TOMS Shoes. Patagonia. Warby Parker. Baron Fig. What do all of these businesses have in common? They’re each social enterprises.

Part of the challenge of becoming an entrepreneur is deciding what type of business you’ll start. It’s worth expanding that discussion to include social enterprise. After all, one of the keys to entrepreneurial success is gathering as much information as you can, then making a decision that best fits your vision and your short- and long-term goals.

Let’s take a quick look at social enterprises and how they typically work. Then, we’ll provide you some additional insight to help you decide if this business model is something you should pursue.

WHAT IS A SOCIAL ENTERPRISE?

Social enterprises are businesses that provide goods or services but also exist to solve specific social or humanitarian problems like hunger, lack of clean water, deforestation or disease. For example, Warby Parker donates a pair of eyeglasses for every pair sold, while Baron Fig plants a tree for every notebook purchase.

As Investopedia points out, “social enterprises exist at the intersection of the private and volunteer sectors.” And contrary to what you might think, not all social enterprises are nonprofits. In fact, social enterprises can exist in a variety of forms, including a B corporation, a LLC or even a 501(c)(3) nonprofit with a for-profit subsidiary.

The key is to ensure you have both a social purpose or mission and a sustainable business model. Starting a business is never easy, and social enterprises can introduce some specific challenges that you should try to account for in your planning. Use the following three-question checklist to help determine if your business will work better as a social enterprise.

SHOULD YOU START A SOCIAL ENTERPRISE?

WHAT IS YOUR MISSION? 

It’s imperative to define the problem you’re solving through your business. This is a good time to reflect back on your personal entrepreneurial vision. What’s driving you? What goals do you want to accomplish? If you find a social mission inextricably linked to those answers, it’s more likely that your business could thrive as a social enterprise.Alexa Simeone is a prime example. She founded Lele Bombe in 2017, a fair trade jewelry distributor that connects people to handmade wearable art created by displaced indigenous communities in Colombia. By connecting indigenous artists with conscious shoppers, Lele Bombe is able to support native communities of Colombia and help shoppers find the ethically sourced jewelry they’re looking for.Rather than start a jewelry business that distributes domestically, Alexa was driven by a desire to support underrepresented Colombian artisans and help preserve their culture. Through Lele Bombe, she’s built a bridge between these talented artisans and customers who, without this link, would be much less likely to support these particular makers.

“FastTrac helped me build a strong business foundation on which my dreams of empowering African women can grow,” said Liz Forkin Bohannon, CEO and co-founder of Sseko Designs. “It gave me tools and encouragement that empower me to empower others, and introduced me to valuable tools and relationships that helped get our business off the ground.”

HOW WILL YOUR BUSINESS OPERATE? 

Once you’ve identified your social mission, the next step is to think through your business model. This is where social enterprises can be particularly challenging, as business owners sometimes find themselves in a battle of profits vs. purpose.Let your purpose and your social problem be your guide. Then examine your business model and determine how you can satisfy your social mission while also being profitable. It’s important to remember that you don’t have to solve a global issue in a short period of time. In fact, it might be best to narrow your focus—a particular area of the world, for example—then broaden your impact in a way that supports, rather than hinders, your business growth and profitability.This is where it’s easy to get overwhelmed. And that’s where Kauffman FastTrac can help. The immersive online course is designed to help entrepreneurs work through each stage of the process when starting a business. And for those starting social enterprises, the self-paced curriculum can be an invaluable resource.”Without a solid foundation, I wouldn’t have been able to do this,” Alexa said. “FastTrac helped me to frame the market research in a way that really solidified the opportunity that existed for sustainable and fair trade programs. My ability to quantify that opportunity has led me to additional growth opportunities.”Another tip? Should you seek investors, do your due diligence to ensure that they’re in full support of your mission. That way, if a challenge does arise, it’s more likely that everyone will make decisions from a similar starting point instead of risking the enterprise’s integrity.

WHAT DETERMINES SUCCESS?

All social enterprises are united by a common need: to measure their impact. Refer back to your social mission, then decide how you’re going to determine success. If you opt for a one-to-one purchase model like TOMS or Warby Parker, a natural starting point is to keep track of how many goods are donated. If you’re working with a specific population like a community of artisans, you’ll want to track how many people you work with and what’s produced and sold as a result.Measuring impact and success not only helps keep your social enterprise accountable to stakeholders like investors, but it can also provide compelling statistics that support your story and message. Plus, over time, you’ll be able to identify success milestones and quantify cumulative impact, both of which validate the efficacy of your social enterprise.And remember: you have a partner in social enterprise and entrepreneurship with FastTrac. As you consider a business model that empowers others, we’ll do the same for you.

When you start a new business, you will almost always open a bank account. And to help streamline the process, here are three documents the bank will almost certainly ask you to provide.

