Belief is the key

As a serial entrepreneur I have experienced many times the thrill of following my own path to success, however I  defined it at that time of my life: change the world, make a fortune, make an insight into reality, whatever.  Eventually all ventures evolved into a state of mind best explained by this picture.  The only way to go forward was to "press on" no matter what, believing that the top of the mountain was not far and then it would be, oh so sweet, downhill all the way.  My mother often asked "how far do you still have to go?".  The answer, always, "I am below the rock, I cannot see, I cannot stop, but I am an optimist, it is not far".  And so the rock slowly got pushed up the mountain with minor "strategic" directional adjustments to suit the landscape, but moved primarily by total commitment powered by belief.

Belief (not stubbornness) is the root of achievement, that internal voice that makes us persist in the game.
Toady we see one such game playing in front of our eyes, on Jeopardy.  It is the latest chapter of IBM's pitting  the machine against the human.  The last match was in 1997 and Garry Kasparov was our knight.  He had belief to spare.  He lost to Deep Blue and went into a deep depression as a result - some mountains are too tall and rocks too big, but letting go is always tough.
How would you like to be the Humans' knight in shining armor: Brad Rutter or Ken Jennings?  It takes true grit and great belief.  In the other corner, despite appearances, it is not Watson, it is the IBM team behind that multicolor-cyberface-cum-mawhawk, with seven years and $1-2 billion worth of dreams and persistence on the line.
 
It is a quixotic battle: like that against Deep Blue before. Watson will eventually win for no other reason that IBM will find the Rutter and Jennings of artificial intelligence and put them to work pushing that rock to the mountain top. In this sense defeat of the Humans is inevitable. It may happen tonight or tomorrow or by an average of three nights (BTW Deep Blue won not all matches, only 3.5 to 2.5 over 7 matches). Perhaps we'll have to wait longer yet, but it will come. Our brightest Humans can make machines "smarter" over time but we have not yet found a repeatable and fast way to make ourselves smarter.

Regardless of who wins Jeopardy, the human ability to imagine, belief and commitment will have won again.  And now go back to pushing your rock, you don't have far to go.

Marco Messina

Twitter, Facebook and Questions with Unintended Consequences

Last night I worked very late, so late that I fell asleep at my desk. I found myself walking into a huge building by the sea, a convention center.  Admission was free, inside there were many rooms.  The doors were labeled with subjects of interest: Politics, Business, Poetry, Religion, Internet Services, Sustainability, Global Warming, Venture Capital, Innovation, etc. I entered one that appealed to me.  In it I found thousands of people standing elbow to elbow, people of all sizes and colors, speaking many languages, but English for the most part, many with interestingly English-as-second-language sentence structures and words. Their attires reflected the world, and activities and lifestyles ranging from poets to explorers to programmers to marketing consultants to business managers and entrepreneurs just starting new internet ventures. Those you could single out from the unassuming clothes and visible optimism and excitement in their faces.

They all stood around, some in clusters, each seemingly shouting to all and occasionally attentive especially to someone at the center of a cluster. They all spoke short statements beginning with “Did you know” followed by few words. Frequently they’d move on across the crowd, as in a Brownian motion, until they orbited a new cluster where they seemingly recognized the shouter at the center.  One cluster was notable for its size, over 200,000 people coming and going. The man at the center had his nose to his laptop’s screen typing frantically at high speed.  Every few minutes he’d shout “Did you know: I just published blah blah blah”.  The participants of the cluster would eagerly elbow their way toward him and each would pull away a page he had just written and read it attentively.  Some would then turn around and, raising the page in the air, would shout “Did you know: Marty Zwilling just published blah blah blah” and people from other clusters would eagerly reach for the page held up high.  The cacophony of Did-you-hears was almost like white noise, but with practice I learned to listen.  There were some twits shouting “Did you hear: I am Bozo, I woke up this morning, you all have a nice day”, others holding a book of quotations of famous people they did not know, shouted “Did you know: carpe diem – make good of the day” (thank you for the translation) “Did you know: DailyWisdom: "He who guards his mouth preserves his life, But he who opens wide his lips shall have destruction" or “Did you know: I took my dogs for a walk, they are so sweet” or other personal world-stopping insights. Despite the apparent annoyance of the people surrounding them the twits of the Inanities Club persisted with their pronouncements “Did you know: I am at Starbucks at Park and Main” - no one went to meet them, so they shouted it again – another replied “Did you know: I am Mayor of that Starbucks and I unlocked the public toilet at 1^st and Union”.  Most people, clearly aggravated, ignored them. 

