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what comes first, product or company?

I work as a programmer for a research laboratory at a university. In a prior life, I was an independent consultant. I took the research job to have a more laid back lifestyle. 

I have a product idea that would be very useful for at least three groups at my current university. I think I could generalize it a bit and package it up with a nice installer, and hawk it to the same type of research group at EVERY university on earth. I think I could set up a business where myself and a friend could probably make a reasonably good living for ourselves with this product. 

My question is: do I create this product first, prior to forming a company, get it installed locally, and get some feedback from my university groups?  OR do I first form some type of business entity (most likely LLC) which has in the articles of organization that our focus is to build and distribute this type of software?  Any comments are appreciated.

hydrogen
Thursday, March 20, 2003

There are a number of legal issues with code ownership when you are working for a company or a university. What I've usually seen is that any code written for a company while an employee belongs to the company. Consulting gigs are a little bit iffy on this; I've always had code ownership as part of the consultant agreement to clear things up before hand.

Depending on the terms of your employment, you may actually have to leave that employment before working on your software. The university might have a legal claim of ownership otherwise.

Wayne Earl
Thursday, March 20, 2003

Get the product built first. That will be the critical path in your plan, and also by far the most time consuming.

Matthew Lock
Thursday, March 20, 2003

I agree with Matthew on the Critical Path bit (The Goal & Critical Chain - Goldratt).

I would suggest you from a company, then start work on your product - purely for legal issues.

Time/Cost or Feature set will be the way you schedule your project. (This is out of Steve McConnel)

The most important thing you need to concerate on is EXECUTION. lot of people get great ideas, what seperates the sucessful is the implementation bit of it.

All the luck,

Prakash S
Thursday, March 20, 2003

Regarding wayne's comments. I was worried about that, so I had a lawyer (family friend) look over the things I have signed and the university does NOT have any ownership of code I develop outside of my current project.
The code I do at the university is very theoretical oriented (re: science stuff) whereas the product I have in mind is more infrastructure oriented.

However, that isn't to say that if I'm successful the university won't try to stake claim on the software. I highly doubt this would happen; a couple other people in my group own small companies that produce palm pilot applicatoins.  But,  you never know. This is why I wondered about forming the company first - to cleanly demarcate the university stuff from my own product.

hydrogen
Friday, March 21, 2003

Remember that the legality will depend on the country you are in, so take advice from the internet in this respect with a pinch of salt.

Your problem will come if you use the university as a guinea pig to test it out. I'd think about testing it out at another couple of places first, and then make sure you get your university to sign before you test on them.

Stephen Jones
Friday, March 21, 2003

You don't need to have a company to own the copyright. You as an individual own it just fine.

Why not go to the university's HR folks, explain what you're doing, and get them to sign a letter that makes it clear the university does not own the work you do outside working hours. They shouldn't have a problem with that.

What you need most is money, not a company infrastructure. The best way to attract money is to have a working, respected installation. So get those signatures and start building.

Must be a manager
Friday, March 21, 2003

Many universities have rules that force you to explicitly declare any commercial activity you have outside of your job with them, and have rules as to what you can and can not do. Be very carefull and avoid all use of university property (e.g. your computer there), and et everything cleared up (in writing) before you embark on this effort.

Just me (Sir to you)
Friday, March 21, 2003

I was in a similar dilemma (had an idea, while still working for a company) and approached my manager with this.  Asking about ownership issues, etc.  His advice was to just go ahead with it (on my own time that is), and not bother talking to anyone else in the company about it.

After that, the strategy was to focus on the idea and implement it.  The business startup aspect can be time consuming and overwhelming sometimes.  The best advice I received was (as Nike says) "Just do it".

*When* the product makes money, *then* you can start to deal more with the business side.  Without the product, the business stuff just sits there.

I think too many first time entrepreneurs get caught up in the "business" excitement and lose focus on actually creating the intended product.  One side can't fully exist without the other.

Product first, then deal with business.

Good luck.

sedwo
Friday, March 21, 2003

Others above have stated compelling reasons to go with the product first, and providing some very good reasons to do so.

However, I say company first.  Recently I have been reading 'Good To Great' by Jim Collins:
http://www.amazon.com/exec/obidos/ASIN/0066620996/qid=1048263845/sr=2-1/ref=sr_2_1/102-1851447-5136951

This book has extensive research about what seperates 'good' companies from 'great' companies.  Its a very interesting read based on 5 years of research.  He does a good job of presenting facts and not theories.

So, his research indicates that good companies come before good products.  Actually, he talks at length about this very topic.  Basically, if you have the right people, in key positions, you can point them in any direction.

Canuck
Friday, March 21, 2003

However, Canuck, hydrogen's in a different position than the position assumed in "Good to Great" (which, I agree, is an excellent book).  hydrogen isn't going to be hiring employees any time soon.

If hydrogen had a big budget and had to choose between hiring employees or choosing a focus for the company, then the decision would definitely be to hire great employees first.  However, I don't think that's the dilemma here.