INCORPORATION DOCUMENTS

The exact title of these documents will differ based on the type of entity you form and the state in which your form your business:

1. For LLCs, they are usually called Articles of Organization. They are typically just a page or two and will include information about your LLC such as the name, it’s registered agent, the name of the organizer, and sometimes more.
2. For corporations, they are usually called Articles of Incorporation. These are usually a bit longer than the documents for an LLC (usually about three to six pages). They will contain the same information as an LLC’s forms, but may also include information on your board of directors, indemnification, and more.

Regardless, be sure to save these documents when you form your business. If you can’t find your documents, you can obtain certified copies from your Secretary of State’s office. And luckily, you can do that online in many states today.

IRS EMPLOYER IDENTIFICATION NUMBER

Even if you don’t have employees, you still need an EIN. In many ways, an EIN is like a Social Security Number in that the government and other parties will use it as a unique number to identify your business.

You can file an SS4 to obtain an EIN by mail or fax. Alternatively, you can use the IRS’ online tool available here. Note that they have “hours of operation” for that website, so it isn’t available 24/7. If you use the online form, you should receive a copy of the IRS’ letter when you are done. If you don’t, you’ll get it in the mail a few weeks after you apply (but you should still get the number itself at the end of the online process).

Most banks will accept a screenshot of the online confirmation page, but some will require the letter itself.

CORPORATE DOCUMENTS

This is the one item that varies quite a bit from bank to bank. Some banks will require an entire copy of your governing documents (such as a corporation’s bylaws or an LLC’s operating agreement). Other banks will require just the cover page and signature page. And still others might not require this at all.

However, most banks will require some kind of business resolutions or meeting minutes. You (or your lawyer) can prepare your own or you can use a copy provided by the bank. In short, it is a written document authorizing the company to open a business bank account.

ONE MORE TIP…

You should always do your research before selecting which bank to use for your business. The key is to find one that operates the way you operate. If you like in-person relationships, find one that excels in that. If you like online banking, ask them for a demo of their website. If mobile apps are important, inquire about that.

NEED HELP STARTING YOUR NEW BUSINESS?

You can learn a lot about starting a new business from successful entrepreneurs that have come before you. One of the best programs to complete is the Kauffman Foundation’s FastTrac program. You can learn more about the free program and enroll at www.fasttrac.org.

CONTRIBUTOR: Chris Brown, Venture Legal

And not only that, but you shouldn’t try to do everything yourself.

At some point in your entrepreneurial journey, you’ll realize you need help. That’s when it’s time to enlist a professional services provider, whether you’re filling a process or operational gap or you need someone with specific expertise to take some work off of your plate.

Let’s take a closer look at figuring out when you need professional services before answering the all-important question: how do you find them? But first, here’s a quick primer on professional services.

WHAT ARE PROFESSIONAL SERVICES?

Professional services help clients with specialized, knowledge-based services and span a number of industries. Common examples of professional services include:

1. Accountant
2. Financial adviser
3. Lawyer
4. Marketing  consultant or administrator
5. Personal assistant

Both individuals and firms can be professional services providers. They can either provide you with service you desire or consult with you on finding a solution that will work for your business. The type of provider you choose will depend on the specific help you need, as well as your budget.

HOW TO DETERMINE WHEN YOU NEED PROFESSIONAL SERVICES

Deciding when to use professional services is somewhat dependent on where you are in your entrepreneurial journey.

If you haven’t yet started your business, we can’t stress the importance of assessing your personal entrepreneurial strengths. (Note: If you’ve already started your business and haven’t yet done this, it’s not too late).

By figuring out the skills and responsibilities in which you excel, you’ll be able to more easily spot possible gaps or needs and decide when you need to fill them. For example, if you consider yourself a creative thinker but you’re hopeless with numbers, you’ll want to put “hire a tax accountant” at the top of your to-do list.

On the other hand, if you know you are not detail-oriented, you may want to consider enlisting the help of a virtual assistant. Just keep in mind, there are costs associated with those services, so make sure they fit into your budget.

If you’ve already started your business, take a few minutes to examine your workflow, your company structure and your earnings. Are there gaps you need to fill? Any important knowledge or expertise you’re missing? Or are there ways you can work smarter, not harder? Answering these questions will help you identify your professional services needs. Then, you can focus on filling those needs.

3 WAYS TO FIND PROFESSIONAL SERVICE PROVIDERS

If that option doesn’t yield optimal results or you want to broaden your search, try these three resources:

1. Small Business Administration: The SBA is a veritable powerhouse of information and resources. A good starting point is the SBA’s free business counseling, available through several local partner organizations. Consider these groups a knowledgeable sounding board that you can use to explain what types of professional services you need, then get recommendations on next steps.
2. Economic Development Councils: If you haven’t yet connected with your local economic development council, now’s an ideal time. With national entrepreneurship rates on the rise, many economic development councils have dedicated specific resources—or formed partnerships—to help entrepreneurs connect with the people and programs they need. Try a quick Google search for your city + economic development council to get started.
3. 1 Million Cups: Since the Kauffman Foundation launched 1 Million Cups in 2012, the coffee-fueled meet-ups have spread to more than 180 communities in 40+ states and one U.S. territory. The informal, presentation-focused gatherings are a great time to hear from other entrepreneurs, but 1 Million Cups is also an insightful resource for tools including professional services. Head to the 1 Million Cups website to find a community near you.