It took me a while to learn to filter out the twits, the mayors and the small minds repeating big thoughts.  Eventually I learned to be on the lookout for Marty’s shouts and of others like Dakshinamurti, Steve Blank, Smart Planet, TED and Smart Bear, Venture Hype and more.  Even filtering out the useless shouts, it was tiring, but the value of the worthy shouts made it almost addictive. It was like having the Smarts Club doing research for me on what to read and what to learn, publishing their findings seemingly just for me. Despite the addiction, I exited the room then the building on my way home.

I woke up staring at my Twitter page and wondered about it all.  If only a filter could be built to separate the twits from the Smart Club, imagine!  What if this whole Twitter thing had started with “what are you reading” or “what did you learn” instead of “what’s on your mind” or "what's happening" – Some questions do have tragic unintended consequences. Well, let’s hope someone is working on that “twits filter”.  I got up and went to bed.

Marco Messina

The Multiparty Line (over and again)

Suddenly more and more of my friends and family of the "not-early-adopter" personality type are signing up for Facebook.  They think I am a digital technology early adopter, so I am flooded with "how to" and "why" questions. 

We must have reached the tipping point in social media. In most of he country it is now presumed that you can read and write, watch plenty of TV, own a personal computer and a cell phone AND that you "are on Facebook". If not, you'll feel that you have to explain why not: After all, if you want to hear from your children or get photos of your grandchildren you better be on Facebook.  Furthermore, many of your friends probably have given up email and switched to Facebook, social gatherings will announced there - be there or be square.  The more hip only "do Twitter" and text from smart phones.

As I look at how most people use Facebook and Twitter I see a similarity with past chapters in the evolution of telecommunications: The tolerance for multiparty line communications and loss of privacy swung as follows:

Telephones between 1930 to 1960's and even beyond for outlaying rural communities: Seniors still remember that in those years, presuming to have private telephone conversation in a small town was a joke.  Either your neighbor(s) or a bored switchboard operator was presumed to be listening on. 

Automatic switchboards and sufficient telephone lines brought privacy back.

CB radios became popular, not only with long distance truckers, but also with aunt Mae and cousin George from 1972 (because of the First OPEC Oil Embargo and resultant gasoline shortage) until the early 80's.  With some planning (for a trip in convoy) you might manage to talk to someone you knew, but by en large it was the "first Twitter" where you told strangers what was on your mind or "in the road" - listeners "followed you" and you were "Buddies" only because you had in common the same piece of interstate highway at the same time:  10-4 Good Buddy...

Cell phones eventually brought an end to CB radios and brought privacy back.

Computer Bulletin Board Systems (BBS) created the first multiparty communications for computer users around 1975, their use exploded with personal computers in the early 80's until supplanted by the internet in the early 90's.  Again you could "talk" (type) on an open line to all those that had a similar interest: computer software,  computer games (text-based, before-video), dating services (professionals or lonely hearts), etc. 

The first user friendly Internet Browser (Netscape) in 1990 opened the Internet to the masses and with email, privacy was back. By 1999 you had better be ready to explain under what rock you lived if you did not have an email address. 

Web2.0 Social Media Arrives

Social Media  could be said to go as far back back to the PLATO system (1973) at University of Illinois, but in its current Web2.0 form it started with Friendster in 2003, followed by the explosion of  MySpace (driven by the high school crowd), Linkedin (the professional crowd), Facebook (the college grads crowd) and Twitter (the short comments crowd). 

