From Main Street to Wall Street—10 Things a Startup Should Do to Groom Itself for an Eventual IPO

3/16/10

You’ve got the vision, the core team, and even a little money. You’re prepared to devote enormous time and energy to your new startup. You’re unsure what the future will bring but you want to preserve the possibility of going public some day. Here are 10 things you can do to put your startup on the path to an eventual IPO:

[Editor's note: Last month, the author shared a list of 10 things companies need to do now if they hope to go public in the next year or so. This month, he turns the company's clock back and discusses key steps that can help put a startup on the IPO path.]

• Protect Your IP: In some sectors, intellectual property is the heart of the company, but even low-tech or no-tech startups routinely rely on confidential information, trademarks, domain names, and copyrights. You should fashion an IP protection program that matches your needs and budget. Basic IP protection includes: corporate name and trademark searches; non disclosure and invention assignment agreements with employees; confidentiality and IP ownership agreements with consultants and third-parties; limitation of internal access to confidential information to persons with a need to know; proper use of confidentiality legends, trademark symbols, and copyright notices; and domain name registration.

• Respect Former Employers: Sure, you’ve got a great idea and maybe some technology to get you started, but be certain your nascent technology isn’t owned by a former employer, since a lawsuit can stop your new company in its tracks. Similarly, be mindful of any non competition or non-solicitation agreements you or your employees may have-these obligations can affect both the nature of your business and your ability to recruit talent from former employers.

• Bootstrap to Avoid Dilution: A founder’s sweat equity is a crucial part of the startup package, and by granting equity incentives a startup can pay less cash compensation to employees (although minimum wage laws still apply). “Bootstrapping” can help delay substantial outside investment until significant milestones justify a higher valuation-and protect that equity from dilution. Bootstrapping might include founder resources, loans from friends and family, or cash flow from operations. Friends-and-family investments present both benefits (it is money) and disadvantages (it can be awkward to ask Mom for a loan), but may be the best funding alternative at inception.

• Stay Out of the Woodwork: An IPO can be “woodwork” time. People you’ve long since forgotten might show up looking for a piece of the company. Preempt these surprises by making sure your IP rights are properly documented and all equity arrangements are in writing.

• Employ At-Will and Take Vacations: Your employment policies will evolve with growth in your business. An essential one is an employment at-will policy-stating that the employment of … Next Page »

David A. Westenberg, a partner in the Corporate Practice Group of WilmerHale in Boston, is author of the book Initial Public Offerings: A Practical Guide to Going Public (Practising Law Institute), hailed by The New York Times as “the bible of the I.P.O. market” (January 19, 2010). Follow @

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