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The Initial Capitalization
Plan under which operating funds are made available, whether by
investment or by loan, to the venture-entity is a
very crucial aspect of the venture development planning addressing
corporate operations. As noted, this aspect of venture development
comes up as part of the
venture
entity formalism that must be adhered to. While the infusion of
the initial capital into a venture entity may obtain from
investments by investors, very often, such capital infusion is made
by the entrepreneur; and as such the dynamics and potential issues
inherent in this aspect of venture development needs elicitation.
Very often, the traditional
or most common approach to operating a startup venture is for the
entrepreneur to simply capitalize the company by buying stocks of
the company beyond the minimum required to legally organize the
entity, and start working for the company as well as pay oneself
from the initial capitalization while building the business. This
relationship effectively makes the entrepreneur an employee of the
venture-entity. Entering into the above relationship with the
venture entity, of course, a very serious mistake and every
entrepreneur should refrain from such, particularly when the
venture-entity is a technology company. The reason is simple, under
such conditions all developments performed belong to the company and
therefore can be confiscated by creditors and unscrupulous sharks
who are out to take what belongs to others, and there are many
sharks out there.
However, an entrepreneur
who develops without earning any salary continues to own the base
technology. Besides, this arrangement also quite effectively
protects the entrepreneur during the Execution Phase of the
business, which is the phase when most businesses fail - after all,
the truth is that even the best laid plan goes awry, and should that
happens the entrepreneur does not lose the clothing as well. A
salient benefit to the entrepreneur is that should in case the
business in fact fails the entrepreneur does not have to enter into
corporate liquidation issues given that the entity would have no
assets and can as such be liquidated without undue legal fees.
Moreover as the owner of the base technology, to the extent that it
has been developed, the entrepreneur can sell off the technology to
another venture company for cash with which to pay off some
outstanding debts, or for cash and equity in the buyer company, and
still gain substantially.
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In view of the risk inherent in the traditional
approach of initial capitalization of venture entities, the
entrepreneur is advised to have
all funds to be paid into the entity bank-account only as needed:
In effect, the entrepreneur should keep all funds in a personal
bank-account and pay funds into the business accounts only of
amounts as needed to cover checks issued for expenses. In particular
when the entrepreneur has followed the traditional approach of
taking a loan from the bank, then that money should also be loaned
to the venture entity; and the entrepreneur should have prepared a
Loan Agreement, which must be signed by the entrepreneur as
representing self under the creditor and as representing the
venture-entity under the debtor. while these may seem trivial and
nonsensical, the entrepreneur who wishes not to have any issues
about taxes is strongly advised to do all these nonsensical trivialities.
In addition,
the entrepreneur should enter into a contract with the company
signing the document both as the Chairman of the Advisory Governance
Board and as a contract-staff, agreeing to work for the entity and
be paid upon delivery of products to company. The
entrepreneur should also enter into another contract with the
venture-entity in which the entity agrees only to be a marketing
company for the prospective products until offered the product for
purchase. This relationship only as a contract-staff is
critical and must be adopted instead of as an employment with salary
payment deferment, because in the former case, it takes away the
need to pay taxes on salaries not received while in the latter case
the salaries made deemed paid and reverted to the company as loan
and therefore making taxes due and payable.
However, with respect to
the primary objective, under this contract, the entrepreneur can then begin the marketing
of the products while still developing them, and all the time
maintaining ownership of all products and innovations developed
during the Embryonic stage, and enabling the entity to sell the
products after completion of development until the entity is viable
enough to then fully procure the technologies and the rights
associated thereof in an amount equal to the development costs plus salary
forfeits plus reasonable expenses, and reasonable profits.
The entrepreneur may,
however, become employed by the venture entity when the product
sales begin but before the contractual obligations regarding the
product technology are satisfied. In that situation salary payments
should start from the date of hire.
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Clearly, the initial capitalization method suggested
here provides the entrepreneur several forms of protection, and
should be adhered to, unless investors are in fact providing the
initial capitalization. However, even then the entrepreneur may show
consideration towards the investors by offering the similarly
crafted relationship between the investors and the venture-entity in
protection of the investors. generally, the entrepreneur should
develop and craft investment approaches that provides the
entrepreneur maximum protection.
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