From idea to first paying customers, step by step
Two mistakes sink many first-time founders: building something nobody needed, and setting up the company in a way that causes expensive trouble later. These steps address both, in roughly the order you will face them.
Interview people about the problem
Before building anything, talk to the people who have the problem you want to solve. Ask about the last time it happened, what they did about it, what it cost them and what they have already tried. Past behavior is evidence; opinions about a product that doesn’t exist yet are not.
Don’t pitch during these conversations, because people are polite about ideas. Keep talking to new people until the answers start repeating, and write down their exact phrases, which often make the best marketing copy later.
- Ask how they handle the problem today, not whether they would buy a solution.
- Ask what the problem costs them in time, money or risk.
- Ask what they have tried and why it fell short.
- Ask who else is involved in a decision to buy.
- Ask for introductions to others with the same problem.
Define the smallest valuable product
Pick one type of customer and one painful job, and design the least you could build that does that job well enough for someone to pay. Everything else waits. A narrow product that a few people love teaches you more than a broad one that many people find fine.
Parts of the product can run by hand at first. A founder who processes orders manually, or reviews every report before it goes out, learns exactly what to automate and avoids building features nobody uses.
Pre-sell, run paid pilots and set an early price
The strongest early evidence is money. Ask for a deposit, a pre-order or a paid pilot with written success criteria and an agreed price for after the pilot ends. Free pilots often drift without a decision, and a letter of intent helps but is weaker than payment.
Price on the value you deliver, not on your costs, and start higher than feels comfortable, since lowering a price is easier than raising it. Founding-customer discounts work best when customers give something back, such as an annual prepayment or regular feedback.
If you take pre-orders for goods sold online, by mail or by phone, the FTC’s Mail, Internet, or Telephone Order Merchandise Rule requires you to ship within the time you state, or within 30 days if you state none. If you can’t, you must notify the buyer and give them the choice of agreeing to the delay or canceling for a prompt refund.
Choose an entity
An LLC is simple to run and, by default, passes profits and losses through to the owners’ personal tax returns. That suits many service businesses and companies that plan to grow on their own revenue.
If you plan to raise venture capital, most investors expect a Delaware C corporation. Investors and their lawyers know Delaware’s corporate law and courts well, and many venture funds avoid LLCs because pass-through taxation creates complications for the funds’ own investors. Converting later is possible but costs time and legal fees.
A Delaware corporation that operates elsewhere usually must also register in its home state and pay fees in both. Its annual franchise tax is due by March 1, and if the first bill looks alarming, recalculating under the assumed par value capital method often lowers it sharply.
Split founder equity with vesting and file an 83(b) election
Split equity based on what each founder will contribute over the next several years, not on who had the idea. Then put every founder’s shares on a vesting schedule. Four years with a one-year cliff is common: nothing vests in the first year, a quarter vests at the one-year mark and the rest vests monthly or quarterly after that.
If a founder leaves early, the company can usually buy back the unvested shares at the original price, so the remaining team isn’t carrying a large stake held by someone who left.
Because vesting stock is restricted, each founder should consider an 83(b) election. It lets you be taxed on the shares’ value at the grant date, often nothing if you paid fair value, rather than on their value as they vest. File it with the IRS within 30 days of the stock grant, a deadline that can’t be extended, keep proof of the filing date and give the company a copy.
Assign intellectual property to the company
Investors and buyers will check that the company, not the individual founders, owns its code, designs, brand and domain names. Each founder should sign an agreement assigning to the company everything created for the business, including work done before the company existed.
Have every employee and contractor sign a confidentiality and invention assignment agreement before starting work. Without a written assignment, a freelancer who writes your software can end up owning the copyright in it. If you still have a day job, read your employment agreement, since some claim inventions related to the employer’s business or made with its equipment.
Track the first metrics
Early on, a few numbers tell you more than a full dashboard. Review them monthly and write down what you expect before you look, so the results can genuinely surprise you.
Retention matters most. If customers leave soon after they start, spending more on marketing only makes the leak bigger.
- Retention: the share of each month’s new customers still active or paying after one, three and six months.
- Customer acquisition cost: sales and marketing spend in a period divided by the new customers it produced.
- Net burn: cash going out each month minus cash coming in.
- Runway: cash in the bank divided by net burn, so $300,000 at $25,000 a month lasts 12 months.