Founders’ Friday: From Idea to Exit

With the news breaking, particularly loudly in our office here in Austin, Texas, of Amazon buying Whole Foods for $13.7 Billion, I am reminded of how a simple idea can ultimately turn into a successful exit for a company.  In 1978, the co-founders of what is now Whole Foods had an idea — create a natural foods supermarket.  The first store opened in Austin in 1980, countless mergers and acquisitions later, Whole Foods is now being acquired.  Interestingly, it is being acquired by Amazon, the world’s largest internet-based retailer.  Amazon is a tech company, so why is it buying a grocery store?  Well, for a company that started selling books, expanded into production of consumer electronics (e.g. Kindle) and is the largest provider of cloud infrastructure, there does not appear to be any limitations.  Put another way, Amazon’s verticals are endless.  So what does all this mean for founders?  Well, it is yet another real-world example of an idea blossoming into a sustainable business that becomes ripe for an exit.

Despite condensing decades of history into a paragraph, make no mistake about it that both Whole Foods and Amazon, and their respective founders, took a legal path to ensure their ideas were protected, their products and services were sustainable and their business was viable and worthy of financing.  Granted, each had its intricacies, unique make-up and challenges.  Nonetheless, most founders, and I would surmise that both Whole Foods’ co-founders John Mackey and Renee Lawson Hardy as well as Amazon’s Jeff Bezos had to, answer the following questions as they transform from idea to exit:

1. What’s your big idea?  This translates to intellectual property in the legal world.  Intellectual property can include a patent for an invention, trade secret for a formula, copyright for a original work or trademark for your brand.  As a founder, you must ask: (1) Does your idea qualify for any intellectual property protection; and (2) If I use my idea, could I be infringing someone else’s idea/business?  Once you know, registering your intellectual property becomes an important next step.
2. Is this a hobby or a business?  Yes, this is a loaded question, but the reality is that founders need to recognize early that it is a business and take the necessary steps to form a corporate entity.  As part of that effort, co-founders need to agree upon ownership and control provisions and consider expansion, including additional issuances of stock/membership interests, such as for key employees.
3. Will you be going at it alone?  If not, then critical employment/independent contractor as well as third-party (e.g. manufacturer/supplier) agreements should be utilized.  This is particularly important to protect your idea (think NDAs and Confidentiality Agreements).
4. Are you bootstrapping or are you financing?  If financing, you will need to identify your funding source (e.g. angel investors, crowdfunding, VCs).  This decision can impact the kind of entity you choose and how you structure it.
5. Are you operating as you should?  This becomes particularly important in highly regulated industries, but it also applies to any kind of business that must comply with such things as truth-in-advertising, privacy and other laws.  Oftentimes, standard terms and conditions can go a long way toward protecting a business online as well as against customers and other third parties.
6. Are you exit-ready?  An exit, which can come in many forms, will require that you have your proverbial legal house in order.  Remember, your acquirer will have lawyers performing due diligence into the above items, and others.

This process is not as linear as it may appear.  There are always facts and circumstances that require iteration on the legalities associated with a business.  Nevertheless, most founders, and particularly repeat founders, will confirm that they were faced with these questions and had to address them in order to get to their exit.  Reading the tea leaves, it is not out of the question, and may be more likely, that Amazon may ultimately buy you (and everyone else for that matter).  Be prepared.

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law on Fridays dedicated to legal considerations facing founders and start-ups.  Founders can learn more here.