All provide a choice of communication channels that vary from open-line to private-line telephone emulation. In Linkedin and Facebook anyone known or unknown can be friends by invitation and mutual agreement. Friends of friends can be more or less shared depending on user choice and the fee paid for one's account. In Twitter anyone can be anyone's friend, just because they are there.  With something valuable to say and consistent effort nurturing the audience one can garner 200,000 followers or more. In Facebook, with a "poke" you can be "friends for 3 days" and show a little tease (A "poke" is intended to get someone's attention allowing them to see your Facebook page for 3 days, so they can know who you are, and hopefully add you as a friend).  

Those who bother to manage their privacy can hide their Facebook friends, but most users are pretty open, by accident or by design.  Some do not know any better (instructions for adding friends are jammed down your throat while those to manage privacy are far from clear), so they have all their friends visible to all friends of friends. Then they write on one friend's wall a private message (trivial or important) only to discover they were shouting on the town's party line.  

We are back to telephone privacy circa 1945, but this time the technology is not to blame. 

The psychology and sociology of multiparty lines

At this point you can go on to something more productive than reading the remainder. Following are my speculations and opinions on the subject, and you know what they say about opinions.

I always interpreted the user's tolerance of a multiparty line as the price to be paid in the early stages of a new technology introduction: When the resource is limited, the price of privacy is high and beyond the budget of most, but eventually mass adoption scales the system to where privacy is affordable to all.  

Today, however I see the commonplace use of open communication channels for private matters, seemingly with little concern, when means to achieve privacy exist.  Why?

Is there a group psychology in play here, similar to that found in American high schools or colleges: The dynamics of wanting to belong, wanting to be heard, wanting to be included, wanting to be popular?  It would surely explain why the first big successes by social media sites were with students in high school  (MySpace) and college (Facebook), whereas the membership process and the chatter in Linkedin (business leads and job hunting professionals) have been far more private and resulted in slower growth.  

Is this why some feel compelled to announce to the world "I at the airport waiting for a flight to London" (as if we would care) or "Stranded in Paris on the way to Moscow" (it happens to everyone that changes planes in Paris), or "traveling from A to B stopping at C to walk the dog" (as if we all were waiting for them), or "standing in line to buy my iPhone tomorrow morning" (so you are one of a million)?

It's easy to say - just stop following them, drop them from your friends lists, etc. But that is not the point. 

First, those same people at times make public announcements of value ("iPhone proven to lose call" - Good to hear, I am not crazy, "X just released a multitasking xPad" - Good to hear, now I can skip the iPad). 

Secondly, the riddle I wish to unravel is why private comments aimed at a single person find instead their way into the chatter of the public town square. Has the need for privacy been abandoned?  If it is evolving we better understand why and how, because the public town square is changing and we cannot stay away from it - it is the new language we must learn to use correctly.

Please, comment with whatever insight or guesses you care to share (BTW, not just with me but with all my followers!).

Marco Messina

User Interfaces, Arrogance and Opportunity

Disclosure
In the interest of full disclosure I'll admit to some personal and painful experience with User Interfaces (UI).  They probably colored my perspective to this day.
The first UI we learn as humans is language which allows us to interface with mom and other humans. In the US in particular, most people learn the "language UI" only once - English.  As an immigrant from Italy in 1970 (before English had became the world's global language) I suffered the cost of confronting my UI (Italian) abruptly obsoleted and I had to waste a whole semester studying English as second language before I could start full speed with my real courses (not an inconsiderable penalty considering that I still completed a BA and MBA in 4 years).

Looking back, then I chose to almost completely abandon using Italian in favor of English (the former I would not forget while the latter is still a work in progress). I distinctly remember that bargain: Pay a price to get something valuable for the rest of my life.  The alternatives were to go back to Italy or to limit my future to an Italian language neighborhood: both were easier, neither had ROI.

The cost of UI changes
I think all UI changes reflect the same ROI calculation I did back then. The fact that, despite all the push for Vista and Win7, XP still has a 70+ % market share, in my view, reflects that same calculus:  Why invest effort and incur the cost of disruption (personal or organizational or both) to change to a UI that does not have a compelling, demonstrable unquestionable advantage?  70% so far say NO.

