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How to Start a Company Without Losing Your Shirt—or Your Sanity

1. Have a passion

Draft your long-term vision for the company. Do you want a small business run by a close team, or do you want to be a large public company? The answer will determine the ideal entity structure. If you are starting young, you’re giving up an income but you’re gaining valuable experience. If you’re in midlife or older, you’re also giving up a steady income but putting your years of valuable experience into a project you love. Twenty years ago, success seemed the only option, but today, failing is a badge of honor—or at least a learning experience you can bring to your next venture.

2. Prepare yourself for quality of life changes

In the first several years, you’ll experience optimism, loneliness and round-the-clock preoccupation with your startup. Financial challenges include raising capital, making ends meet on a below-market salary and funneling all resources into the company. You know you’ve found your passion when building your business does not feel like “work.” Stretch your expectations and don’t expect immediate success.

3. Determine how long you can sustain the venture before the cash runs out

Funding is the perpetual problem of startups, regardless of stage. Focus on your cash flow to make sure you can pay your people and vendors. Prepare a personal cash flow projection for at least two years so that you can understand the commitment you are making. Hire an accountant to prepare financial statements and a business tax projection so you can reserve cash for taxes and avoid surprises later on. If you plan to go to banks or investors for outside funding, you’ll need a personal financial statement, too.

4. Expand your skill set

Most founders are expert at one or two things, like engineering or finance. But in the intense startup environment, you have to wear many hats and become knowledgeable in new areas, such as human resources and sales. Be prepared to spend your nights and weekends reading and learning.

5. Be Realistic and Pragmatic

The payoff for founding a startup is not a lucrative salary but the equity compensation after a “liquidity event”—an initial public stock offering, a sale, or a merger. So it is important that entrepreneurs can survive—and avoid bankrupting their own futures—while they follow their passions. Years of Top Ramen dinners don’t erase the fact that you are putting yourself at personal financial risk. Be prepared just in case things don’t go according to plan.

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Joyce Franklin, CPA, CFP (Com ’87) is the owner of JLFranklin Wealth Planning in San Francisco and the author of Startup Wealth: The Entrepreneur's Guide to Personal Financial Success and Long-Term Security.