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Differences between startups and small businesses

Entrepreneurs and business owners in California might use the terms small business and startup interchangeably, but there are some key differences between the two. Startups differ from traditional businesses in how they think about growth, how they are funded and how they plan to exit the business. According to a co-founder of business seed accelerator Y Combinator, the difference between small business ventures and startups is that startups are designed to scale.

An important part of the definition of startup is rapid growth. Those who are launching startups should plan to expand to a very large market over a short period of time. According to the Small Business Association, the term startup usually refers to a business that has high growth potential and is technology oriented.

Small business ventures and startups are also distinguishable based on how they are funded. New small businesses are more likely to rely on funds from ownership, loans and grants to get the operation going. Startups, by contrast, tend to rely on money from venture capital firms or angel investors. There are some important practical differences that arise from the source of funding. Angel investors tend to be more involved in the business than a bank that has made a loan, for example.

In a traditional business like a restaurant or dental practice, the owner may not have a plan for leaving the business until he or she is ready to leave it. With a startup, especially those that are seeking venture capital funding, an exit strategy should be developed early in the process.

In a case where a person wants to start a new business, an attorney can help with the legal requirements. An attorney with experience in business formation and planning can make recommendations as to the type of legal entity that would be most appropriate. An attorney might also draft contracts setting forth the responsibilities of different owners or attempt to negotiate the terms of venture capital funding on a client's behalf.

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