Remember: you may be your company’s only employee, but you’re certainly not alone. There’s no shame in enlisting help from a professional services provider. In fact, you’ll likely find that filling some of those gaps helps reinvigorate your focus and helps your business become more successful. How’s that for motivation?

If you hire contractors to provide services to your new business (or if you, yourself provide contract services to a client), then you’ll likely need to use IRS Forms W9 and 1099.

What this means is that you’ll either have to file 1099s with the IRS to report payments made to a contractor for services (or, if you are the contractor, your client is likely to ask you for a W9). These forms will be a requirement in (most) service-for-payment situations, but they are not required in traditional employee-employer relationships.

WHY DO WE HAVE W9S AND 1099S?

As you probably know, when a business pays employees the business must withhold portions of the employee’s paycheck for tax purposes and then remit the withholdings (along with additional payments from the business) to the government. These payments cover the employee’s income taxes and also employment taxes such as social security and Medicare.

However, when a business pays independent contractors, that doesn’t happen. Rather, it’s the contractor’s responsibility to report and pay their own taxes. As a result, if a business pays a contractor and neither party tells the IRS, then it’s possible that the contractor won’t pay their taxes on that income. Further, the IRS won’t even know about the transaction, so they won’t be able to seek payment of those taxes.

THAT’S WHY WE HAVE W9S AND 1099S

The purpose of W9s and 1099s is to make sure the IRS knows about payments for services and, thus, is able to collect taxes owed from those payments. Clients must file the 1099 to inform the IRS of the payment (if it is over $600 in one year); and the contractor must give the client a W9 so that the client can complete the 1099 and file it with the IRS.

HOW TO USE W9S

If you are a contractor, you may be asked to provide a W9 to your client. Conversely, if you are hiring a contractor, then you should always ask your contractor to give you a W9 before you pay them for their services. (Technically, they are only required when a contractor is paid more than $600 in one year for services, but it is usually a good idea to request them when you start paying a contract just to keep your records straight.)

The form itself is pretty simple. It includes certain information about the contractor such as the contractor’s name, address, and most importantly, their EIN or SSN. It is only one page and doesn’t take long to complete.

HOW TO USE 1099S

Generally speaking, the requirement to complete and file 1099s falls on the client, not the contractor. In this case, the business hiring the contractor must complete a 1099 for each contractor which it pays more than $600 in one year. The forms are due shortly after the close of each tax year and a copy must be delivered to both the contractor and also the IRS.

Provided the business has the contractor’s W9 it should be easy to complete because the main information in the 1099 is the contractor’s identifying info and how much the contractor was paid.

Luckily, you can do this online and there are multiple online service providers that can help you manage the process for a reasonable fee. And as always, you can hire an accountant or CPA to help you manage these filings.

HOW TO MAKE A PLAN AND STAY COMPLIANT

Writing a business plan and starting a business takes a lot of work. To help, make sure you think about these IRS forms when you are getting started so you can  get off on the right track. In short, if you plan to hire contractors to provide services to your business, plan on requesting their W9s and schedule time at the start of each year to file the previous year’s 1099s. And if you are the contractor, be sure to have a fully completed W9 in your files so you can give it to your client when they ask.

To learn more about starting a new business, check out the Kauffman FastTrac program.  It offers free online courses to learn how to write your business plan, start your business, and remain compliant with many different government requirements.

CONTRIBUTOR: Chris Brown, Venture Legal

If you’re self-employed, there’s no doubt your to-do list is a mile long. But what about what not to do?

It’s hard to learn from mistakes until you make them. But we want to save you the trouble with a list of seven prevalent self-employment mistakes.

Use this checklist to examine how you’re working and how you’ve set up your business, plus spot areas of improvement. There’s an old saying: “forewarned is forearmed.” What follows is your self-employment secret weapon.

IGNORE YOUR FINANCES (ESPECIALLY TAXES)

The financial side of your business can be the most challenging part. That’s why it’s best to be proactive about your finances, even while your earnings or revenue are low.

Start by hiring an accountant to help ensure you’ve covered all your bases. You can also get input on how you should set up your business, whether as an LLC or an S-corp. Plus, an accountant can guide you through deductions you’ll want to track, like mileage, business expenses, even office rent and utilities.

You can also get a better understanding of your tax liability, which will change depending on your business. If you sell products, for example, you may have to pay state sales tax, depending on where your business is located.