I love "Must be a manager"'s advice.  Talk to HR.  They'll have no problem clearing this all up in writing.  That's the best of all worlds; if the university tries to "stake claim" to the software, hydrogen can just whip out that written document.

Brent P. Newhall
Friday, March 21, 2003

Brent,

Mostly I agree with you.  He is just starting out.  I was just trying to illustrate the other side of the coin.  I was making the case, without necessarily stating it, that thinking like a CEO and not a software engineer, is most important when creating a software product (not to be confused with non-commercial software).

I think it is really important to focus on the company side of things, because a great product does not necessarily equate to sales.  It is necessary to focus on customer needs, feedback, building relationships and so forth, when  writing commercial software.  All that sappy marketing crap, is actually important.  Starting your company first, helps you get into that mind set. 

Without doing so, you run the risk of developing software that *you* think is great, but doesn't address all of the concerns of your target market.

Canuck
Friday, March 21, 2003

Are you trying to start a "Ben & Jerry's" or an "Amazon.com" company?

I am currently reading Rob Ryan's "Smart-ups: Lessons from Rob Ryan's Entrepreneur America Boot Camp for Start-Ups". It's pretty interesting, but basic stuff. It is definitely focused on start-ups that want VC funding and to go public, but I think his message is still helpful:

Get customers ASAP. This will give you money and product feedback. You can sometimes get customers even before you have a product! Interested customers can place orders, knowing the product is still in development. These "pre-orders" help fund your development and look good to VCs and other prospective customers.

runtime
Friday, March 21, 2003

Having worked with 100s of entrepreneurs, I can state with no uncertainty that forming a company first is usually a disaster. I know there are case studies and books that will tell you that without the foundation of a company, your product will never succeed.

But here is what happens- the engineer gets sidetracked by attending to company details, and then by being told to write a business plan, and then by being told to work on a product line because no one product companies survive, and then on raising money because how can you create a whole product line if you are working alone, and and and...

So, here are the correct steps- build enough of the product so that you can be sure A) it will work B) people want it, badly, and C) there are a lot of people in part B.

And realize when I say be sure, I don't mean assume, I mean actual conversations with actual buyers who are ready and willing to pay actual money- otherwise they can't really be counted as a potential customer, and don't fit requirement B.

Then, you can start to explore the idea of quitting your job and selling your product. A premature move to form a company has cost more people than I can count (and that's just of the ones I have personally met) a ton of money simply because they never got far enough to confirm the above 3 points, without which no company survives very long. I venture to guess that anyone who says form a company first either has never done it, or was starting with a six figure bankroll.

Best of luck.

Matt
Friday, March 21, 2003


Thanks for the comments. I thought I'd clarify a few things.
This company is essentially going to be ME, and maybe one other guy if I'm successful enough to warrant hiring people. I'm not planning on IPOing anytime soon. My goal is simply to make as much money as I do now (about $100K, FWIW) by running my own show, instead of working for da' man.  Hopefully I can grow sales so that I'm making a lot more than I do now, but I'm setting the initial target to "survival." Think FOG CREEK and FOG BUGZ & CITYDESK, not Microsoft billions or whateverthefuck.com's 1998 IPO blitz.

I could be missing something important here, but aren't the warnings about all the time and money wasted spent forming a company a bit overblown? In the midwestern state where I am based , forming an LLC costs $135. There is a $40 book from NOLO press that guides you through the entire process. To shut it down if I'm not successful costs about $100. Buying stationary and a new website will cost about $200. So if I totally fail, I lose $500...what's the big deal?

hydrogen
Friday, March 21, 2003

Google was started from research performed in a university.  So was Cisco.  However, in both cases neither of them were incorporated from the get-go and only did that later after they were sure that there was demand.  However, Cisco did initially have some problems with Stanford regarding intellectual property rights since it was said that some of the hardware design they used in their routers weren't just a product of the founders own ideas but were a combination of research perfomed by other graduate students.  So you will definately want to heed the advice of others who have previously posted regarding the need to first clear it with the commericalization and research licensing department of your university.

I wouldn't even go through the trouble of creating an LLC initally and would just do it as a sole proprietorship.  You'd probably want to start incorporating when you make over 75 - 100,000 due to potential tax benefits and the ability to have better personal asset protection.  However, you did mention that you might be also bringing in a partner.  In that case, it would be wise to create the LLC and get the partnership agreement in writing witnessed by lawyers unless you really really trust your partner as your own mother.

Good luck with your new venture!

HeyMacarana
Friday, March 21, 2003

Please keep us posted on your progress! I'm sure many readers here fantasize about giving the middle finger to Da Man and striking out on their own.  :-)

runtime
Friday, March 21, 2003

Yeah, keep us posted of your progress.

Prakash S
Friday, March 21, 2003

> I could be missing something important here, but aren't
> the warnings about all the time and money wasted spent
> forming a company a bit overblown?

