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Essentials / RodinStar / Startup

When to incorporate your Start-up?

 

Awarded the

“RodinStar” Post 

of the week!!

 

 

30 minutes before starting to write this article, I got off a call with Arvind Batra, founder of @Eventshigh, an event aggregator. They are building an IP around interest-led discovery of events.

Arvind sought me out after listening to me speak at @nextbigwhat Unpluggd event in the last week of May, 2014.

Some questions he had were:

    • Should they incorporate the company in the US or India?
    • Is true that it is easier to raise money from US investors if the company is incorporated in the US, and has a subsidiary in India?

For a while, I went back to when I was starting out for the first time. Like Arvind, I was weighing myself down with problems that were not yet mine. With experience, I am wiser, and below, I share some of the learnings.

First, know your stage.

We normally don’t pay attention to the difference between a product, a startup, and a company, and use the terms almost interchangeably, but @vijayanands brings out a good distinction.

A product has users, a startup customers, and a company investors. Tweet this

Knowing the difference, will tell you what (not) to focus on at each stage. Not just that, by describing your endeavor accurately, you also tell at what stage of the business you are in.

For example, Abhilash (@abhiscar) and I are currently working on Parallelo and we are at the product stage, meaning we have users, and we are working on the product-market fit.

Before you read further, a Product here means a SaaS product, and my learnings are primarily as a SaaS entrepreneur.

Worry about the problems of that stage. 

If you are not charging your users yet

You are probably not charging your users because you haven’t found the product-market fit. Of all times in the life of a business, this is the most stressful because you are in a whirlpool of intense research, fast pivots, and the pressure to ship fast. And you are probably one or two people doing all this, which means time is one luxury you don’t have.

Your business requires you to focus on things that matter most at this time. That is converting users into customers. Not incorporation. If you don’t find your product-market fit, you won’t have customers anyway, so why spend time on incorporation?

Incorporating a company takes only a couple of weeks, but keeping on top of compliances after incorporation takes a toll. For example, regardless of whether you are running a successful business, you have to pay Professional tax for the company and file returns for it as long as your company remains incorporated.

And if things don’t take off, there is only one thing that you need to know about company closure, that it is a real PAIN IN THE BACKSIDE, even in the US. I’ve done both, so I know.

So come to an understanding with your co-founder about how you both will own the business, and

Put all energies in building a product that users would love to pay for. Incorporation can wait.Tweet this

If you have customers

Congratulations. But ask your CA if you should still incorporate.

If you are just about ramping up, you can still hold off incorporation until you hit Rs 10 lacs in revenue in a financial year.

So what happens when you hit this Rs 10 lacs mark?

You are required to charge and remit service tax, for which you need to have service tax registration, unless all those revenues are from outside India.

If you hit this revenue mark and growing, you may soon be in situations where you have to incorporate anyway (because your client requires it, or you plan to raise equity or debt capital soon), so it may be a good time to incorporate your start-up, and go for the service tax registration in the incorporated entity’s name.

For as long as you are a proprietorship concern though, just make sure that you diligently maintain accurate records of all income and expenses, and treat the business different from yourself. If you cannot and you are among those who think Business Governance is the name of a flop movie, Rohan Arinaya, ex-PwC and partner Merican Consultants has some sage advice.

“…We don’t realise, but as entrepreneurs we don’t differentiate between self and profession. The finances and the lives continuously intersect each other. Yes, this shows the level of dedication to your Start-up but what happens in the process is that the business continues to receive a large amount of capital which might not have been otherwise available. Its like having a rich father when in college – its great you can spend the money but the process of learning and mastering the art of managing limited finances should be imbibed at as early a stage as possible.”

If you have employees

Don’t think you need to be an incorporated company because you are hiring.

People are attracted to a brand or a challenge, not because an entity is incorporated.  Tweet this

When you are still a small unit, your first couple of hires are probably those that you know well and understand Startup risks. See if you can build a trust bond with them and hire them for a proprietary concern to stave off incorporation for the time being. Put your promise of ESOP in writing and execute it when you finally incorporate.

If you are going to raise money

This is when you must incorporate so you can offer shares to your investors for the money they will invest. If the investors are strategic in nature, like that Accelerator you are part of, or a law or design firm that offers their services for equity in your company, see if you can convince them to wait till the time when you have to incorporate.

Find the fastest route to revenue

As it may have been clear to you, the objective of this post is not to advise against incorporation, but to know when to do it. The time interval between ideation and an incorporation event (steadily growing revenues, strategic partners who need equity, investor interest) could be more than 6 months. So ask your CA when is the ideal time to incorporate.

Now to that other question.

Is it easier to raise money from US investors if the company is incorporated in the US and has a subsidiary in India?

If Rudyard Kipling were to answer this question in his IFesque manner, he’d have said :

When you are a business that customers can’t get enough of
and for you, investors cut each other by half,
there is no step you’ve taken wrong, or an action amiss
’cause, it’s your arse that everyone wants to kiss.

