Out on Your Own
by: Andrew K. Jacobson, © 2003Congratulations! You are going to start your own company! Before you do, you have to leave your current employment. Below is a checklist of things to do - and not do - before you leave.
Employee Rights.
Do make sure that you receive what is due you when your employment ends. You must be completely paid for the services you provided within 72 hours of the end of employment. If you are not fully paid within 72 hours, you can seek redress from the California Labor Commission - including a day's pay for each day after the 72 hours that you remain unpaid, up to 30 days.
Severance Pay.
Check your employees' manual to see if you qualify for severance pay, particularly if the end of your employment is not voluntary. You can negotiate for severance pay if you are terminated involuntarily, even if your company does not have a severance policy.
Retirement.
Arrange for any 401(k) plan, IRA, or other retirement-type plan. Does it need to be rolled over? Check with your financial advisor. Also, if you have been granted stock options, check with your financial advisor about their value and the conditions under which you should exercise the options.
Health Coverage.
If you qualify for COBRA health care coverage, you must be provided with the information necessary to make it possible for you to choose COBRA coverage within 45 days. If you are starting your own company, COBRA may be more affordable than seeking independent coverage for a small company.
Trade Secrets.
Make sure that when you leave, you do not leave with any of your soon-to-be former employer's trade secrets. Purge your computer and personal files of correspondence and files that contain information valuable to your employer. If often makes sense to do so with the assistance of your employer ? it reduces the suspicions that you are stealing from them. Many start ups have suffered early deaths when former employers sue them for theft of trade secrets, because of suspicions (or plain paranoia) of former employers. By the time the issue is resolved, the start up has incurred huge legal debts, discouraging angel investors and venture capitalists. Moreover, the legal process hijacks huge amounts of time that could have been used developing the start up's service. Customer lists, secret recipes, manufacturing processes, and the like can all be an employer's protectable trade secrets.
However, many things are not trade secrets. If you have met customers, and can find them easily again (such as through the Yellow Pages or Internet) without referring to the employer's list, the identity of that customer probably is not a trade secret. Further, your experience in the industry is yours, not the employer's: "Equity has no power to compel a man who changes employers to wipe clean the slate of his memory." Avocado Sales Co. v. Wyse, 122 Cal.App. 627, 634 (1932).
If you were just an employee, your former employer cannot prevent you from competing with it. Even if you signed a "Covenant Not to Compete," California courts will not enforce it if you were just an employee. However, many other states will enforce a covenant not to compete. Seek good legal advice. Checking with an attorney before you leave is likely to be far more cost-efficient than when you get sued.
After You Leave.
Now that you have left your employer, you want to start your own business. What do you need to do to protect yourself?
First, find an accountant you trust, and knows your industry - even the most personable accountant is not worth the effort if she does not know your particular needs. Accountants not only do tax forms, they can also recommend specifics about your business. Below are some areas that you will need advice about.
Money, Money, Money.
The success of any business means making more money than it costs to provide the goods or services. You will need a good software program that will allow you to monitor your finances effectively. Quickbooks is renown as the easiest to use, but other software may be more effective for your business. Your accountant can advise you about what it most effective.
Form of Business.
Should you be a "C-Corp."? An "S-Corp"? An LLC, a partnership, or a limited liability partnership? Your accountant can help. Once the form is chosen, you will need to memorialize the agreements made with any fellow adventurers, through by-laws, Membership Agreements, and the like. Remember this mantra: get it in writing. It is far cheaper to do it when everyone's memory is fresh, than to wait until there is a dispute, and lawyers have to be hired.
Employees.
If you intend to employ anyone, you can hassle with the payroll forms yourself, possibly missing requirements that can earn substantial tax penalties, or you can hire a payroll service to handle the process for you. A payroll service is usually the way to go. Also, you will need an employee manual, to set the standards for your firm. (Get in writing.) Ask your accountant for a good lawyer (or just contact this writer!)
Insurance.
One of the biggest needs is not always obvious. You will need insurance, of varying types. If you employ workers, you will need workers' compensation insurance, which has been expensive and difficult to obtain in California recently, even though it is legally required. You should also get general liability insurance, and product liability insurance if you create products. However, you need to protect yourself and the others in top management. Check out disability and life insurance. Life insurance, paid by the company on each of the top executives, can allow the dead executive's heirs to be paid off for the executive's interest in the company, without bankrupting the company itself. A good insurance agent can be of great assistance.
Real Property.
Are you going to need space for your business? It is wise to start educating yourself as to the market and where you can locate. San Francisco, for example, is punishingly expensive, especially for a start-up with no cash flow. Is there somewhere else you can be and still serve your customers? A computer parts assembler may want to be within an easy drive of Silicon Valley, but space in the Valley itself is still expensive, even after the market crashed a few years ago. Check other locations, such as Oakland or other parts of the East Bay, which did not participate as much in the Internet boom a few years ago.
Also, prepare for failure, as well as for success. Many landlords will expect the top principals to personally guarantee the leases, especially if it is for more than a month-to-month tenancy. Do not sign the first dotted line you see. Leave yourself an out, if you can.