Furthermore, to follow Microsoft into the promised land we'd have to trash perfectly viable PCs that just happen to have an engine insufficient for the new OS.  It is like GM offering you a car that carries no more people, goes no faster, saves no money and requires you to learn to drive with a joystick sitting backwards and looking at the road through a mirror - eventually you'll like it.

Arrogance as a strategy
Todays' announcement that the miraculously uncluttered, minimalist new-design Internet Explorer 9 (IE9) will not run on XP is the reflection of an arrogance we would not tolerate from automakers.  It's tantamount to GM announcing cars wider than the lanes in our roads, for awesome benefits to be sure, like improved cornering stability, or all passengers sitting in first raw, and replying to our objections with "build new roads" (a "let them eat cake" attitude comes to mind).

In the days when most (low power) cell phones can sport an effective web browser, one has to wonder the necessity of dumping viable PCs just because they cannot run Win7 and IE9 - has anyone heard we are in a recession?  Yet the me-too desire for IE9 will prompt many to "eat cake": buy new expensive hardware with a new OS and IE9 to do no more than an iPhone or Android phone would do.  Arrogance may pay off after all.

Opportunities abound
Arrogance however always carries a price to be paid when the American public abruptly switches to alternate suppliers more responsive to their needs: see the experiences of GM and Toyota, Internet Explorer and Firefox/Chrome, Motorola and HTC/Nokia/et al., United/USAir and Sothwest/JetBlue, and so on.

One would be tempted to add to the above list Microsoft and Linux/Ubuntu, but we cannot.  It may be a sea change in the making with Android (an Ubuntu skin), but is not yet here.  Why after 10 years of Linux has it not happened?  It's not the economy, stupid; it's the UI.  Yes, the UI.

Linux in all its incarnations can run better than XP on old PCs (as on new cell phones) and can deliver equivalent or the exact same applications (through WINE) but pigheadedly keeps coming out requiring the user to adapt to a  new UI. If there were a benefit to that UI change users would do it, but since there isn't they just don't change - 70% market shares says so.

Geeks and Linux fans spend much effort touting the greater elegance and whatever many other strengths, but seem to be totally oblivious to the fact that Toyota can pull customers away from GM and Ford ONLY BECAUSE THE UI IS THE SAME and the technical improvements/advantages require NO learning curve.

In the business parlance of the day the saying goes: OUR (business/product) value proposition is...  That's great because it means we understand that a value proposition is key, but we should strive to phrase it in terms of THE BUYER, not in our terms.  Perhaps: FOR CUSTOMERS THAT WANT X we offer Y that does..  It would set the right frame of mind for OUR mind.

So, in closing here is a thought for all of you innovators out there looking for ideas: Produce a Linux that looks and feels (the UI) identical to XP, so that "XP migrants" have NOTHING to learn, make it run like Ubuntu on old PCs (those obsoleted by Win7), with a minimalist looking IE9-style web browser that requires no new PC and OS (Firefox/Chrome?).

Beware - The window of opportunity is closing fast. Android, a garden open to all, will soon deliver a uniform UI from cellphone-to-tablet and eventually to PCs (as Apple promises from pad-to-phone).  If a new option with an XP-UI appears, it can still capture the transition moment, and you can capture a market, else the UI consistency from phone-to-PC promised by Android will be the David's stone that slays the arrogant Goliath.

Either way it will be the UI, not the power, not the features, not the economy, the UI.

P.S. I loved my birth language UI, I changed it because of the ROI, but cannot forget the price I paid
Ciao
Marco Messina

The Magic Ten

Sales are the only unquestionable proof that anyone on the planet values and wants what you make (or plan to  make).  Therefore it is the only proof that your business has any potential of being a viable,  even a successful venture for you and your investors.
Of course your business may still fail for a thousand reasons some related to you (management skills), some beyond you (timing and economic cycle).  But if no one wants to buy, it is proof that there is no potential - change what you make or go invent something else.
 
