The capitalization costs associated with your startup are something that should be well defined in your business plan.  Unfortunately, sometimes plans do not match reality.  That is why your capitalization plan is one of the most important aspects of your startup.  Now, if you’re bootstrapping, it’s not such a big deal.  But, if you’re building something serious, you have to account for planned and unplanned costs.  It’s a daunting task to say the least.

Most important, have a PLAN.  Not just the big picture.  You need a real business plan — spreadsheets and all.  Figure out QuickBooks — get training if you need it.  You’re a big picture person?  Too bad, the details are where it’s at.  Get comfortable with the idea that outside of being well-funded, you need to analyze every transaction in your business.  Your investors will definitely want to know what your profitability report looks like.  Know your books, period.  Now, some of that comes after capitalization, but the reality is you need a plan BEFORE you get to that point.  Plan as if.  Act as if.

I’ve consulted for businesses that have bootstrapped and financed and the singular conclusion I have drawn is that in both cases these businesses’ success hinged upon their level of organization and planning.  I know it sucks.  Just suck it up and do it.

This week is off to a roaring start on all fronts.  I’m juggling three different initiatives and all have substantial momentum.  I wish I could share more, but at this point mum is the word indeed.

Building a complicated business isn’t a bad thing at all.  For one, complexity means you are benefiting by creating a barrier to entry into your product, service or market.  On the other hand, ideas like these tend to require substantial initial capital.  That’s why I’m such a big fan of bootstrapping.  You preserve equity and force yourself to keep things simple and inexpensive.  As you move your idea forward and pull in some revenue, you can reinvest and make your business as complex as you like.

The point of this post is to remind us all that sometimes the easy ideas are some of the best.  Take Todd Davis of LifeLock for example.  Sure, they raised a bunch of money, but the business itself is so simple it’s genius.  A little technology here, a  little automation there and marketing that takes advantage of everyone’s media-induced fear of identity theft and you have the perfect money making storm.  All of this because they do something that everyone can do for themselves at nearly no cost.  But, it’s a pain in the ass so why not pay $10/month or $110/year and let them do it for you?  Believe me, lots of people do.  LifeLock is a money making machine and now they have lots of copycats.

I used to see businesses like this and think I’m doing something wrong.  These ideas would really get me down.  Now, I look at them as educational and inspirational.  Most important, it reminds me to keep things simple.

Now, after a two year hiatus, Adsense Secrets 4 returns.  For the most part fully updated to reflect the many changes to the AdSense program over the past few years.  What’s more, since this is being released as an eBook, Joel’s made it available for only $9.95!  That’s a fantastic deal to get you started in maximizing your AdSense revenue.  Google just announced its earning and blew away the Street’s expectations.  Now is a great time to get your feet wet and one of the first stops is monetizing your assets with AdSense.  I highly recommend Joel Comm’s Adsense Secrets 4.

Watch this space.  I’ll have a lot more to add after reading Adsense Secrets 4 especially as it relates to how thoroughly Joel is killing it monetizing his very specialized area of expertise.

Most of us have one job.  We go to work each day and diligently perform the duties before us.  If we’re smart, we participate in our employer’s 401(k), contribute to an IRA and save at least three month’s salary.  That is the most common strategy work-a-day slaves guard against loss of income and plan for retirement.  And, that’s fine for most folks.  However, it’s a position I find to be untenable in my situation for the short and long term.

There is no guarantee if you lose your job you’ll be able to find a new job that matches your skills, interests or even expected income level within your three month cushion.  Sure, you can take a penalty a draw against your 401(k) or IRA, but you pay a steep penalty for doing so and it probably won’t buy you  a lot of time anyway.  Take my wife for example.  She left a job nearly six months ago and has not found a suitable place to land since.  Granted, she has had the advantage of my income to cover her expenses, but imagine if that were not the case.  What would she have needed to do in order to meet her monthly outlay?  Anything from working a couple part-time jobs to temping to taking a lower paying full-time job are all options she might have needed to exercise.  That just sucks and it happens to lots of people every day.