If you’re already working for yourself and you haven’t done these things, don’t panic. Do, however, act quickly. Not understanding your finances and your taxes can become a costly (and unnecessary) burden.

ISOLATE YOURSELF

Starting and running a business is exhilarating. Yet it’s also challenging and can sometimes be lonely. You’re likely working long hours and juggling a number of responsibilities (more on that in a moment). And if you work from home, it’s easy to become a disheveled hermit crab!

The trick is to make sure you’re getting out, talking to people and taking care of yourself. Schedule an occasional coffee or lunch date with a friend, family member or colleague. Attend a networking event once a month to meet new people and spread the word about your business. Take a walk or head to the gym to clear your head and manage your stress. Something else to consider—depending on the specifics of your business and your budget—is to get a desk or office in a coworking space. Not only will you have a dedicated workspace that’s outside of your home, but you’ll also have a chance to mingle with other entrepreneurs to build your network and provide a needed boost of creative energy.

WORK 24/7

As you start your own business, you’ll likely find that it’s easy to work a lot, especially if you work from home and can effortlessly switch from your living room to office.

Working long hours is often a natural part of being an entrepreneur, but be cognizant of work-life balance. Do what you can to establish a schedule and get into a routine. Again, this is especially helpful if you work from home, but is also useful no matter where you work.

If you find yourself pulling too many late nights in a row, don’t hesitate to take a step back and assess how you’re working and what improvements you can make. Another tip? Don’t hesitate to schedule breaks. Maybe you’re so excited by your work and business that you find you’re working seven days a week. It’s great that you love what you do so much, but see if you can scale back to six days a week (or five). Because while you feel exhilarated now, that grind will likely catch up with you. It could also make it more difficult for you to enjoy time with your family, friends and favorite hobbies. Self-care is often overlooked by entrepreneurs, but it’s important. Taking care of yourself is one of the most effective ways to keep your business running smoothly and on a path to success.

DO IT ALL

When you start your business, it’s natural that you’ll have to wear a lot of hats. But be wary of trying to do too much, especially as your business grows. Instead, assess your skills and strengths to find out what you should focus on. Then, look at ways you can delegate or even outsource other responsibilities—hiring an accountant, for example, or partnering with a marketing firm. If you find yourself overwhelmed by the administrative side of your business, consider hiring a virtual assistant, which can be a helpful and more cost-efficient way to fill that gap until you’re ready to bring on an office or business manager.

Keep this in mind, too: there’s no shame in admitting you’re not cut out for a particular role or task. It will be much better for your business (and you) in the long run if you can play to your strengths and find other ways to fill gaps in your operations.

FORGO LEGAL ADVICE

Lawyers aren’t cheap. And as you’re starting out in your business, you’ve likely found a variety of other ways to spend your start-up capital. If your business includes working with other companies (and especially if it involves contracts), you’ll want to invest some time and money into securing legal expertise. Just as an accountant can walk you through your financial and tax obligations, a lawyer (especially one who specializes in working with entrepreneurs and start-ups) can help ensure that your business is properly structured and that you have documents like contracts, proposals and scopes of work that are correctly written to protect you and your business. In the early days of your company, you don’t necessarily need to keep a lawyer on retainer. But at least consider an initial session with one to validate that your business is on the right path. Then, should you need further legal counsel down the road, you’ll already have someone to call.

IGNORE BASIC MARKETING PRINCIPLES

It’s easy to overlook marketing, especially in the early days of your self-employment. After all, you’re busy doing the work. Why should you spend time and money talking about what you do, especially if you’re coming into the self-employment world with a strong network of referrals?

Keep this in mind: the best person to promote your business is you. And you want to make it clear that you’re open for business, as well as the products or services you provide. That’s why it’s ideal to at least cover the basics: set up a website, create a logo, print business cards and set up a couple of social media channels.

You’ll probably soon find that keeping up with your marketing is an entirely different challenge. And as we mentioned earlier in the post, it might be worthwhile to consider outsourcing to a marketing agency or individual marketing consultant. The important thing, however, is to do what you can to help potential clients find your business. You might also want to make networking events a regular part of your schedule, especially as you’re building your pipeline. Get out there, tell your story and put a face to your business. You’ll find that you’ll likely reap the return on that valuable investment for years to come.

UNDERCHARGE

Undercharging for work is more common than you might think, especially for people in the early days of self-employment. If you’ve switched career paths, for example, you may think that you need to build up your skills, so you’ll cut your prices while that happens. Or perhaps you sign on the dotted line for a seemingly lucrative piece of work, only to crunch the numbers later and realize the deal isn’t as sweet as you thought.