The trouble is that this sales "acid test" is almost never performed soon enough.  Innovators waste untold  resources on whimsical notions that  the world needs X because they thought so and without ever asking anyone if it is true, except perhaps for overly sympathetic family and friends.  The genetic make up of the inventor/innovator is to instinctively seek solutions to perceived problems, then develop total belief in the solution found, often with smug disregard for the opinion of the less innovative.  Unfortunately, those less innovative folks are the customers that should buy your product (BTW they probably innovate in their domain just as much, just do not appear so to you). Because their focus is elsewhere, almost always they will have different perceptions than you. BUT, if they do not like your offering, your product is crap: beautiful, genial, elegant perhaps, but business-wise it is still crap.

Before investing a great deal of energy developing prototypes, let alone finished products, do yourself a great favor:
1  Get out of your office or garage
2  Look for 10, TEN, not two, TEN prospective buyers of your product

3  Find a way to explain in 45 seconds: what you offer, and its value proposition 

4  Continue to search until you have found ten that say they would buy whatever you intend to make
5  After TEN people say they will buy at the price you envision, go prototype your product.
6  Then go back to validate with your ten prospects if they would still buy it.
7  If less then ten would, use the feedback to explore design modifications and
8  go back to searching for prospective buyers until you are back to ten
9  Repeat the loop for every prototype iteration
10 If you have less than ten fans or buyers go back to look for more - Remember TEN

Clearly this formula calls for good walking shoes and door knocking stamina far more than an MBA.  The latter in fact will give you countless excuses to stay in your office to over analyze your own questionable notions of reality until, eventually failure will lead you to forget the textbooks and fancy formulas codified years ago, then get good sneakers and go talk to customers about what they want NOW.
It is a simple formula: TEN

Oh, and you can bet heavily on this outcome:  If you can show your prospective angel investors that you have done this field market research, or better yet you have actually sold something to somebody, you'll be in a class apart from all the funding seekers they see - you will have the beginnings of a proof of market

Marco Messina

Planets, Aristarchos, Ptolemy, Copernicus and Entrepreneurship

The power of discovery
I just came across this interesting news of one more step forward in the discovery of earth-like planets elsewhere in our galaxy. The increasing frequency of news like this supports the idea that we are getting close to proving once more that our plane is not only "not the center" but is also not unique, in which case various "other life" considerations inevitably follow.

The Greek philosopher Aristarchus of Samos had already figured the "not center" idea in 43 BC; he was ignored for 1500 years and even today is hardly given any credit.
Aristotle and Ptolemy with the flawed but more intuitive idea of Geocentricism (earth at the center of the universe), and with a better "sale pitch" got and controlled mind-share for 1500 years.
Copernicus and Galileo eventually sold Heliocentrism (sun at the center of the planets), a v2.0 of Aristarchus ideas, with better "showmanship" (drop balls from the Tower of Pisa and incarceration for heresy) to win the  mind-share race.

Centrism and Entrepreneurship
Humans would seem to have an instinct to imagine ourselves unique as much as permitted by ignorance, dogma and lack of facts. Possibly there is a survival value in brains intuitively "provincial" since it would limit the amount of data to be dealt with at any given moment: worry about immediate local threats (tigers), less about future and distant ones. With that trait, individually, we can intuitively and locally develop the notion that what we do is unique.  In reality however, we just have not looked for and found our competition.

For innovators and entrepreneurs, the remedy of this blind spot is getting out (talk to customers, talk to others in the same industry) and looking (search the blogosphere, academic research and industry press). Investigation will make us discover "another planet" like us, our competition. Loss of the myth of our uniqueness will require a radical change, a new perspective just as human psychology was impacted by the Copernican revolution. Finding our competition will demand a far less self-congratulatory and more guarded state of mind (i.e.we found the tiger, now what?).

Some more lessons from Aristarchus
Just as it happened to old Aristarchus, as an entrepreneur and innovator you may well have the right answer to "the question", but the market may not be  ready for it (e.g. there is lots of that happening now in the new green energy business!).  Pursuit just the same.

Recognize the possibility that the market will eventually accept your answer, but it may be in a version 2.0 advanced by a more compelling salesman.  The antidote is to strive to become a better salesman.  Meanwhile speak ( and twitt) loudly and consistently  "around" the established thinkers (the Aristotle and Ptolemy of your day).  Don't give up, the mind-share race is won one brain at a time.