If you are an executive, three months’ salary won’t cut it.  You need to have a six to twelve month reserve.  The higher you soar, the harder you fall and the more difficult it becomes to find the right fit as well as adequate compensation.  That’s me in a nutshell.  As I mentioned in my post on transitioning, if you are forced to move on, you have to have a game plan to replace your current income.  In my case, it’s my start-up.  What if you knew that you wouldn’t have a job in six months?  What would you do?

It’s crazy not to diversify your income sources.  It’s crazier still to accept your current income as sufficient.  If I’m hiring a sales guy or business development guy, I always ask him what his income target is.  If I get a response that isn’t titanic (better yet, infinite), it’s a real turnoff.  Where is the hunger?  You must be hungry to succeed and excel at whatever it is you do.  It’s about passion.

Run through all the “what if” scenarios you can think of in your own life and start to consider how you can take active steps to mitigate risks.  Think about it, it’s the very reason we buy insurance or extended warranties on big ticket items.  Start working on an insurance plan for your income and do it today.  The only thing that’s in your way is you.  Find a few hours here and there and just get moving.  Then, let that momentum carry you forward.

What are you doing to actively diversify your income?  Tell me in the comments below!

However, no matter what your exit might be, you can’t avoid the due diligence process.  It pays to plan ahead.  The more you can anticipate what might be asked of you, the easier the diligence process will be and the quicker you can negotiate your exit.

Here are just a few of the things on the legal, financial and HR side to have handy (and you can always Google up a comprehensive due diligence checklist):

• Articles of incorporation 
• Bylaws and any amendments
• Minutes of any corporate meeting
• Lists of subsidiaries and other entities in which the company has an equity interest
• Copies of employment contracts
• Employee handbooks and policy and procedure manuals
• Employee benefit program info
• Property leases
• Equipment leases
• Documentation of all intellectual property
• Financing or line of credit agreements
• List of all outside counsel and purposes
• Outside counsel billing statements
• Any consent decrees or memorandi of understanding with any government agency
• Settlement agreements or judgements as a result of litigation
• 3 years of general ledger level financials
• Current budgets and 3 year projection

Again, this is by no means a comprehensive list.  Rather, it’s simply meant to give you an idea of the items you will find presented to you on such a checklist.

When it comes to performance metrics relative to a Website, be prepared to throw in everything including the kitchen sink.  Things such as:

• Visitors
• Unique Visits
• Keywords used to find your site
• Ranking reports for the most important keywords in your industry
• Page views
• Time on site
• Bounce rate
• Traffic sources segmented by paid, organic search, direct and referring sites
• Registrations
• Registration rate
• Data points captured
• Any meaningful data analysis based on the data captured
• PPC and PPA campaign performance and spending levels segmented by source

Items such as those derived from your own data analysis will be specific to your business.   Build and maintain well thought out reports that memorialize every important operating metric you can think of.

I’ve been on both sides of the due diligence process and can tell you for certain you will be well served to start off on the right foot by both thoroughly documenting your performance metrics as well as keeping great records of everything that your business does.  You never know when the right person may come knocking.

I know a lot of you might think that’s pretty short, but I tend to disagree.  Think about commercial advertising.  The thirty second television commercial is the industry standard.  Products are the easiest to pitch.  Currently, one of my favorites is ShamWow.  It’s a simple product that’s easy to demonstrate.  Its value proposition is clear, “you’ll spend $20 a month on paper towels, buy ShamWow for $20 and we’ll guarantee the product for 10 years.”  Pitching services based businesses is a different story altogether.  This is especially true when the value proposition is difficult to convey.

And, that’s where I am today.  I’m making progress in this area and am actually pretty close to that ten second pitch.  The trick, I’ve learned, is to keep trying.  Pitch everyone who will listen and see how they react.  Take what you learn and re-factor your pitch to make it tighter and tighter.  We all know that time is money so the better you can deliver on the short, the better.

How have you pitched your product or service and what have you learned?  Let me know!

