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The software industry has been at the forefront of technological developments for decades now, with major companies such as Apple and Microsoft ranking among the most valuable and successful companies in history. It’s no wonder, then, that so many people aspire to start their own software company. But do you know how to start a software company?
New software businesses are created constantly in order to leverage the latest innovations in technology through various services and products. However, although it might seem as if the software industry is saturated with companies of all sizes, knowing how to start a software company is not as easy as it might seem. It’s even harder to create a successful software company that can keep growing over the long term.
In order to succeed, software companies need to figure out what problems they are setting out to solve, and work towards solutions that their customers and clients need. Just as importantly, a software company needs to stand out from the field and gain an advantage over its competitors.
This article will discuss the ins and outs of how to start a software company. We will look at the key factors that business leaders and startup founders need to consider in order to set up their software business, share key insights into what it takes to ensure the success of your company, and discuss how to protect your business and software products.
First Steps for How to Start a Software Company
There are two key issues you need to consider before starting a software company: your own qualifications, and what kind of problem your software business will be trying to solve.
Many software startup founders create their own businesses because they have a background in the software industry or the tech sector already. Many business leaders acquire programming skills and business expertise through their education, through degrees in Computer Science or Software Engineering, for example. Taking business courses, such as in finance, accounting, or marketing, can provide founders with valuable supplemental education as well.
It is not always necessary to have an education in computer science or business. Many successful software startup founders acquire valuable skills through on-the-job training. Working at a software company in a management position, for example, can prove hugely important in providing you with the necessary skills to start and lead a software company. The same goes for signing up for training programs at various software companies that can help you acquire important communication and leadership skills.
In addition to having the necessary education and training skills, you will also need to generate a product idea by identifying a problem you will aim to solve. Based on your experience in the software industry, what is it that you think is lacking or missing among the available products and services? Is the product you are proposing viable? Does a market exist for it?
Once you’re able to identify a problem and prove that a market exists for your solution, you will have come up with the fundamental justification for why you need to start a software company.
Determining the Legal Structure of Your Software Business & Meeting Legal Requirements
Once you make the decision to start a software company, you have to decide what kind of legal structure it should have. The legal structure of your business will determine how you file taxes and how much you will be paying. There are several legal structures to choose from depending on your goals for your company:
- Sole proprietorship: A sole proprietorship is the most common and simplest type of business. It is owned and operated by one person, with no legal separation between the person and the business. As a result, the owner is responsible for the profit, losses, and debts of the business.
- Partnership: A partnership is a type of business shared between two or more individuals. The partners negotiate an agreement to form the partnership, and in doing so agree to be responsible for their share of the profits, losses, and liabilities of the business.
- Limited liability company: The purpose of an LLC is to protect business owners from personal liability for the decisions and actions of the business. LLC business owners have to pay taxes on their portion of profits via individual income tax returns. They also have to pay self-employment tax.
- Corporation: A corporation is a legally independent entity owned by shareholders. Corporations file taxes separately from business owners, which can have the disadvantage of leading to double taxation. A corporation is generally a business type for those software businesses that have plans to grow fast, and is usually not suitable for smaller companies.
Deciding on the right legal structure for your software business is part of meeting all the necessary legal requirements for starting and running a business. There are several other legal requirements that you need to consider:
- You need to familiarize yourself with all the national and state requirements for opening and operating a software business. That might include getting permits and licenses when and where they may be needed. Failure to have the right licenses and permits can lead to heavy fines and the shutdown of your business.
- Find out what taxes you will be required to pay, including sales and income taxes. You may have different options available for paying taxes based on the kind of business structure your business has.
- You may need to get a tax identification number for your software business. Corporations need one if they file tax returns, as do partnerships, which have to file business information with the IRS annually.
- You need to choose and register a business name with your state government. A Doing Business As (DBA) is required when you are conducting business under a name other than your own legal name. A DBA can be registered through the state government or county clerk’s office.
Making a Business Plan
Creating an effective business plan is a crucial part of how to start a software company. In simplest terms, a business plan is a document that outlines and defines the purpose of your software business. Take time to research the software industry to understand what role your own company will play as part of the larger software market. A software business plan should have the following components:
- A company description, including what type of software you intend to develop
- Location of business
- Key targets (consumers, clients, market)
- List of competitors
- Market overview and research
- Plan of operations
- A financial plan, including budget and funding sources
- Required equipment, costs, and expenses
- List of legal requirements, including permits and licenses
The details of the business plan will differ based on the nature and type of business, but the key takeaway is that the plan should give you and your potential investors a clear sense of whether you can and should start a software company. Always consider the how and why of starting a software company when putting together a business plan.
Raising the Necessary Funds
Unless you are among the rare group of founders who have achieved success on such a level that you can pay for your next business with your own funds, chances are you will need external sources of funding to get your software company off the ground.
Raising the necessary capital takes time and effort. Many business founders look to venture capital funds as an important source of investment. You should put in the time and effort to research VC funds that have a history of successfully funding software companies similar to the one you intend to start. Get in touch with them to find out if they are interested in pursuing an agreement with you.
Accepting VC funding means that you will have to share equity in your company with the VC investors that have agreed to give you capital.
Grants and loans are other potential sources of funding for your software company. You may qualify for an SBA-backed loan, and should contact the local office of the Small Business Administration to find out. Various government agencies and educational institutions, such as local universities, may also provide research grant opportunities that are worth pursuing.
In addition to investing your own savings, as so many business owners do, you might consider reaching out to trusted friends, family members, and business associates to see if they are interested in investing in your software company. There are, of course, potential issues when mixing the personal and professional, but you should not miss out on the chance to use your professional and personal networks to your benefit.
