How to start a startup: A clear path for founders

Author:

The Carta Team

|

Read time:

23 minutes

Published date:

5 January 2026

Learn the foundational steps to start your startup, from finding a problem and building a team to setting up your legal structure and raising your first funds.

Contents

• How to find and validate your startup idea
• Customer discovery: How to know if you have a good idea
• Conduct market research
• What to include in your business plan
• Who should be on your founding team?
• Co-founders
• Lawyers
• Advisors
• How to set up your company's legal foundation
• C corp vs. LLC: What's right for your startup?
• Ownership and equity management
• The cap table
• How do you fund your startup?
• Types of investors
• Fundraising options
• Understanding SAFEs for early-stage fundraising
• Working with your investors
• Alternative fundraising options
• Pitching investors
• Valuing your company
• Hiring a team
• Startup taxes
• Federal, local, and payroll taxes
• Corporation vs. LLC taxes
• Equity compensation taxes
• Deductions and credits
• How to build your minimum viable product (MVP)
• How to get your first users and listen to their feedback
• Exit strategies
• IPO
• M&A
• Your journey is just beginning
• Frequently asked questions about starting a startup

How to find and validate your startup idea

A successful startup begins by solving a real problem that people are willing to pay to fix, not just by having a product idea—in fact, having no market need is the top reason startups fail, accounting for 42% of collapses. The best ideas often come from a pain point you are passionate about and uniquely positioned to solve. Think about a challenge you've faced in your own life or work that doesn't have a good solution. This personal connection can fuel your determination through the ups and downs of the startup journey. The goal is to find a pain point that a specific group of people experiences, as this forms the foundation for everything that follows.

Many aspiring founders think they need a world-changing idea before they can start. In reality, the best startups often come from a deep understanding of a specific, frustrating problem. This focus helps you identify your first potential customers and gives you a clear direction for what you need to build, which will inform the early startup metrics you track.

Customer discovery: How to know if you have a good idea

Once you've identified a problem, you need to validate that other people feel the same way. This process, known as customer discovery, is a critical activity for early-stage founders and involves talking to potential users about their experiences. These conversations are not sales pitches; they are opportunities to listen and learn.

Your goal is to confirm that the problem is significant enough that people would pay for a solution, and you can ground your research in real data using resources like the Small Business Administration’s (SBA) state-by-state snapshots of small business activity. As Heather Hartnett, CEO at Human Ventures, explains during Carta’s Startup Fundraising 101 webinar: "You should talk to at least 100 customers to see if you have any insight. If you're a founder, you should know that problem inside and out and what customer is going to want to use it." This feedback is invaluable and will guide your product development strategy.

Conduct market research

Market research is how you validate that your idea is more than just a personal frustration. It’s the process of talking to potential customers to confirm that the problem you see is one that others experience and want solved. This early feedback is invaluable and helps you avoid building something nobody wants. It’s your first reality check.

To conduct effective market research, you can follow a few simple steps. The goal is to listen more than you talk and to understand the customer's world deeply.

• Identify your target customer: Start with a specific group of people who you believe experience the problem most acutely. Being specific here is better than being broad.

• Prepare open-ended questions: Your goal is to learn about their problems, not to pitch your idea. Ask questions that encourage them to share their frustrations and current workarounds, such as "What's the hardest part about managing your inventory?" or "When’s the last time you tried to solve this problem?"

• Listen for patterns: Pay close attention to recurring themes and pain points in your conversations. If multiple people independently bring up the same frustration, you're likely onto a real, widespread problem.

• Look for buyer intent: Early signals that people are actively looking for a solution or are very unhappy with existing options suggest a strong market need. When someone says, "If you built that, I would pay for it tomorrow," you're getting a strong signal.

What to include in your business plan

Think of your business plan less as a formal document and more as a storytelling tool. It can help you organize your thoughts and clearly communicate your vision to potential co-founders, early hires, and future investors.

Your business plan should be a living document that evolves as you learn. In a tough market where hard pivots are happening everywhere, this flexibility is a survival skill. It serves as your strategic guide during the early stages of your company, helping you stay focused on what matters most. It’s a roadmap that you can adjust as you gather more information.

Here are the key sections to include. Each section should be concise and clear, getting straight to the point.

• The problem: Clearly define the pain point your startup is solving. Explain why it's a significant problem for your target customers and what makes the current situation unacceptable.

• Your product: Describe your product or service. Detail how it directly addresses the problem you've identified in a unique or superior way.

• Target market: Identify exactly who your customers are. Research the market size to show the potential scale of your business and the opportunity for growth.

• The competition: Acknowledge your competitors and explain what makes your approach different or better. In an opportunistic, but crowded field where nearly half of all late-stage capital raised in 2024 went to AI companies, differentiation is a key component of any investor pitch deck.