A short answer is the quote below, powerful coming from whom it did:

Revenue solves all known problems – Eric Schmidt. Chairman of Google.  Tweet this

Thanks for reading. I am no company law expert, so if there are any errors, or you think differently, please leave a comment below.

While at that, we are still looking for early users for Parallelo, you could be one.

If you’ve ever emailed an attachment to somebody and wished you knew how they engaged with it, you should check out Parallelo Tweet this

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12 Comments

  1. Profile photo of asha chaudhry

    kiran….

    i’ve been a huge fan of your writings right from your first post on trhs.

    awesome learnings. 

    loved your rudyard kipling version.

    loved loved how you’ve done the “tweet this” :))))) i’ve been telling myself for the longest time i need to do it for every quote of alok’s. but i think we should do it for EVERYONE’S POSTS!!

    keep inspiring!

  2. Profile photo of Kiran Kumar

    Thanks Asha. Your support keeps me going. Rudyard would not forgive me for defaming him huh? I saw the tweet style on customerdevlabs and copied it. I think we should do everything to make it easy for people to share the content. I can write a quick post on it if you like.

  3. Profile photo of asha chaudhry

    pls do kiran!! abhik actually did a test post for me to demystify it (i’m very very very tech-shy :()

    but once i learn – i learn for good. so i’m open to learning it. pls pls pls post on it – it will benefit everyone!!

    ps: i messed the top of your post – just couldn’t resist!

  4. Profile photo of Alok Rodinhood Kejriwal

    Thank you for writing this so simply and profoundly.

    I have seen entrepreneurs getting so distracted with this nonsense, its not even funny!

  5. Profile photo of Kiran Kumar

    All from my own behaviour and experience 🙂

  6. Profile photo of Harshit Taunk

    Kiran, very simple and yet elaborate post.  But I have a small query.  When you start generating revenues,  do we not have to produce a bill to the customer for the service or product we are selling?  And for bill, I suppose we need to have a company which is incorporated.  Please correct me if I’m wrong. Thanks

  7. Profile photo of Manish Singh Bisht

    Superb!!

  8. Profile photo of Kiran Kumar

    Hi Harshit, thanks for reading it. You can give a business name to your sole proprietorship (eg. Apex Consulting) and open a current account. You can accept cheques, wire-transfers, or use paypal.

  9. Profile photo of Kiran Kumar

    Manish, glad you liked.

  10. Profile photo of Rishi

    Kiran — While I agree for the most part there are actually business critical situations where it makes perfect sense to incorporate sooner. It’s okay to not incorporate if you are focused solely on Indian (any local) markets or are not in a hurry to go global. However, more and more startups now are incorporating in US/going global or planning to raise money from US investors. If you’re one of those who is planning to go global (read US) by starting off in India, I’d suggest the sooner you incorporate (both in India and US) the better. Here’s why:

    1. Getting visas and immigration for founders becomes much easier if you’re incorporated and can show documents (certificate of inc., tax returns etc.) to verify your business history. Incorporating the right way can open up visa options which don’t exist otherwise. 

    2. If you plan to do business with customers in US primarily, it simplifies many things from payments to transfer pricing to taxes. If you’re dealing with large enterprises in US, they verify your business history, ratings etc. — don’t let a simple thing like incorporation hurt your chances of winning a potential pilot customer.

    3. It separates founders’ liability from the company’s — people overlook this thing and think “this is like a 1 in million chance”, but you never know when and from where you get hit by something like a lawsuit/legal notice. Don’t believe me? I’ve been through that crap and it’s a bigger mess than dealing with some paperwork related to compliance or filing annual taxes.

    4. IF you’re building something breakthrough/innovative, you can protect your IP in a much better way. 

    5. It’s a signaling issue – some investors take you more seriously if you’re incorporated before raising funding. In any case, if even if you haven’t done before you approach investors (US investors) for funding – they WILL make you incorporate first. There’s no other way.

    P.S. The thing with any startup advice is there’s no one rule (including what I said above) that applies to all. That is one big reason why I HATE any general advice. Founders should always seek professional (lawyers/tax professionals etc.) advice if they’re serious about your startup and they have an idea of how they’d like to take it forward. Most lawyers, tax professionals will provide free consultation – DO IT! It’s okay if things don’t workout and you have to shut it down, but my suggestion is don’t be scared of paperwork if it makes sense in your case.

  11. Profile photo of Kiran Kumar

    Rishi,

    Thanks for your comment. And I am sorry I took so long to reply. For a Saas business, I still feel all of what you said comes into play only after one has got the product-market fit right. If one is targeting large enterprises, what you say is difficult to disagree with.

  12. Profile photo of Rishi

    np! Just to clarify, I wasn’t suggesting everyone should jump to incorporating and dealing with all issues that come with it. I think this is a decision that needs to be taken very carefully in consultation with someone knowledgable (lawyers, tax professionals etc.). There is so much advice that people take for granted without knowing what it entails. An example — people nowadays just go and incorporate in Delaware because “someone” suggested/they read somewhere that it’s easier there; sure, there are cases where it makes perfect sense but in most cases I’ve seen it wasn’t required. This is one of those things where one rule doesn’t apply to all. 🙂 

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