Ross Mayfield has a great little article about flipping micro ventures
A Flip/Flop Bubble of Microventures?. By this he means creating micro ventures for the sole purpose of selling it to some large company like Google.

I am a big believer in developing a company with the goal of making it as great as can be, with an eye on exit in public markets. I look M&A exits as options along the way. The problem is when you build to flip, you may be focused, but short sighted. Essentially, you loose IPO as the exit option and M&A opportunities you can’t foresee.

Which is really the whole idea of bootstrapping, you are focused on building a solid business from day one.

Choosing a legal structure for your new venture is some thing that you do have to think about. If only for planning purposes. Having gone through the offshore companies is cool phase a long time ago, I decided that there are really two things you need to think about:

• Whats best for your business?
• Whats best for your and your partners personal economy?

Why are these separate. First of all what is good for promoting and growing your business is often transparency and flexibility. What is good for your personal economy is not necessarily that. All kinds of tax rules make the varying structures good for various kinds of people and incomes.

Whats best for your business?

First of all without your business doing well you wont have any personal income to worry about, so this should come first.

For this transparency, flexibility and simplicity is vital. When you are just in the early bootstrapping phase like I am right now, you dont want to be bogged down by bureaucracy or extra costs.

On your own

When you are just starting out and you are only in business with your self, you are already as transparent as can be. So theres not much to worry about.

Partnerships

If you are working on this with one or more partners you need to keep things simple and transparent, no matter how good friends you are. This also has the added benefit of keeping out the lawyers and letting you yourselves decide whats best.

Transparent and short partnership agreement

Following rule 2 from my 6 simple rules for micro ventures distribute revenue early and often. This requires that each partner knows what his job is and what his share of income is.

Lets say Bob takes care of hosting and programming and his partner Mary takes care of marketing and sales.

They should according to my rules say that Bob takes care of the entire hosting and development task all costs included. In return he receives %70 of income.

Mary on the other hand has agreed to take care of the entire sales and marketing task including all costs in return for %30.

This is very simple and keeps the inevitable arguments under control.

They can always renegotiate this in the future or bring further partners in if need be.

In most partnerships you have the inevitable arguments about money, expenses, investments etc. This way you can split this out entirely.

All of this points to the best structure for your business at least in the startup phase is a partnership or variation there of.

Most countries allow you to setup partnerships just by entering an agreement between yourselves. While you are in the idea phase a verbal agreement should be fine. However it might be a good idea to write it down in clear language what each of your tasks and responsabilities are on what share you receive for this.

Once you start actually doing business above the hobby level, you probably may need to do some kind of formal registration of your partnership. Some places like Denmark it is actually beneficial to register for VAT purposes immediately, so your purchases are vat free.

Limited Liability Company

For international use (but read what I say below), say Bob is in Australia and Mary is in Norway a US Limited Liability Company (LLC) is almost certainly the way to go. Bear in mind though that this does cost a few hundred bucks to set up if all of your partners are abroad. If one or more of the partners are resident in the US it can be done cheaply and easily by yourselves. See this book for the best how to I know of:

LLC’s are great. They are transparent for tax purposes like a partnership and offers the warm comfy feeling of limited liability. They also do setup a more corporate image if you are into that sorts of thing, just remember be a business dont play a business.

I should also say that you almost certainly dont want to create your LLC until you have some income. It is a cost and there is bureaucracy involved. That is also why its good to move to a LLC from a partnership, because for tax purposes they are exactly the same, so no hassle.

If you are outside the US or just want someone else to manage it you can use a corporate services provider like this one (Disclaimer while they look sound and I am considering using them myselves, I do not have first hand experience with them):

Why not corporations?

Corporations where designed with something called the corporate veil, which essentially means its a black box. It acts and is taxed like a seperate person and has tons of rules behind it which cloud and never enhance the transparency.

This is good for dealing with investors. Venture Capitalists will amost certainly want you to be a corporation if you wanted to do the non-bootstrap route. As a bootstrapper though stay away for your business.

Remember though that you and your partners personal tax planning is an entirely different thing and each of you might find a use for them there.

Single person LLCs

As I said before, create your LLC when you have the money and time to spare to do so. While they are partnerships strictly speaking you may still incorporate them with you as the only partner in many US states.

Now why would you want to do such a thing? Well this would make it easier for you to bring further partners in later.

Google/Yahoo/IBM have offered to buy us, what next?

First of all congratulations. As you are now out of the bootstrapping phase you should convert the LLC into a real corporation at the exact share percentages as before. You should also by now have money to pay a lawyer to do this for you well.

Whats best for your and your partners personal economy?

Everyone is different and have different needs and requirements. If you are in the startup phase and are Funding through a nine to five like I am. I want to deduct all my costs and expenses against my salary. You may not be able to do this in your country, but in Denmark and the US you can. So that is my requirement.

Later on when my business starts making money, my requirements will most properly change. I will probably want to leave income in a company to reinvest later. I might even move to a place with a better tax climate than here. This should be my choice and not my business partners.

I therefore recommend that you startup just having everything as personal income/costs (US 1099). Then when you start breaking even create a personal holding company, which is just a corporation that you yourself own. This does not even have to be in your own country of residence, but do check local rules and regulations about this.

Conclusion

As my old Danish teacher always tought me in grade school, “you always need a conclusion Pelle!”.

Basically keep your business simple and transparent using partnerships or just as a self employed.

Your personal financial and tax strategy should be kept separate from your business.

And as always IANAL
this is just based on my own experiences and often alcohol controlled thought patterns.

