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I have a well thought out idea for a new startup. The startup will be unrelated to my current small company that is doing quite well.

My basic options are to incubate the new startup within my existing company or launch the new startup completely separate from the existing business.

What are the pros and cons of each approach?

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3 Answers

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It can be done, we have run 2 businesses here for 8+ years now, and it can work BUT you need to set it up so you fall into the pit of success (things I wish we had done earlier).

  • Keep seperate records (like your books etc).
  • Account for time spent on each business, by each person seperately. Even if you aren't charging it directly it need to be kept as a guide of the "true investment" made.
  • Split expenses. Rent, power, servers, cleaning etc should be split as a % of use (like 1/4 for the new business)
  • Have a "defered payment arrangement" setup between the two companies so there is a record of the new one owing the old one until it gets on its feet. Once it does you will need to track the owings both ways because one will do well when the other isn't ... this is both very good and problematic.
  • Have everyone agree what the effort split is going to be. Both businesses will need care and attention in order to succeed, which is going to get it and when.
  • Have an agreement on the sunset clause, if the new one gets bought who goes with it, who stays with the old business.

Questions to ask yourself first.

  • Can the current business withstand the cash investment in the new one?
  • Can the current business deal with you not giving your full attention to it?
  • Do the two business models work well together? Ours don't, one is product sale with SLA and the other is basicall Project/Time and materials. So there is conflict between the two models when it comes to who does what when and why.
  • Is there oppurtunity to share customers? This is a good start.
  • Is it better of done as a sub department or purely a brand name?
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up vote 1 down vote

If it's totally un-related and your current customers are not necessarily a fit then it would probably make sense to make it it's own business. That would make it easier for you to bring on partners, investors or sell it down the road without it affecting your other income/business ventures.

Usually for something like this you would at least get a separate bank account, wouldn't be much more to file the paper work annually to make it it's own entity.

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up vote 1 down vote

The answer really depends on your current startup structure, both from an ownership perspective and how it handles its financials. In the simple case where you own the current company completely, and you are not billing overhead on contracts to outside parties (like the Federal government), then incubating the new startup inside the existing company doesn't really have many downsides as long as you keep separate bank accounts and books. Watch out for snares like credit card processors though, they almost ALWAYS have something in their terms of service that prohibits you piggy-backing transactions for an unrelated company through the established merchant account.

So, here are some potential downside considerations:

  1. Liability issues. Mixing resources and blurring the line between entities can potentially allow someone that is suing one company to go after the other. Incorporating helps this, but beware conditions that allow 'piercing the corporate veil'. I am not a lawyer, so a few minutes of legal advice would be good on this point
  2. Blurring of overhead cost structure. This becomes serious if you have contracts that you're billing overhead rates under because technically some of that overhead (lights, office space, office supplies, etc) is being consumed by the unrelated entity. If you have a Federal contract that requires certain financial controls, this is especially thorny.
  3. If ownership is shared in the existing company, get a waiver on any claims to the new entity from existing shareholders. They should be kept 100% in the loop that this is new entity is going to be incubated. Check employment agreements to be sure you can create IP that is outside the rights of the existing company. Again, if you have a simple situation where you wholly own the existing company, this is probably a non-issue, but in all other cases, tread carefully!
  4. Diluting efforts from the main company. This isn't really an incubate/don't incubate argument, but it is a consideration. Time you spend on the new startup is time not spent building the existing business. What impact will that have on the existing company, both from your own output, and also the output of others in the company... this can be a morale issue that cuts productivity.
  5. Mixed records and resources - If you are not diligent about keeping files, paperwork, etc in a separable manner, you may have trouble when it is time to 'graduate' the new startup from it's incubation phase.

Advantages to incubating:

  • Minimizes the effects of #4 above in some ways by allowing you to minimize time on wrangling the basic needs of the new startup.
  • Shares resources which lowers costs and also gets things up and running faster. Efficiencies in terms of space, basic utilities, office equipment, even administrative staffing can make it cheap to get something new off the ground.

Good luck!

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