However, forming your corporation is the best way to get you energized.  Once you get your articles of incorporation and the realization sets in that what you are doing is real, the game is on.  At least that’s how it works for me.  Here are the essential steps:

1. Set up your corporation.  I recommend an LLC for most new businesses.
2. Get your EIN here.  It’s free and you can get it nearly instantly online.
3. Set up a business checking account with the bank of your choice.
4. Begin to separate your personal and business financials as much as possible.  Fund your checking account with the money you need to pay for business expenses and determine what that investment means to your business.
5. Use QuickBooks for your accounting.
6. Write a comprehensive operating agreement.  It’s easier if you are the only member, but there are plenty of good examples online to help you if your business structure needs to be more complicated.

That’s really it.  You have all the fundamental items in place to represent your business as a going concern.

1. Website Hosting – Unless you’re building something really big and complex, you don’t need your own server and/or collocation.  Even if you are, it’s cheaper to prototype your application with something like PHP/MySQL that flat out start building with J2EE/Oracle.  If you have the funding, fine.  Go for it. But if you want to start small and on the cheap you can get a decent hosting package for $80/year.  Check out GoDaddy, that’s who hosts this blog and the rest of my micro-sites.
2. Email Hosting — One of the best cheap services that offers a ton of value for email hosting that I’ve found is FuseMail.  While you can use your own domain with Gmail, I found that having the ability to use FuseMail for my DNS as well as multiple domains for email was a really powerful combination.  The services costs $0.99 per mailbox per month with a ten mailbox minimum and 1GB of shared storage.  Additional mailboxes and 1GB increments of storage can be had for $0.99 each.  FuseMail has a nice web mail client, calendar, spam and virus filtering.  You can even customize your web mail using your logo and colors and it looks really professional.
3. Avoid costly software – Now, I admit I use MS Office. Until there is a true replacement for Outlook, I will continue to plunk down my hard earned coin (for Outlook alone).  However, there are lots of great alternatives such as OpenOffice.org, Google Docs.  For email there’s Thunderbird or even Gmail .  Need Photoshop?  No you don’t.  Try the GIMP.  Need team collaboration and are ready to use SharePoint?  Forget it.  Try BaseCampHQ.  Need to access your PC from anywhere?  Ditch GoToMyPC and try TightVNC.  Need to print documents or images as PDF’s.  Guess what?  You don’t need Adobe Acrobat.  Instead, check out PDFCreator. 
4. Incorporate on the cheap.  Use Corporate.com to incorporate.  If you’re fairly comfortable choosing your entity type and don’t have a lot of partners or shareholders initially, this Corporate.com is a really inexpensive way to formalize your business.

I’ll keep adding to this list as things come to mind.  When you startup cheaply, you build discipline that will help you operate efficiently in the long run.  When I finally did have a big budget, I was still of the mindset that I was broke — even though I could get whatever gadget, software or service I needed.

How do you keep your startup costs down?

Any investor angel or otherwise only has one thing on his mind when writing a check, “what’s your exit strategy?”  It’s an important question.  If you put money into a business, you expect to get more money than you put in out of it.  And, it’s a fair proposition.  The trouble comes when you take financing too early and erode your equity.  Strictly speaking, an idea isn’t worth anything.  You have to develop it in order to build value.  The higher the valuation at the point you take your first round, the lower overall impact to your equity.  It’s simple really.

Bootstrap as much as you possible can in the early stages.  Tap knowledgeable friends.  Do your own research.  If it’s a technology start up, find a friend who can do it and offer sweat equity in return for their moonlighting efforts.  At minimum, get a prototype in place before you stretch out your hand.  Once you do, there’s no going back.

Speaking of moonlighting, if you are currently working full-time separate your work (paycheck) from your start up.  I can’t emphasize this enough.  Be loyal to your employer and keep producing great results at work.  To the extent possible, don’t let your start up life creep into your work life.  If, like me, you’re in senior management, share your idea with your CEO.  You never know what he might be interested in investing in next.  But, don’t do your start up on his time.  Seriously.  When you are honest, produce results and avoid conflicts of interest, you preserve your most valuable commodity — namely, your reputation.  I think Buffett also said something like, “it takes 20 years to build credibility, but only 5 minutes to ruin it.”  Manage your time and you will get there.