Strive to find a way to stay in the game that is not totally dependent on the disputed idea you are championing. Staying power (most often enabled by capital) is the answer to the challenge. If you go out of business pursuing only the unpopular idea you will not survive to the day when reality will prove you right beyond dispute.

Marco Messina

Patents and Due Diligence

I frequently run into investors that seem to find a great deal of confidence in the fact that the company the are doing due diligence on has an "issued" patent.  They seem to believe that once the PTO issues it we are in Safe Land.  I wish I could be that optimistic, instead I often find myself "raining on the parade" suggesting that there are still big questions to be addressed:

Markets covered

If the projected market is global, but the patent is only issued in the US, what will the cost be to cover other countries?  

Is there still time to file abroad in desired markets? 

The rest of the world works on the basis of "first to file", so if someone invented well after the US inventor, but filed first in the country in question, it would be quite hard (not impossible) and expensive to contest the foreign filing.

Cost and means cost of enforcement

The PTO issues a patent but does no enforcement. Protection and enforcement of the rights implicit in the patent are up to the inventor/holder: Does the holder have the means to enforce its rights?  No cash to pay for litigation is about good as no patent.

If a company is granted a permanent irrevocable exclusive license to the patent by the inventor, the holder is the one that has to protect it through litigation, unless the right to prosecute infringers is granted along with the license, which normally isn't since the licensor is expected to protect the patent rights as consideration for the royalties received.  Does the holder have the ability, financial means and will to protect the patent rights? If not and the company does not either, it may have no means to prosecute infringers and in practice have no patent at all.

How "real" is the patent?

This is the question that seldom seems to be considered. In "Patents: what do they mean to you" I referenced the debacle of Research In Motion (RIM the maker of Blackberry) whose issued patent had one claim  invalidated years after being issued.

Another interesting case is that of so called "bogus patents" as this "Must Read" case reported by ReadWriteWeb.com: 

The notorious U.S. patent 6,411,947, a broad "method" for automatically classifying and responding to email inquiries known as the Firepond/Polaris patent, has finally been invalidated after 12 years on the books. (continue)

The warning here is: if it looks to you to be too easy, too obvious to be patentable, have an expert check the details, not just validate that the patent is issued. If it does not quack like a duck, it may not be one regardless of the stamp put on by the PTO or it may be so only for a short while.

Are patents useful?

Of course they are.  They certify to a good degree the novelty of an idea if not to its economic value. By virtue of the prior art research done, they attest to the difficulty of finding competitors.  Competitors could well exist that have prior art but never bothered to file a patent and they could come out later as they did for RIM.

Should inventors file them? Of course, but with the awareness that they grant no explicit protection. They only give one the right to spend money in litigation  to protect the rights implicit in the patent. 

Should investor value them?  Certainly, but, in my view, subject to the above considerations and making sure that due diligence includes looking carefully under the hood.

Marco Messina

Business organization for your startup

Thoughts from business experience.  For legal opinions, consult your attorney and tax accountant.

Do not start as a sole proprietorship
This is the only recommendation sure to have no dissenters. All else following is meant as a general guideline to use in questioning your attorney on the best course for your particular circumstance.

The LLC - quick, easy, inexpensive
Many would agree that on a minimal budget this is the best alternative to get limited liability protection cheaply and quickly.  Most states now have web sites where name availability may be checked and reserved, sample minimum articles of organization are provided, applications may downloaded and filed by mail.  If you are in business alone in most states you can be in business in a few weeks, for $100 or less, and have little else to worry besides doing business.  Your local SBDC or SCORE chapter will help you free of charge to get it done.