As you launch your business, be sure to do ample research on what to charge for your products or services. You can typically find helpful information with a Google search, but it also doesn’t hurt to reach out to a few peers in your area to get their input. You don’t want to overcharge, but you also want to ensure that your business is viable and you’re able to support yourself. Then, as your business grows, you can look for opportunities to gradually raise your price, especially if your business is a service-based model. The goal over time is to work smarter, not harder, and a significant part of that is doing less work for more money (yes, it’s possible!)

Here’s one additional tip: it’s OK to make mistakes. You’ll likely make several of them, especially as you’re launching your business. Use those missteps as learning opportunities so that you can improve your business and how you work.

And if you find yourself wishing you could turn back time to make sure you’ve covered all of your self-employment bases, we can help. Register for Kauffman FastTrac, a free, self-paced online course that walks you through the process of starting a business. Even if your company is up and running, it doesn’t hurt to review topics like setting realistic financial goals or defining your brand and marketing to ensure your business is set up for long-term success.

Using well-drafted contracts can help you reduce risk and improve your odds of success. And when trying to start a new business, you can use all the help you can get.

One way to make things easier on you and the people you contract with is to use the MSA/SOW format. In this post we’ll explain what that means and how to do it.

WHAT IS THE MSA/SOW FORMAT?

The MSA/SOW format is simply a method of using certain documents to create contractual obligations between two or more parties.

Here are the two elements:

1. Master Service Agreement (MSA): The MSA outlines the legal terms and other default rules between the parties.
2. Statement of Work (SOW): The SOW outlines project-specific deal terms–usually a description of the services and the payment terms. An MSA can have just one SOW, or it can have multiple SOWs attached to it over time.

WHY YOU SHOULD USE THE MSA/SOW FORMAT? 

There are a lot of reasons entrepreneurs might want to use the MSA/SOW format:

1. The most obvious benefit is it saves you time and money–once you and the other party have signed the MSA, you don’t have to continually negotiate all the legal and default rules again for each project.
2. Often, you can negotiate and sign SOWs without having your attorney involved.
3. Sometimes you might want to terminate just one project and not your entire relationship with the other party. In this case, you can terminate one SOW while leaving the MSA and other SOWs in place.

WHAT TO SAY IN YOUR MSA? 

You can put all kinds of stuff in your MSA. However, the big-ticket items are as follows:

1. Properly identify the parties–use their legal names and, for businesses, include a reference to the state in which they are incorporated.
2. Make it clear that the MSA is, in fact, an MSA and that SOWs will be attached.
3. Outline how long the MSA will last and how the parties can renew it.
4. Be sure to cover all the default legal terms such as default payment terms, ownership of intellectual property, confidentiality, etc.
5. Since you’ll be signing two sets of documents, be sure to establish which will control (the MSA or the SOW) if the terms in the two documents conflict with one another.
6. State how, and under what circumstances, a party can terminate early. And if someone can terminate early, detail what will happen if they do (for example, what payments will be due).

WHAT TO SAY IN YOUR SOW?

While you can include a lot of things in your SOWs, here are the things you should almost always cover:

1. Always include a reference to the MSA (its title and date) which governs the SOW.
2. Make sure the SOW has a date or other SOW number, so you can refer to it in other documents.
3. Include a description of what the service provider is doing under the SOW. And when relevant, what they are not doing (for example, a web developer might state that they are not responsible for hosting).
4. If the MSA’s default payment terms will be used, then you can state that in the SOW. Alternatively, you can write in different payment terms for that one SOW.
5. And last, always sign the SOW!

NEED HELP STRUCTURING YOUR DEALS?

Starting a business is hard! But there are a lot of resources out there to help you succeed.

If you haven’t already, you should check out the free Kauffman FastTrac program. It’s an online course that will help you organize and manage your new business.

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An Entrepreneur’s Guide to Starting an LLC

If you’re starting a new business you’ve probably thought about forming a limited liability company (commonly called an LLC). But do you know why you should or how to do it? If not, this post is for you.

WHAT IS AN LLC?

An LLC is a business structure recognized in every state in the country. The structure is very similar to the corporate structure in that it exists separate from its owners­–this means it can sign contracts, own property, sue and be sued, have multiple owners, and more.

Because it exists separately from its owners, the owners enjoy “limited liability” for the debts and liabilities of the company. That means the LLC’s owners are not personally liable for the debts and obligations of the company. Thus, if someone obtains a judgement against the company, the LLC (and not its owners) will be required to pay the damages. (Note that there are exceptions to this and in some cases the owners can be personally liable. Most notably in situations involving “piercing the corporate veil” due to fraud.)

However, there are many differences between corporations and LLCs. First, LLCs generally have less formalities. Depending on your state, you may not have to hold annual meetings or file annual reports, you likely don’t need a board of directors, and even officers are optional. Second, LLCs can choose how they want to be taxed. Most are taxed as a sole proprietor (if it just has one owner) or as a partnership (if it has more than one owner). You can read more about business taxation in this post.