• Your team: Highlight the experience and skills of your founding team. Especially in the early stages, investors often bet on people as much as they do on an idea. As serial entrepreneur Tim Eades notes, when raising a seed round, some investors were willing to commit capital based on their belief in the team even without an ironclad proof of concept. Use your business plan to explain why you are the right person to tackle this specific problem, detailing the unique expertise, past successes, and industry relationships you bring to the table.

• Marketing strategy: Outline how you’ll reach your target customers and drive adoption. Highlight the main channels you’ll use (such as content marketing, search engine optimization, social media, partnerships, or events) and why they fit your target audience. Briefly explain your messaging approach and how your tactics support scalable, cost-effective growth.

• Financial projections: Provide a high-level forecast of your expected revenue and expenses as part of your startup's financial reporting. This doesn't need to be perfect, but it should be thoughtful and based on reasonable assumptions about your market and business model.

Who should be on your founding team?

Starting a company is a difficult and often lonely journey. Surrounding yourself with a team of experts you trust to help you grow your budding business is critical, including co-founders, lawyers, and advisors.

Co-founders

Having a co-founder means sharing responsibility, so you’re not totally on your own. Choose a partner who has complementary skills or knowledge to your own. Most importantly, find someone who will share your vision for the company.

A co-founder can provide much-needed moral support and bring a diverse set of skills to the table, which can be key for handling the challenges of building a business. The data supports this: While solo founders led 35% of all new companies incorporated in 2024, they were less successful in raising venture capital, accounting for just 17% of companies that secured a VC round that year.

When choosing co-founders, look for people you trust, respect, and can communicate with openly, especially under pressure. Think about past colleagues, classmates, or friends who have demonstrated resilience and a strong work ethic. The early days of a startup are intense, and since small businesses collectively employ 45.9% of American workers, your founding team is the bedrock not just of your company's culture, but of its future impact.

Lawyers

Selecting a team of lawyers or a law firm is on par with choosing your co-founder. Most founding teams will have to start thinking of their legal needs once they’re ready to accept a check from investors. Having the right legal team to assist you through the process of forming and financing your company can make a big difference in your ownership and control of the company going forward.

Advisors

Startup advisors can offer valuable advice when your company is young, but many startups (especially pre-seed, idea-stage ones) don’t have much cash on hand to compensate them. Giving advisors a percentage of your company in the form of advisory shares allows you to reward the people who help your company grow with ownership and skin in the game.

How to set up your company's legal foundation

Setting up your business as a legal entity and registering it with a state is important. While colloquially called incorporation, formation is the official term.

Incorporation is a non-negotiable step that makes your company a real entity in the eyes of the law, investors, and employees. It protects your personal assets and sets the stage to secure funding and hire employees. Don't skip this part or try to cut corners.

Deciding when to incorporate and how to incorporate your business can have huge implications down the road. From understanding tax implications to properly setting yourself up for future investment and growth, there’s a lot riding on your choice.

Getting your legal house in order from the beginning saves you from costly cleanup later. The basic steps are straightforward and set a professional tone for your new venture:

• Know when to incorporate your startup, and file the necessary paperwork with your state.

• Apply for a federal tax ID number, also known as an Employer Identification Number (EIN).

• Open a separate business bank account to keep your company's finances distinct from your personal ones.

C corp vs. LLC: What's right for your startup?

The choice you make between establishing a C corp vs. an LLC is one that will affect how you're taxed and whether you can raise money from certain investors. For most high-growth tech startups, the C corporation (C corp) is the standard choice because it's the structure venture capitalists (VCs) are set up to invest in. This is backed by data: Among the tens of thousands of startups on Carta (the majority of which are VC-backed), traditional corporations make up over 90% of the companies on the platform, while LLCs account for just eight percent.

• Corporations: Common types of corporations include C corps and S corporations (S corps), which have the same underlying legal entity type but are taxed differently. When you form an entity, you’ll have to pay fees to set it up, file a Certificate of Incorporation, comply with all regulatory and tax requirements, and file other various reports.

• Limited liability company (LLC): A limited liability company (LLC) is a business structure that legally separates business assets from your personal assets. This structure protects business owners from being pursued personally for repayment of debt or liability associated with their businesses.

Here’s a simple breakdown of the two:

Ownership and equity management

Holding equity means you have an ownership stake in the business. A wide range of people and entities can own equity in a company, including the company’s founders, investors, employees, advisors, and consultants.

The cap table

A capitalization table, or cap table, is the official record of who owns what in your company, making proper cap table management a high priority. It lists every person and entity with an ownership stake, from founders and investors to employees with equity granted through a stock option plan. It's the single source of truth for your company's equity.

Many founders begin with a spreadsheet to manage their cap table. But as a company grows, what starts as a simple document can become messy and complicate crucial events. Starting with a clean, accurate cap table from day one is one of the smartest moves you can make. A disorganized cap table can raise red flags for investors, create major headaches during fundraising, and lead to unexpected share dilution.

