93 Rules for Starting Your Business
I wrote this article a few months ago.
So Steve Cohen, my podcast producer, and I made a podcast about it.
Here’s the episode:
And here’s the article:
No joke. This is going to be a bullet FAQ on starting a business.
If you’re a lawyer, feel free to disagree with me so you can charge someone your BS fees to give the same advice.
If you can think of anything to add, please do so. I might be missing things.
If you want to argue with me, feel free. I might be wrong on any of the items below.
I’ve started, advised, invested in, been on the board of dozens of businesses. Many billions in exits.
There are many types of businesses. Depending on your business, some of these won’t apply.
All of these questions come from questions I’ve been asked.
The rules are: I’m going to give no explanations. Just listen to me.
1) C-Corp, or S-Corp, or LLC?
2) What state should you incorporate in?
3) Should founders vest?
Yes, over a period of four years. On any change of control the vesting speeds up.
4) Should you go for venture capital money?
First build a product, then get a customer, then get friends and family money (or money from revenues, which is cheapest of all) and then think about raising money. But only then. Don’t be an amateur.
If you don’t build a product first (even if you have to do some things manually that you will later automate), then there is no way to test demand, no way to test specific features, no way to get feedback.
You will spend six months raising money, six months hiring programmers and building a product, and then probably fail.
THIS is why many startups fail. Test, test, test.
5) Should you patent your idea?
Get customers first. Patent later. Don’t talk to lawyers until the last possible moment.
6) Should you require venture capitalists to sign NDAs?
No. Nobody is going to steal your idea.
7) How much equity should you give a partner?
Divide things up into these categories: manages the company, raises the money, had the idea, brings in the revenues, built the product (or performs the services). Divide up in equal portions.
8) Should you have a technical cofounder if you are not technical?
No. If you don’t already have a technical cofounder you can always outsource technology and not give up equity.
9) Should you barter equity for services?
No. You get what you pay for.
10) How do you market your app?
Friends and then word of mouth.
Social media is BS. Build a product that people want.
Craig Newmark emailed his friends every day about events happening in San Francisco.
They would share his emails. Soon he was sending thousands of people emails.
Only THEN did he build a website (Craigslist). When he knew there was demand. Now it’s worth billions.
11) Should you build a product?
Maybe. But first see if manually your product works. Then think about providing it as a service. Then productize the commonly used services. Too many people do this in reverse and then fail.
12) How much dilution is too much dilution?
If someone wants to give you money, then take it. The old saying is 100% of nothing is worth less than 1% of something.
One time I raised $30 million in the first round for a company I started (Vaultus). But there was demand for $20 million more and I said no. I wish I had said yes.
13) Do you listen to venture capitalists?
Yes, of course They gave you money. But then don’t do anything they ask you to do.
Remember: They WANT you to spend so they can get great terms on giving you more money in the next round.
SAVE YOUR CASH.
14) What if nobody seems to be buying your product?
Then change to a service and do whatever anyone is willing to pay for.
I had a company once that made websites. If someone needed a logo, we did it. If someone needed a friend, we did it. If someone needed a TV commercial, we shot it.
“Focus” is a slogan used by people who aren’t entrepreneurs.
15) If a client wants you to hire their friend or they won’t give you the business (like a bribe) what should you do?
Always do the ethical thing — hire the friend and get the client’s business.
16) What do you do when a customer rejects you in a B2B business?
Stay in touch once a month. Never be angry.
Rule: 16 touches later you will have the business.
17) In a B2C business:
Release fast. Add new features every week.
18) How do you get new clients?
Rule: The best new clients are old clients.
Even when I do my podcast, the best guests are guests who have been on before.
Always offer new services.
19) What’s the best thing do for a new client?
Over-deliver for the first 100 days. Then you will never lose them.
20) What if your client asks you to do something not in your business plan?
Do it, or find someone who can do it, even if it’s a competitor.
The way I got offers for my first company was by referring clients to other companies. Those other companies eventually ALL offered to buy my company.
21) Should I ever focus on SEO?
22) Should I do social media marketing?
23) Should I ever talk badly about a partner of an employee even though they are awful?
Never gossip. The way you do anything is the way you do everything.
24) I have lots of ideas. How do I pick the right one?
Do as many ideas possible. The right idea will pick you.
DOING is 100x more valuable to your business than thinking.
24a) Aren’t “ideas a dime a dozen and execution is everything?”
Who told you this? A good idea is difficult.
And execution ideas are a subset of ideas. There are bad execution ideas and good execution ideas. One means your business will fail, the other means you will make millions.
Practice every day having ideas so that when you need to execute, you will have good execution ideas.
25) What is the sign of an amateur?