WHY ENTREPRENEURS MIGHT WANT TO FORM AN LLC

There are lots of reasons why you might want to create an LLC. Here are a few of them:

1. If you have other people working for you, an LLC can help to protect your personal assets.
2. An LLC can make you look larger than a one-man shop.
3. If you want to add co-owners later, it is often smart to form an LLC now.
4. Using an LLC can help your clients avoid the IRS classifying you as an employee.
5. In certain situations, an LLC can help you save money on taxes.

CREATING A BUSINESS PLAN: HOW TO FORM YOUR LLC

Once you’ve decided that forming an LLC is the right move for your new business, here’s how you’ll do it (note that it is often best to work with an attorney to do this, but you can usually do it on your own if you wish).

First, you’ll file Articles of Organization with your state’s Secretary of State. This is kind of like your company’s birth certificate. It will include your name and a host of other organizational information such as your company’s purpose and duration. Keep in mind that your name must be unique–it cannot be identical to another registered business name in your state. Also, you’ll need to designate a Registered Agent. In short, this is the place where official mail and lawsuits can be mailed.

Second you should draft and sign an Operating Agreement. This document sets out the rules and procedures which will govern your LLC. For single-owner LLCs, this might just be a few pages. For multi-owner LLCs, your Operating Agreement will likely be 10-20 pages (or longer) and will likely cover things such as voting rights, economic rights, transfer restrictions, tax obligations, and more.

WHAT’S YOUR NEXT MOVE?

Before jumping in and forming your LLC, you might consider all the various steps involved with starting your new business. You can also register for the free Kauffman FastTrac program to learn more about the process and to learn more about creating a successful business plan.

Contributor: Chris Brown, Founder, Venture Legal

When I was a young man of 34, with limitless dreams but a small bank account, I founded my mutual-funds company with a personal investment of just $2,000. Today, 41 years later, the value of my investment in American Century Companies, the management company of American Century Mutual Funds, has grown to more than $1 billion.

This fantastic appreciation came about mainly because of the way the company was initially financed. Decisions you make while establishing a venture or when seeking early financing will have long-term ramifications on your personal wealth. I can offer today’s beginning entrepreneurs no better counsel than to describe how I did it.

IDEAS TO PONDER

First, let me give you some ideas to ponder: Why give away half or more of your company to get financing from investors? You are going to work day and night to make the business succeed, so you deserve to own the biggest part of the company.

As you struggle to find financing, you may be tempted to accept the terms proposed by would-be investors, but why not resist those terms and structure the financing to satisfy your own long-term needs, both for the business and for you personally?

Although we did not realize it at the time, my wife and I found that the initial financing plan became a key component in building our personal net worth to a level where we are now able to create and endow a major medical research center. The success of our first dream is making our second dream possible.

SMART FINANCING

Back in 1958, a smart lawyer–and a smart mother–saw to it that my partner and I started on a firm financial footing. When we decided to launch the company, my mother impressed upon us the need to have the best and brightest lawyer we could find. She sent us to a lawyer she knew, but he had too much work, so he passed us to his brother, Irving Kuraner. Irving was a graduate of Columbia University Law School and member of Phi Beta Kappa, who had worked a year for Sullivan and Cromwell on Wall Street before returning to Kansas City to go into practice.

After Irving did the legal work to form the company, we turned to the question of how to obtain our startup financing. Irving came up with the concept that has been critical to our success and for which I have always been grateful. He told us that if we sold only common stock to others in order to obtain our initial financing, we would greatly dilute our own interest in the company. Instead, Irving suggested that we consider using primarily preferred stock, along with a little common stock, to obtain the initial operating capital.

PUTTING IT TOGETHER

The idea intrigued us. Irving asked how much of the common stock we each wanted to own. I wanted one half, and my partner, a CPA, asked for one fourth. Irving then suggested that the company take the following steps:

1.  Authorize 400,000 shares of common stock at 1 cent par value for $4,000 and…
2.  Authorize 1,000 shares of 5 percent Non Cumulative Preferred stock at $100 par for $100,000. The preferred stick wouldn’t pay a cash dividend but the value of the preferred stock would increase each year by 5 percent until the company repurchased the stock.

Then, I would buy 200,000 shares of the common stock for $2,000, equivalent to half of the company. My partner would buy 100,000 shares of common stock for $1,000, equivalent to one fourth of the company. We would offer each other investor 10,000 shares of common stock for $100, as well as 50 shares of the five percent Non Cumulative Preferred stock for $5,000. These outside investors could not buy the common stock, with its potential for great rewards later, unless they bought the preferred stock. The preferred stock would give us our operating capital.

FINDING INVESTORS

To find outside investors, I turned to people in a field that I knew well–medical doctors. I had gone to medical school before choosing investments as my career, and my wife, Virginia, was a registered nurse. The first doctor I tried to interest said we had the investment plan backwards. He said that management–my partner and I–should limit ourselves to 25 percent of the common stock and let the outside investors, those putting up the most money, take 75 percent. To which I replied: “No way. We are taking the 75 percent, because we are investing our time to make the company a success. Time is money.”