Assessing the Key Costs and Expenses
As a business owner, you need to have a firm understanding of the main drivers behind the costs and expenses associated with running a software company. Those costs and expenses include:
- Employee wages
- Research and development costs (R&D)
- Marketing and promotion
- Rent of office space and business location
- Office equipment, supplies, and furniture
- Software development costs (data storage, servers, applications)
A full assessment of these costs and expenses will have a big impact on any decisions relating to funding and generating revenue for your software company. Consider how much initial investment you will need to cover these expenses from the start, and how much revenue and growth you can expect to generate in order to keep the business running at a profit.
Hiring the Right People
Like any other business, a software company will fail or succeed based on its people. Hiring the right people is the surest way of guaranteeing that your business is off to a strong start. For that reason, founders have to take an active, hands-on approach to hiring the people they need to get the business started.
While all types of employees, from the administrative staff to the marketing team, contribute to the success of a company, the one crucial factor for software companies is the kind of software development team they can recruit.
When hiring developers, companies should look for those candidates who have both the necessary skills and the passion to work at new, startup companies. Start-up companies have their own unique work culture, and certain developers are more suited for that kind of environment than others. One option for attracting and keeping especially valuable talent is to offer them stock in the company.
In announcing job postings, you should be specific about the skills you are looking for, and put the focus on potential candidates with experience working on new products and in start-up environments. Contractors, overseas workers, and freelancers are all viable options if you are looking to outsource some of the work assigned to your software development team, especially during the early stages of your business. When outsourcing your operations, make sure that you have proper measures in place to protect your software, including the source code, and that you hire only from reputable organizations.
Testing, Promoting, and Marketing Your Software Products
Testing your software is vital to the success of your software company at every stage. Once your software product is past the development stage, it should be tested thoroughly to reveal and fix any bugs and ensure that it hits the market at a high-quality level. Having a successful, satisfactory software product from the outset will boost your company’s reputation and increase customer loyalty, which is especially important during the startup phase of a software company’s lifecycle.
Software companies should have a thorough quality control and assurance plan in place to test their software. Often, a dedicated team consisting of a few developers will test every feature of the software product to ensure that it functions as intended. Sometimes, external testers are brought in to assess the quality of the product. Each test should follow an agreed-upon set of procedures. A select group of end-users should also be invited to test the product to assess how user-friendly and functional it is. Only once all the bugs and errors are found and fixed can the product be finalized.
The product then needs to be promoted and marketed. All software products are primarily marketed online, since clients of software companies will be on the lookout for new products online. Having a solid online presence is therefore of utmost importance for software companies. That means having an appealing and user-friendly website, a solid social media presence, and promotional campaigns that might include previews or teasers of the newly released product.
Protecting Your Software From Intellectual Property Theft
Intellectual property theft can be devastating to a new software company, and can permanently damage the business prospects and reputation of the company. Having effective protection measures in place is therefore essential. Some of those measures include:
- Ensure that all employees and individuals with access to privileged information about the software products sign non-disclosure agreements (NDAs). You should consider seeking advice from a trusted business lawyer when drafting a solid NDA.
- Obtain the necessary patents and trademarks for your software. Consult with a patents or intellectual property lawyer who can help you navigate the process of obtaining those patents and trademarks. The product names and symbols of your company should be registered with the U.S. Patents and Trademarks Office.
- Register the copyright to your products. That way, you will be able to prove that your company invented the product. It should be noted that copyright protections are valid for a longer period than patents.
Protecting Your Software Business with the Right Insurance Coverage
Learning how to start a software company involves assessing the many risks that you and your business will face at every point, right from the start. A software company, like any other business, can’t operate safely and lawfully without having the right insurance coverage in place. That’s why having an effective risk management strategy is so important.
Cyber liability insurance is essential for all software companies to protect against cyber crimes, including ransomware attacks and data breaches. Technology errors & omissions insurance (Tech E&O) is just as important because it is designed to protect against liability risks faced by people working in the tech sector, including at software companies. For software development companies, this may be the first insurance policy to consider.
Most business owners, including startup founders, require a business owners policy (BOP). A BOP bundles together several policies, including general liability insurance, commercial property insurance, and business interruption insurance.
For a software company’s leadership, directors & officers insurance (D&O) is a must-have. D&O insurance protects the directors and officers of a company against lawsuits alleging a breach of fiduciary duty. While it is generally a good idea to have D&O insurance, it is especially important for any software company that has a board of directors.
All software companies with employees need workers compensation insurance. Although there are a few exceptions, most businesses require workers comp in almost every state except Texas. As well, employment practices liability insurance (EPLI) provides software companies with coverage for claims made by employees against their employer.
For a thorough overview of what types of insurance software companies and other small businesses need, check out Embroker’s Ultimate Guide to Small Business Insurance.
Knowing how to start a software company takes time, patience, and a lot of research. You have to be willing to commit yourself fully to your vision for creating your software company, and embrace all the risk-taking that comes with working to realize that vision.
At the same time, it’s important for startup founders to take on the responsibility of protecting their business from the outset. That means creating an effective business plan, deciding on the right legal structure, meeting all the legal requirements for starting a business, raising the necessary funds, hiring the right people, and testing the products to ensure high quality.
Above all, starting a software company responsibly involves taking the necessary measures to protect your intellectual property, and having the right insurance coverage to protect yourself and your business.
Curious about the best policies for your business, check out Embroker’s digital insurance platform.
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