How do you fund your startup?

There are several startup funding sources to get the initial money you need, and it's encouraging to know that significant capital is available—in fiscal year 2024 alone, the SBA had a $56 billion impact on small businesses.

Types of investors

For a high-growth company, understanding the different types of investors is key, as raising money from angels and venture capitalists is the typical route. Common sources of startup financing include:

• Bootstrapping: This refers to funding your business with your own savings. Bootstrapping gives you complete control as a business owner but can limit your growth speed.

• Friends and family: Raising small amounts of money from people in your personal network can be a quick way to get started, but be sure to treat it as a formal business transaction.

• Angel investors: These are wealthy individuals, known as angel investors, who invest their own money in early-stage companies, often in exchange for equity.

• Venture capital: These are institutional firms that invest other people’s money into high-growth startups with the potential for a large return.

• Accelerators and incubators: Accelerators and incubators (like Y Combinator) are programs that guide, mentor, and help fundraise for startups in exchange for an equity stake in the company.

Fundraising options

Most companies raise funds every 15 to 18 months, hoping to raise enough capital for a 12– to 14-month cash runway. Your funding options will vary depending on which stage your company is in.

Typical fundraising options for founders include:

• Seed fundraising: Also called seed funding, this is the preliminary capital, most often from VCs or angels, which helps launch a business or develop a prototype or minimum viable product (MVP).

• Priced round: When a startup is raising a round of financing at a specific valuation, it’s known as a priced round. In other words, priced rounds are equity investments based on a negotiated valuation of a company.

• Convertible securities: A type of investment that lets founders raise money while postponing negotiations on the company’s valuation until a later time. Convertible notes and SAFEs are the two most common types of convertible instruments.

Understanding SAFEs for early-stage fundraising

A Simple Agreement for Future Equity (SAFE) is the most popular instrument for early-stage fundraising, and its dominance continues to grow. The instrument is also the clear favorite for the next stage of fundraising: From late 2023 to late 2024, founders used SAFEs in 64% of seed rounds, compared to just 27% for priced equity rounds and 10% for convertible notes.

Pitching investors

A pitch deck is a presentation that a founder or executive uses to tell investors about their company during the company’s fundraising process. It can be the foundation of an in-person fundraising presentation, or can be shared on its own as a written document.

A pitch deck typically includes information about the company and its leadership, the market opportunity it is targeting, and the company’s revenue and business models. See examples of Carta’s pitch decks for our series A and series D.

Valuing your company

To manage your company’s equity and keep track of what shares are worth for each holder, it’s essential to know the valuation of your company, which is an assessment of the worth of a company at a given time. You can measure the valuation in several ways.

• 409A valuations: A 409A valuation is an independent appraisal of the fair market value (FMV) of a private company’s common stock (the underlying security reserved mainly for founders and employees, but not investors) on the date of issuance. In order to offer or issue equity to service providers, understanding the FMV is crucial unless you want to risk severe IRS penalties for the company and equity holders.

Hiring a team

Compensation is what you pay employees in exchange for their time, work, or services. Getting comp wrong or failing to properly invest in your employees can be the difference between a thriving company and a failed startup.

Here are some of the steps founders can follow to create a compensation plan:

• Develop your company’s compensation philosophy
• Define roles and levels ( job architecture )
• Create performance management guidelines
• Build your hiring plan
• Create a forward-looking headcount plan

Startup taxes

Taxes are never simple, but they become exponentially more complicated when you’re growing a new startup. Founders have several key tax considerations to keep in mind.

Federal, local, and payroll taxes

You’ll face federal- and state-level taxes as a startup founder. Depending on the state in which you’re incorporated or in which you conduct business, you may also owe city- or county-level business taxes.

Understanding SAFEs for early-stage fundraising

Exit strategies

An exit event is most startup founders’ pot of gold at the end of the rainbow and is traditionally a celebratory occasion. Typically an IPO or M&A gives existing shareholders the chance to access liquidity and potentially realize on-paper gains by selling some or all of their shares.

IPO

An initial public offering (IPO), or “going public,” is when a company begins trading its shares on a stock exchange for the first time. IPOs allow a company to raise capital in the public market by selling newly issued shares and allowing its existing shareholders to sell their shares. Usually, an IPO is the first opportunity for the general public to buy a stake in a high-growth tech startup.

Frequently asked questions about starting a startup

What is a startup?

A startup is any new business in its early stages of operations and fundraising. Startups can be in any sector, including technology, healthcare, and agriculture. Startups are private companies that are not publicly traded. When a company has an exit event like an IPO or M&A, it is no longer considered a startup.

What is an entrepreneur?

An entrepreneur is an innovator who brings a new idea, skill, or product to market. Entrepreneurs start a new business by absorbing a high risk for the chance of a high reward.