Any of these things:
- Asking for an NDA
- Trying to raise VC money before product or customers
- Having fights with partners in the first year. Fire them or split before anything gets out of control
- Worrying about dilution
- Trying to get Mark Cuban to invest because “this would be great for the Dallas Mavericks”
- Asking people you barely know to introduce you to Mark Cuban
- Asking people for five minutes of their time. It’s never five minutes so you are establishing yourself as a liar.
- Having a powerpoint that doesn’t show me arbitrage. I need to know that there is a small chance there is a 100x return on money.
- Catch 22: Showing people there’s a small chance there’s 100x return on their money. The secret of salesmanship is getting through the Catch 22.
- Rejecting a cash offer for your company when you have almost no revenues. Hello Friendster and Foursquare.
26) What is the sign of a professional?
- Going from bullshit product to services to product to SaaS product. (Corollary: The reverse is amateur hour.) Example: Oracle sold a database. Then they would send over 100 consultants to “install” the database. This is how they built their database. It took them four years of selling their database before they actually had one.
- Cutting costs every day
- Selling every day, every minute
- When you have a billion in revenues, staying focused. When you have zero revenues, staying unfocused and coming up with new ideas every day.
- Saying no to people who are obvious losers.
- Saying yes to any meeting at all with someone who is an obvious winner.
- Knowing how to distinguish between winners and losers (subject of an entire other post but in your gut you know, trust me).
27) When should I hire people full time?
When you have revenues.
28) How long does it take to raise money?
In a GREAT business, six months. In a mediocre business: infinity.
29) Should I get an office?
No, not unless you have revenues.
30) Should I do market research?
Yes, find one customer who DEFINITELY, without a doubt, will buy a service from you. Note: I don’t say buy your product because your initial product is always not what the customer wanted.
31) Should I pay taxes?
No. You should always reinvest your money and operate at a loss.
32) Should I pay dividends?
33) What should the CEO salary be?
No more than 2x your lowest employee if you are not profitable. This assumes you are funded. If you are not funded, your salary should be zero until your revenues can pay your salary last. Important.
Rule: The CEO salary is the last expense paid in every business.
34) When should I fire employees?
When you have less than six months burn in the bank and you aren’t getting revenues growing fast enough.
35) When should you have sex with an employee?
When you love her and the feeling is mutual.
36) What other reasons should one fire an employee?
- When they gossip
- When they don’t over-deliver constantly
- When they ask for a raise because they think they are making below industry standard
- When the talk badly about a client
- When they have an attitude
- When they talk badly about one of your partners or investors.
37) When should you give a raise?
Rarely. Find many incentives for people to be happy. It’s not just about money.
38) How big should the employee option pool be?
39) How much do advisers get?
1/4 of 1%. Advisers are useless. Don’t even have an advisory board.
40) How much do board members get?
Nothing. They should all be investors. If they aren’t an investor, then 1/2 of 1%.
41) Should you take the offer to buy your company?
Yes. In cash.
42) What is the only effective email marketing?
Highly targeted email marketing written by professional copywriters, and the email list is made up of people who have bought similar services in past six months.
42a) Corollary: If you have zero skills as a copywriter then everything you write will be boring.
43) Should I give stuff for free?
Maybe. But don’t expect free customers to turn into paying customers.
Your free customers actually hate you and want everything from you for nothing so you better have a different business model.
3% of your free customers will turn into paying customers.
3% of your paying customers will buy more expensive products. This will be the cause of all of your profits.
44) Should I have swag?
45) Should I go to SXSW?
46) Should I go to industry parties and meet-ups?
47) Should I blog?
Yes. You must. Blog about everything going wrong in your industry. Blog personal stories that you think will scare away customers. They won’t. Customers will be attracted to honesty.
BE the voice of your industry.
48) Should I care about margins?
No. Care about revenues.
49) Should I spin off this unrelated idea into a separate business?
No. Make one business GREAT. Throw everything in it. Do DBAs to identify different ideas.
50) Should I hire people because I can travel on a seven-hour plane ride with them?
Don’t be an idiot. If anything, hire people the opposite of you. Else who will you delegate to?
51) When should I say no to a client?
When they approach you.
52) When should I say yes to a client?
Every other conversation you ever have with them after that initial no.
53) Should I have sex with an employee?
Stop asking that.
54) Should I negotiate the best terms with a VC?
No. Pick the VC you like. Times are going to get tough at some point and you need to be able to have a heart-to-heart with them.
If the company does well, everyone will be rich.
55) Should I even start a business?
No. Make money. Build shit. Then start a business.
56) Should I give employees bonuses for a job well done?
No. Give them gifts but not bonuses.
57) What should I do at Christmas?
Send everyone you know a gift basket.
58) If my customer just got divorced what should I say to him?
“I can introduce you to lot’s of women/men.”
59) When should I give up on my idea?
When you can’t generate revenues, customers, interest, for TWO MONTHS.