This man didn’t invest, but nine other people–six of them MDs–invested when we made our initial offering. Each bought 10,000 shares of common for $100 and 50 shares of preferred for $5,000. Subsequent transactions brought in more capital. Over the years, my wife and I increased our share of the ownership, such as when my partner and some early investors wanted to sell their stock.

INVESTING IN ENTREPRENEURS

A lot of venture capitalists, both then and now, would agree with the doctor who thought my partner and I should take the minority stake. But entrepreneurs need to understand that if they are going to have to sell the dream, people must believe in you, believe in your dream and invest in a company. The person doing the work must have an incentive to do a good job and to be successful.

If you are going into business, you must believe that you have the ability to make your dream happen. I sincerely believe I could accomplish the same thing today.

In 1980, 22 years after the initial financing, the company was able to buy back all of the preferred stock. Each investor received $16,100 for the preferred stock purchased in 1958 for $5,000, a long-term profit of $11,100. Each investor still held 10,000 shares of common stock.

CREATING WEALTH

About that time, the company really began to prosper, and many stock splits followed. The wisdom of the investment became spectacularly clear in 1998, 40 years after the initial financing, when American Century agreed to sell a large minority stake to J.P. Morgan for $900 million. By then, the common stock for which each investor had paid just $100 in 1958 was worth more than $60 million each!

Not a bad investment. Some investors sold at that time. Most important to me, there had been little dilution in the original financing, meaning I was able to benefit from the fruits of my labor and use the wealth I had created for my family and for society.

INVESTING IN THE FUTURE

Several investors, including doctors who were then retired or thinking of retirement, used a portion of their riches to endow chairs at the universities they had attended and to create foundations to make gifts to other worthy causes.

As for my wife and me, we are busy investing in our new dream, the biomedical research facility in Kansas City called the Stowers Institute. We have given assets that are today worth $340 million, and when we die, the remainder of our estate–about $1 billion–will go to the Institute.

We are giving back something more valuable than money to the millions of people who made our success possible. We want to improve the quality of everyone’s life.

CONTRIBUTOR(S): James E. Stowers, Jr., Chairman, American Century Investments

All businesses start with an idea, and eventually, a business plan.

Yet before you dive into the intricacies of planning business operations and logistics, you should identify what type of business you want to start: growth or lifestyle.

Making this decision before you get into the weeds of business planning will help guide your company’s structure, your mission and will likely play a big role in your funding options (more on that shortly).

To help you determine which type of business is best for your vision, let’s briefly examine both growth and lifestyle businesses. Then, we’ll offer some considerations that will help guide your decision-making.

GROWTH AND LIFESTYLE BUSINESSES EXPLAINED

As the name implies, growth businesses (also referred to as high-growth, equity or scalable businesses) are focused on growth —the faster, the better. According to the University of Tennessee-Knoxville’s Anderson Center for Entrepreneurship and Innovation, “A growth business focuses on a marketplace with potential for rapid and robust growth over the coming years. There may be technological innovations that spawn rapid development of new products, or there may be changing customer dynamics that create new market needs.”

Although it’s likely that technology will play a role in a growth business, these types of businesses aren’t specific to one industry. Rather than sharing a market niche or product vertical, growth businesses instead are typically united by a common outcome: increasing the value of the business and, in many cases, eventually selling the company at considerable profit.

Lifestyle businesses, on the other hand, are intended to support an entrepreneur’s lifestyle. You might see lifestyle businesses also referred to as “mom and pop shops,” but this can be an unintentionally narrow view of the market segment.

Profitability is a focus for lifestyle businesses, but there’s typically much less emphasis on rapid growth in favor of slower, more incremental growth. That isn’t to say that lifestyle businesses can’t generate seven-figure profits (or more). Yet where the essential focus for growth businesses is, well, growth, lifestyle businesses as a whole take a less aggressive approach to profitability, especially if the business owner is maintaining his or her preferred lifestyle.

WHICH TYPE IS RIGHT FOR YOU?

Yet before you make a final decision and continue working toward launch, let’s look at two considerations that highlight some of the key differences between the two.

FINANCING

If you’ll need capital to start your business or to keep it running in the early stages, you’re definitely not alone. Growth businesses tend to attract investors more easily than lifestyle businesses, although this certainly isn’t a hard-and-fast rule.

Because growth businesses are so hyper-focused on growth, business owners will typically include in a business plan a detailed projection of the next few years’ of revenue. And depending on the specifics of the business, growth entrepreneurs may find they need outside investment help to meet aggressive goals (and ideally would later reward investors with a significant reward on their investment, especially in the event of a sale).