Because we want to save you from majoring on the minors. The difficulty of creating a product is so vast compared to setting up a company that you should not consider the company until you have a product.

Personally I have a problem with procrastination, I have tried to build a product in my spare time for years, and always find myself worrying about all the wrong things - company structure, website etc. But it's all a waste of time until the product is finished.

Matthew Lock
Friday, March 21, 2003

Product first. The company stuff is just useless overhead.

pb
Saturday, March 22, 2003

>> I could be missing something important here, but aren't the warnings about all the time and money wasted spent forming a company a bit overblown? ... So if I totally fail, I lose $500...what's the big deal?

The *only* reason to form a legal entity like a corporation or LLC is to provide a legal structure for receiving business income and paying yourself out of the proceeds. The point is, until and *unless* you have business income, forming a company is a *waste of time and money*.

With no income to support a company, all it does is create fees, expenses, bookkeeping, and tax preparation tasks that are not justified by any current income. The main expense of a corporate entity is *your* time and hassle and is is MUCH more than the trifling few hundred needed to set things up. I have my own S Corp I use for contracting, so believe me, I *know*.

Don't take this the wrong way (as a slam against you specifically) but most "I intend to write this product that..." statements are pure vapor and never lead to a finished, marketable product. Especially my own ideas - I am the vapor king in my neighborhood. :-) The point is, the odds are that you *probably* won't have a product.  Just as if I say "I probably will write Buttfloss 2003 by 3Q 2003" I probably won't.

So, the answer to your "what comes first" question is not really product or company - it's *revenue*. Find a way to make money, then form the company when you have the idea sewn up and ready to go. If it's a product, don't incorporate until you have a product in a shrink-wrap, ready to sell state, or at least you're well along with beta testing.

After all, you're saying it's cheap and easy to incorporate, right? So no harm in putting it off.

Bored Bystander
Monday, March 24, 2003

---
The *only* reason to form a legal entity like a corporation or LLC is to provide a legal structure for receiving business income and paying yourself out of the proceeds. The point is, until and *unless* you have business income, forming a company is a *waste of time and money*.
---

Actually, I'll be more specific about my situation.
I have a job with the university working on a pure research project which pays $80K a year. I have a second part time contract with another researcher (who does more 'applied' research...the software is infrastructure) for $80/hr. I have a third one-off contract this month implementing an infrastructure project for another researcher. I priced this at $5K because I can do it in about 2 days, because I have built up a bunch of core code that I can re-use.  I have noticed a need in all three of these groups for a certain type of product. (all of this research is medical-oriented). 

What I want to do, instead of being "some guy" and selling a "contract" is to package up some of my software as a product and be "FooBar Corp" and sell licenses to that product. The steps involved in making the product are cleaning up the code base I already have, wrapping it up with an installer, writing documentation, and creating marketing materials, etc.  I am very busy at the moment but after contract #3 finishes up, I imagine it will take 6 weeks to tidy up my code and put an installer around it.

I suppose if I had the chutzpah I could just be "some guy" and go around making people buy the license from me directly. However I feel like I would get more sales if I was "Some Guy, CEO of SomeCorp, with our amazing FooBlah sofware".  Also I feel like being incorporated would also make me look more professional as a consultant. So I'm actually looking at the company as more of a way of legitimizing my current status and being a "marketing tool" rather than looking at it from the perspective of reducing legal and tax liability.

SO perhaps what I will do is package this thing up, write the installer, then see what happens from there. Thanks for the advice!

hydrogen
Monday, March 24, 2003

Yes, legitimacy as a business is a GOOD THING. I did not say otherwise.  Selling a product under your own name probably won't fly unless the product is one of a kind and completely unique.

May I suggest, though, that there are options other than incorporation or LLC. Most people starting a business simply register a trade name or "DBA" (doing business as), which requires a small fee to a local county office, generally, and which "results" in your establishment as a sole proprietor.


This is basically what small time flea market vendors, Ebay sellers, and many other self employed types do (you don't really think that someone that cleans houses is going to pay $1000 to incorporate, do you?)


So you can at least have a name to operate under until you see how much money you're going to make, if any. Since you explained it further, I think this is really your best option.

Bored Bystander
Monday, March 24, 2003

Have you considered that due to the way research budgets are set up most universities I know prefer to spend 20K in salaries to get something implemented by "some guy", than to spend 3K on a software package doing the same thing?

Just me (Sir to you)
Wednesday, March 26, 2003

Hey Just Me, that is a very good point I hadn't really thought about.

Research groups i work with do buy software products - like excel, SAS, bioinformatics software from Affy, etc. I wanted to make my product something that you wouldn't think about buying....and price it accordingly.  I.e. it seems like people don't have too much beef buying 10 licences of Office at $500  each, but buying 1 licence at $5000 is a problem.

I will have a chat with the guys i work for (the guys who obtain the grants) to get their opinion. Thanks for the heads up!

hydrogen
Wednesday, March 26, 2003

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