60) Why didn’t the VC or customer call back after we met yesterday and it was great?
They hate you.
61) Why didn’t the above call back after we met yesterday and it was great?
Yesterday was like a split second ago for them and a lifetime for you. There’s the law of entrepreneurial relativity. Figure out what that means and live by it.
62) Should I hire a professional CEO?
63) Should I hire a head of sales?
No. The founder is the head of sales until at least $10 million in sales.
64) My client called at 3 a.m. Should I tell him to respect boundaries?
No. You no longer have any boundaries.
65) I made a mistake. Should I tell the client?
Yes. Tell him everything that happened. You’re his partner. Not the guy that hides things and then lies about them.
66) My investors want me to focus. Should I listen to them?
No. Diversify in every way you can.
67) I personally need money. Should I borrow from the business?
Only if the business can survive for another six months no matter what.
68) I just bought two companies. Should I put them under the same roof and start consolidating?
No. Not for at least two years.
69) Should I quit my job?
No. Only if you have salary that can pay you for six months at your startup. Aim to quit your job but don’t quit your job.
70) What do I do when I have doubts?
Ask your customers if your doubts are trustworthy.
71) I have too much competition. What should I do?
Competition is good. It shows you have a decent business model. Now simply outperform them.
72) My wife/husband thinks I spend too much time on my startup?
Divorce them or stop your business.
73) I’m starting my business but I have relationship problems. What should I do?
Get rid of your relationship.
74) Should I expand geographically as quickly as possible?
No. Get all the business you can in your local area. Travel is too expensive time-wise.
75) How do I keep clients from yelling at me?
Document line by line every meeting and send your document to the client right after the meeting.
76) I undercharged. What should I do about it?
Nothing. Charge the next client more.
77) I have an idea for an app but don’t know how to execute. What should I do?
Draw every screen and function. Then outsource someone to make the drawings look like they come from a real app. Then outsource the development of the app. Get a specific schedule. Micromanage the schedule.
78) I want to buy a franchise in X. Is that a good idea?
Only buy a franchise if it’s underperforming and you can see how to improve it. Don’t buy on future hopes, only buy on past mistakes.
Make sure you can say what your unfair advantage is in one sentence.
79) I still want to buy a franchise in X. Is that a good idea?
Rely on the three Ds: Death, Debt, Divorce. When someone dies, the heirs will sell a business cheap. When someone is in debt, they will sell a business cheap. When someone divorces, the couple usually have to sell a business cheap.
IMPORTANT: Even if the trends in the industry are in your favor, you CANNOT predict the future. But you can use the past to help you get a deal. Always get a deal.
80) I have a lot of traffic but no revenues. What should I do?
Sell your business. There’s only one Google. (Well, there’s two or three Googles: Facebook and Twitter.)
81) I have no traffic. How do I get traffic?
Shut down your business.
82) Should I hire a PR firm?
No. Do guerrilla marketing. Read “Newsjacking” and “Trust Me I’m Lying.” PR firms screw up from beginning to the end. The first time I hired a PR firm, instead of sending me my contract they accidentally sent me their contract for Terry Bradshaw. He was paying $12,000 a month. Was it worth it for him?
83) My competition is doing better than me across every metric. What should I do?
Don’t be afraid to instantly shut down your business and start over if you can’t sell the business. Time is a horrible thing to waste.
84) I’m in business now for six years and my business doesn’t seem to be growing. It’s even slowing down. What should I do?
Come up with 10 ideas a day about new services your business can offer. Try to get a customer for each new service.
Rule (again): The best new customers are old customers. Do new things for old customers.
85) Is it unethical to run my business from the side while still at my job?
I don’t know. Did God tell you that in a dream?
86) My customer called me at 5 p,m, on a Friday and said, “We have to talk” and now I can’t talk to him until Monday. What does it mean?
It means you’re fired.
87) XYZ just sold for a $100 million. Should I be valued at that? I’m better!
No, you should shut up.
88) Investors want to meet me and customers want to meet me. Who do I meet if I need money?
You should know the answer to that by now.
89) If an acquirer asks me why I want to sell, what should I say?
That you feel it would be easier for you to grow in the context of a bigger company that has experienced the growing pains you are just starting to go through. That 1+1 = 45.
90) I just started my business. What should I do?
Sell it as fast as possible (applies in 99% of situations)
91) I can change the world with my technology.
No you can’t.
91a) Corollary: Don’t smoke crack.
92) If you’re so smart why aren’t you a billionaire?
Because I sold my businesses early, lost everything, started new businesses, sold them, and got lucky every now and then.
You create your luck by being healthy and not regretting the past or being anxious about the future.
93) Should I even start a business?
Only if you love managing the contradicting needs of employees, shareholders, clients, potential clients, partners, acquirers, competitors, etc.
Else, try to invest in someone who does so they do all the work for you.