Jetpack Step 5: How to Choose Your Legal Structure and Story

Step 5: How to Choose Your Legal Structure and Story. 6 steps to launch your purpose-driven startup

Your goal in Jetpack for Changemakers Step 5 is to gain clarity on your legal structure and funding options. You’ll also aim to tell a comprehensive story about your idea and impact – to attract supporters, investors, and collaborators.

This is when the elements really start to come together and you will shape a plan.

Before We Start (Not So Fine Print)

Now is the time to investigate and consciously decide on the right legal structure for your startup. Choose carefully because the wrong legal structure can be costly to set up and even more so to unwind if you get it wrong in the beginning. Get advice from a legal expert with insight into the for-purpose world and startups. What follows is NOT legal advice. We can offer you some points to consider to help you make an informed choice. That’s it.

Hurry Hurry, Don’t Rush

Invest time in learning. This is an area where it’s worth reaching out to more experienced founders and asking about their experiences, positive and negative, so you have some sense of what you’re getting into when it comes to legal structures and also, funding.

Don’t just grab a template from the web, or buy an entity from a company selling off the shelf-registered businesses (unless you know what you’re doing). Be ready to challenge your assumptions. You might think you need to be a charity or a not for profit because an organisation you admire or know of happens to be one. You might think you need to have DGR status because you assume you need philanthropic funding to support your startup. You could be right. You could also be making a mistake. You need the right structure and legal arrangements for your startup. Don’t rush this step.

How Hard Can It Be?

At first glance, there are only four commonly used business structures in Australia:

  • Sole trader
  • Partnership
  • Company
  • Trust

So, you might be thinking it can’t be that hard to pick one and go from there. There are differences and subtleties. For example, you might choose to legally set up as a company (one of the four). However, you could choose to go with a conventional Pty Ltd structure or a Social Benefit Company. The subtleties and nuances matter, as you’ll read in this excellent article by CEO Prashan Paramanathan

So much to think about

The choices that you make will be driven by factors such as:

  • Protecting your social purpose and mission; important when it comes to funding and governance choices and also, succession planning. You might be the CEO today, of an organisation comprising of 1-2 people. You may grow beyond that. At some stage, you’ll have to step down.
  • Tax, you need to think about the tax implications. Managing tax is good money sense and as we discussed in a previous article that’s part of a founder’s job.
  • Flexibility, things are fluid in the early stages of a startup. So, you might want to go with the simplest option right now, that lets you focus on getting established. Once you have a stable operating business, you can always review your legal structure. In practical terms, that might mean you set up as a Pty Ltd, which is very straightforward.

Should I Get a Board?

We get asked this question a lot. It’s entirely your decision. Managing a board will bring overhead, so the real decision isn’t whether you need one or not, it’s WHY you think you need a board. If the value you get from a board is greater than the time and energy you put in, then go for it. Some considerations to guide your thinking should include;

  • Timing: if you’re not yet clear about your value proposition and the fundamentals of your startup, a board won’t help you. In fact, you probably won’t be in a position to recruit because your potential board members will have a hard time determining how they can contribute. Focus your energy on completing the fundamentals. Do not pass go.
  • Overhead: people with experience at board level will have expectations about how they are run. This means that you’ll have to take on some co-ordination and administration. At a minimum, you’ll need to have a charter or terms of reference, an agenda, a log of actions and minutes. You’ll also need to ensure that board members know in advance what guidance or decisions you need from them. That’s your time and energy.
  • Value proposition: you may not be in a position to provide financial remuneration, so why would someone join your board? People join boards for all kinds of reasons, including networking opportunities, contributing their networks, expertise or experience to a social cause and some people just want the job title for their Linkedin profile.
  • Politics: any activity involving more than one person entails some degree of political content. This isn’t a bad thing. Politics and influencing are part of life.

Perhaps the key consideration is whether you are comfortable with another body or group, providing direction at this early stage. The purpose of a board is to govern. In other words, they are accountable for ensuring that there is due diligence in the running of an organisation. So they’re not a committee, they have tangible influence on how the organisation is run. Are you ready for that?

What about an advisory board?

This usually follows the preceding question and the considerations are very similar. The difference is that an advisory board doesn’t have direct influence. An advisory board is a consultative body. The same considerations apply.

But I’d love these people on my side!

You can. They could be your mentors. That could offer the same mutual value, with less overhead and risk. You’ll also have the opportunity to test the relationship and grow them on a 1.1 basis. There’s nothing stopping you from offering your mentors the opportunity to connect informally over the occasional lunch or dinner. In fact, they’ll probably jump at the chance.

Dancing with Funders, Customers or Both?

Securing funding in the form of a loans, grants, donations or investment is time-consuming. Weigh up the pros and cons of acquiring customers, or chasing funds. The answer will not be straightforward and could even be ‘for now, we will go with x’.

Funding: no such thing as a free lunch

If you intend to approach funders, explore and learn about different sources of funding to help you get started. Funding, including philanthropic donations, are likely to come with conditions or at the very least expectations. Decide on your non-negotiables before you go hunting for money. Talk with your team and think carefully about the ‘what if’ scenarios.

Mission: lock it in

A mission lock will be one of your key considerations. This is a mechanism that ensures the intended social purpose of a venture remains its primary objective in the long term. It might be hard to imagine life without your startup. However, people leave organisations all the time, for a variety of reasons, some benign and some not so. Whatever the reason, you will want to know that in the event of your departure, the venture remains focussed on the mission. It will also help to protect your mission in the event that someone (eg an investor) joins your startup.

Know your story by heart

With clarity on the structure, you should start to assemble a pitch deck. You’ll need this for discussions with potential funders, partners and supporters.

There are thousands of pitch decks online, so grab one to get an idea of what’s appropriate for the phase you’re at and the audience you’re pitching to.

As with your gaddie pitch, practice running through your deck. Know the numbers and the content of every slide by heart. You should be able to talk through this as easily as you can flow in and out of your gaddie pitch. Here’s a good reason: you never know who you’ll bump into. Here’s another: imagine you’re pitching to a potential investor and your laptop battery dies or they just say something like ‘let’s not worry about the slides, shall we?’ (a common test), you want to be credible. Be prepared.

Whatever You Do, Don’t Do This!

‘I get ignored so much, people should call me Terms & Conditions.’
– We have no idea who said this. We just thought it was funny.

Get expert help with legalities

Don’t cut corners with legal advice. Get advice from an experienced professional. For example, check out Allens Accelerate a legal practice dedicated to supporting the Australian startup community and providing expert legal advice to startups, investors, and corporates and government agencies responding to disruption and investing in innovation. Allens also run community forums such as their Social Enterprise Startup Bootcamps.

Up Next…

Step 6: Design the Minimum Solution. Learn how to design a prioritised roadmap to start designing and building your solution.

These articles are written to capture the essence of the six steps of the Jetpack for Changemakers program. We’re sharing them to provide a guide of what we have found to be most effective for purpose-driven startups. If you are interested in gaining a more in-depth understanding, along with the accountability and personalised guidance from experienced coaches to complete each step, please get in touch with us. We would love to chat about your options.

Learn More About Jetpack for Changemakers

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