That said, growth businesses are sometimes categorized as risky, so you’ll want to ensure you have a sound business plan (and financial projections) before you approach potential investors. One tip: business planning and projections are a time to dream big, but not too big. Delivering unrealistic projections to potential investors is one of the fastest ways to make them run in the opposite direction.

Does that mean you couldn’t get financing for a lifestyle business? Not at all, but be prepared for it to be more difficult. Rather than supporting growth through outside investments, lifestyle businesses typically increase their capital with debt financing. This can be tricky to secure, especially through traditional lending channels, but the rise of alternative financing methods such as crowdfunding platforms has given entrepreneurs a variety of options to explore.

YOUR GOALS

This is the prime time to do a little soul-searching. As you prepare to launch your business, you certainly want to set business goals to guide your company’s evolution. Yet what about your personal goals? Knowing what you want to accomplish is an important factor in deciding between a growth and lifestyle business.

For one thing, growth businesses are demanding. They require a significant commitment of both your time and resources. To achieve accelerated growth, especially in a rapidly changing market landscape, you’ll likely make several sacrifices to stay on track, most notably your quality of life, including time off and ability to disconnect from the business.

Lifestyle businesses, on the other hand, are aptly named because a primary goal is helping an entrepreneur maintain a comfortable lifestyle. Profits may be less than a growth business, but the quality of life is typically higher, allowing more of a work-life balance and the ability to simultaneously pursue other interests, like travel.

Again, keep in mind these aren’t hard and fast rules. Starting a growth business, for example, doesn’t necessarily mean you’ll never again take a vacation. And conversely, a lifestyle business may prove more demanding than initially expected, especially in the early days. There’s no doubt you’ll forge your own path as an entrepreneur, but it’s important to consider the collective experiences of business owners who have gone before you so that you can properly structure your business — and your expectations — from the beginning.

YOU’VE DECIDED – NOW WHAT?

Once you’ve made a decision on whether to pursue a growth or lifestyle business, you’ll want to develop a business plan, understand your market, determine startup costs, identify your customers and create a brand message, just to start.

The time before you launch your business is also an ideal time to register for Kauffman FastTrac, a free online course that will give you the insight and framework to develop your business idea and prepare for launch.

Whether you opt to start a growth or a lifestyle business, FastTrac will help you prepare for what’s ahead with topics that include:

1. Setting realistic financial goals.
2. Managing business functions.
3. Determining the steps to profitability.

Register today and you can start the course anytime.

Oh, and one last thing? Congratulations! Deciding what type of business you want to start is an important step toward launching that business. We can’t wait to see what you do next!

“A growth business focuses on a marketplace with potential for rapid and robust growth over the coming years. There may be technological innovations… or there may be changing customer dynamics that create new market needs.”

Half the Work Force Should be Celebrating Small Business Week

No matter where you live, you’ve likely encountered a small business. That’s because small businesses –  whether they’re locally owned coffee shops or grocery stores – make up about 30 million businesses across America. That’s nearly half the work force. Despite the numbers though, you probably remember the small businesses you’ve visited because of the hard-working and friendly atmosphere of these community-owned shops.

This week, we’re recognizing small businesses during the 55^th National Small Business Week, April 29 – May 5. To celebrate their contributions to our community, we’re highlighting some of the FastTrac users who have found success with their very own small business.

Sarah Schumacher, Cyclone Press

Cyclone Press delivers all the design, print, and website needs for startups and entrepreneurs. Sarah got her start in 2011 after doing mostly freelance work, working as a designer between consumers and printers. She went through the FastTrac program after being laid off and not finding opportunities for part-time work. She relaunched her freelance work and decided to focus on small businesses as her clientele – businesses who are passionate (and focused) on getting off the ground.

Alexa Simeone, Lele Bombe

Collaborating with Colombia’s indigenous artisan co mmunity, Lele Bombe creates handmade wearable art. From beaded necklaces, earrings, and bracelets, these colorful accessories are meant to preserve the culture of underrepresented artisans. Alexa Simeone is the founder and Creative Director for Lele Bombe. In May 2017, she went through the NYC FastTrac program and gained insight into market research and how to establish a grass root idea. Alexa brought a design and sales background to her work with individual artists, giving artists a platform to share their work. She works with a Human Rights lawyer and Cultural Mediator to collaborate with the artists and women in Colombia who design the art. As part of the New York City Fair Trade Collation, Alexa and Lele Bombe are able sustain the value of the Embera culture.

Jessica Corbett, Hitched Planning + Floral

As part of her severance package from being laid off from a corporate event planning business, Jessica was given some money and a business class opportunity. That class? FastTrac. She found a market for wedding planning and floral designs after planning a friend’s wedding and not finding a lot of wedding planning options. She hired her first employees after taking a Growth Venture FastTrac course, in which she was the only woman attending. Hitched has been operating out of a studio in the Westside of Kansas City for the past five years.