[ Just added this to my new series on Antipatterns ]

A mistake I myself have made as well as many other smalltime entrepreneurs is that we have wanted to appear like a business to early. Symptoms of this are things like:

• Incorporating
• Renting office space
• Buying a fax machine (You know a business needs one)
• Fancy stationary
• Fancy graphic designers
• Multiple fault tolerant high availability servers
• Human resources officer (If you’re a startup and have one these you really are on the slippery slope)
• etc. etc.

These are all fine at the correct phase of your business, but don’t waste these huge money suckers without an actual need.

I for example have rented a server which hasn’t really been in use since february. That is ¢49 out the door every month. Stupid really. Now is when I need it and I could have saved ¢147.

I also just bought business cards from VistaPrint because I’m going to Reboot in a couple of weeks and it’s handy to have at such events, but if not it would have been a waste of money at this time.

If you think about it one of the traps that leads to big businessitis is playing a business. This is often necessary if you want to attract venture capital, after all they want to know that you are serious and have things like a fax or an hr department. But really, I think the businesses who really succeed are the ones that focus on their business model and not how they appear outwards.

Last year I wrote a long pice The Electronic Micro Venture in which I outlined these 6 simple rules to help launch and fund a transparent micro venture.

As these are very important to what I am doing right now it I will keep an updated version of the 6 rules here.

These rules are somewhat inspired by The Cluetrain Manifesto, The Agile Manifesto and Joi Ito’s essay Emergent Democracy :

1. Focus on one and only one clearly defined economic activity.

You need to be able to model and audit this in real time. Create another entity for each related activity. If you need to group them together create a new parent entity, whose only focus is as a kind of mutual fund investing in it’s child entities. This also distributes it’s profits that it receives from it’s holdings direct to it’s share holders.

The revenue model should be very easy to understand. Model it out and create an online revenue calculator. This will help share holders understand and focus on the business at hand.

2. Distribute revenue early and often.

Depending on the exact revenue model, distribute in realtime or on a weekly basis. If deemed necessary keep a limited reserve in the venture, but distribute everything else to the share holders. This helps the transparency and motivates all parties to focus on 1.

3. Attempt to eliminate the burn rate.

If at all possible reduce all fixed costs. I’m not just saying what the GAAP says are fixed costs. The idea that consultants fees and monthly hosting fees are dynamic expenses are a left over from the industrial era. Any fixed costs need to be funded by you or an investor. So keep them small and transparent. Each one should be justified publically. If at all possible eliminate the burn entirely by offering shares to a stakeholder responsible for managing one particular function (see 6.)

4. Pay stakeholders with shares, not cash.

Salaries, wages and consulting fees are NOT transparent nor do they make sense in a massively networked world. Pay developers, staff and suppliers with shares. Due to rule 2. they will start receiving funds quickly. This focuses all parties on Rule. 1.

5. Keep a flat democratic command structure.

Representative democracty is NOT transparent. We are all on the internet now, there is no longer a need nor excuse for the traditional 3 layer structure of (officers, directors and shareholders). Utilize Blogs, Wiki’s, Discussion Forums and email to maximum ability.

6. Outsource Capital Costs

The traditional lump sum funding method is not transparent. If there are any major capital costs outline each one them when seeking funding. As an example in my hosting company we have the following capital costs:

• Server hosting
• Completed Transaction Processing Server customized for the hosting business.

For me the two of them are worth each say 25% of the company. Now an investor might want to offer $20,000 so I could buy the servers and pay for hosting until the venture is profitable. However I would receive the same value if a hosting company offered to handle the physical server hosting on an ongoing basis in return for 25 of the shares. The same thing is true for the software development. Traditionally the vc would pay a large lump sum to handle all the developers salaries. Offering 25 of the company to whoever solves the problem is better. Maybe a guy with big pockets could hire a team of developers in Hydrabad to do it or maybe a guy in Hydrabad or Talinn decides to bid for it himself.

If you do end up with a burn rate. Fund it as a kind of reverse option. Investor B. guarantees a maximum of $500pm for 12 months. When the venture needs it to cover it’s burn, it calls the monthly option.

update I have created a presentation over on my latest project SoapBX following up on my ideas for micro ventures. Have a look your self Six simple rules for Micro Ventures

When you are bootstrapping you are basically starting from scratch, using your own savings, income and as soon as possible cashflow generated from the new business to grow. When you are bootstrapping though it isn’t only cash you need, but also sweat … and lots of it. Which is why balancing your time is really part of the funding process.

I think most bootstrappers start out like me with a day job. I have tried it the hard way before from meager savings and it aint fun. You start loosing focus from your business by worrying about where the next meal is going to come from. Which is why I left the comforts and low costs of Panama to live with a day job in high cost Denmark.

The day job thing is tricky though. Consulting is great for us IT types as it is generally project oriented work. You also don’t want the kind of job where you have to worry about it when you leave the office. Strictlyish 9-5 is key. Of course at times you need to be flexible, but you really want to have the kind of job where you have energy to work on your startup in the mornings and/or evenings. All of these I know from experience.

So how do I do it right now? I am working as a consulting technical architect at a major Danish financial institution. Once I leave work I really don’t have to think about it again until I come back the next day. It’s probably as perfect as a 9-5 comes.

I do about an hours worth of work on my startup in the mornings, about 4-6 in the evenings and most of the weekend. If you are married like I am this requires a patient wife. How we do it is that on weekends and mornings I work in my office. During the evenings I work with my powerbook on my lap in the sofa next to my wife, so we can still talk, laugh and what have you together while I’m working. It works out pretty good, but seriously Lety I love you, you are an angel.