A more complicated picture
The picture of course gets complicated as soon as you propose to add partners and investors. These are my rules of thumb:

Operating Agreement (OA)
Also called Partners Agreement and other similar names, this not required to organize an LLC in many states, but it is required by common sense: If you have even a a single partner, spouse included, you owe it to yourself to have an OA that spells the rules of engagement: how key decisions are made: e.g. sale of the business, personal guarantee of loans, call for incremental investments from founders, approval of financial control processes, access to records, management compensation approvals, etc.
Most importantly you should agree in writing to how you will part ways if needed (spouses included) - who can buy out whom when and how, how to value the business, etc. To promote fairness, strive to implement the old "parting the cookie" technique " (one cuts the cookie, the other picks which half).  It is much easier to agree when you are friends than when you will want to separate, probably because of irreconcilable differences   If in this negotiation process you learn something about your partner and your partnership dies and untimely death, you won't be the first - better early and with less pain now, before committing time and treasure, than later.


Tax Liability
In most cases, with proper elections filed with the IRS, your LLC will not require separate income tax filings and members report their share on Schedule C of their personal return. Advice from an accountant will cost little and ensure no bad surprises - make it mandatory.

However, regardless of how taxes are filed, members will take the tax liability impact of the LLC's income or loss, so the Operating Agreement should include a requirement that cash be disbursed to cover the members' tax liability.  Otherwise you risk having a tax bill due with no cash to pay it.  Partners with very different financial postures may have very different perspectives, so agree in writing ahead of time.

Complexity increases further as the number of members and investors increases. In particular, outside investors, angels and VCs, are likely to have a very different tax exposure, cash position, needs and objectives from the founders.  Of late many attorneys advertise that an LLC can be set to be govern and to function internally as a C corp with the "proper" Operating Agreement.  Perhaps so, but in my experience managing the different needs with amendments of the Operating Agreement will  become cumbersome, costly and beneficial only to the attorneys.

Furthermore the flexibility of defining the Operating Agreement however one wants is a two-edged sword that impacts investors' due diligence workload and cost.  Corporations' governance is much determined by state statutes which local corporate lawyers know well.  LLCs with complex Operating Agreements require careful review because only what is written governs and what is written could be unusual or unexpected and whatever is missing may be litigated later. Many angel investors simply avoid this risk but investing only in a C corp.

Switching to a C Corp.
At some point, switching to a C corp organization may be a desirable option.  Professional advice from tax and corporate lawyers is mandatory.  Mistakes can have dire consequences.

If you come to this point, be prepared to encounter a painful reconciliation of diverging interests of the owners.  This will be particularly so if along the way some "family and friends" investors extorted or were offered a "non-dilutable" clause or "unanimous approval" of funding decisions or changes in organization.  You may have % majority interest, but veto power trumps and is costly to remedy and there may not be statutes to help you out.  In any event this step will require time, and the less time you have the more leverage the competing interests will have against you - allow plenty of time.

Starting as a C corp
This option is of course preferable if you can afford it and particularly if you start with a business vision that includes angel investors, VCs, many shareholders, IPO, publicly trading stock, etc.  In this case you'll face significant differences relative to an LLC including:

• Higher organization costs
• State corporate filing requirements
• Income tax filing requirements
• Corporate governance statutes 

Details on these points are beyond the scope of this post. However, with respect to tax liability management, in the early stages of your startup you may personally benefit from any tax losses by electing to have the corporation taxed as a partnership (S election). The election can be reversed (only once) later when you no longer benefit from that method of taxation or your corporate needs change (e.g. IPO).

With regards to corporate governance, I have mentored many a budding entrepreneurs (mostly MBAs) much concerned with "preferred states of incorporation" (e.g. Delaware, Nevada, etc.). I am certain a case may be made and supported for their relative advantages. However I subscribe to KISS: In all states there are thousands of corporations that manage to do business successfully subject to their local statutes.  Relative differences among states become relevant primarily in cases of proxy fights and similar circumstances which are unlikely to occur with a startup (you better figure how to avoid them).  Instead, incorporating out of your state of primary operation is sure to require additional costs such as for multiple state filings, "domestication" into the state where your head office is located, retaining a registered agent, and more.  In my view, when your business makes it to be part of the S&P Index and you develop high concerns for proxy fights, you'll have the cash to relocate it then whatever state is desired.

In the end all agree: avoid sole proprietorships.  Beyond that, be ready to adjust your corporate organization to match your budget requirements of your shareholders and investors.  

Marco Messina