and fighting might be impossible if the offender is in China or has those deep pockets. In valuating your business the IP accounts for one third of the value next to management and a great product. In the discussion around documentation, the founder needs to identify who actually created it and who owns it. This is important down the road when the company sells or does a M&A. The document usually vends the IP into the company so the company owns the intellectual rights. I prefer to have the patent holder (usually the Founder) lease it to the company for a period of time. It avoids a lot of pain over ownership.
Employment and Consulting Agreements
These just keep everything clean with no disagreements down the road. Money always muddies the water and clean agreements outlining roles, responsibilities and expectations make a business a good place to work. As a consultant to Founders I often get partners to write each other’s role and responsibilities. It make for an interesting read.
Consider a Term Sheet (TS) like a Letter of Intent. It begins the negotiation of an investment by the founder to an investor. It’s supposed to be simple i.e. bullet points, to expedite the process as it spells out the investment opportunity. It can be binding but is usually non-binding as it doesn’t propose in any way that it’s an agreement and is really not enforceable in court.
The Offering Memorandum (OM)
The Offering Memorandum is also called a Private Placement. It’s like an exhaustive business plan specifically for raising money. It’s got everything in it from bios of the founders to finance, use of funds, operations and anything that will allow an investor an informed decision to invest in the company. It outlines the amount being raised and the terms of the investment. This is an expensive document to produce, as it must pass compliance with the Securities Commission. Once approved it is ‘shopped’ to specific investors usually chosen by the company itself.This is specifically for private companies seeking investment and is not an Initial Public Offering (IPO) that seeks investment from the public.
The important of each document is defined by the founder’s vision and objectives. Obviously if the company needs financing all of the documentation needs to be in place.Don’t make excuses for not doing it. The process of documenting your start-up will give you a better understanding of both your strengths and weaknesses so you will realize your dream.