A prototype is where the rubber starts to hit the road: It's the first physical embodiment of your business idea, and a tool you'll use to attract the resources you need to grow. Don't confuse a prototype with the final product - a distracting and potentially fatal mistake. Pretty looks aren't important. A good prototype is just a working demonstration that showcases what your product will do.

To develop one, you'll need spec-document software, like Omni Outliner or Microsoft (Research) Visio; a development server -- you can lease one for $300 a month from a Web hosting company like ServerBeach; collaboration tools like Basecamp's Web-based application, and a VOIP calling service like Skype.

Show your finished prototype to a dozen or so potential customers and investors who can validate your idea, define key features, and guide your product development.

$$$ required: $100K to $500K

Objective: Avoid infringing on others' patents and secure some of your own.

Patents and patent law are a major headache for tech and Web-based startups, so you'll want legal guidance. Gordon Davidson, a partner with Fenwick & West in Mountain View, Calif., warns that the most important thing is to avoid falling afoul of a "blocking patent" -- one that defies any engineering work-arounds. Just ask Research in Motion (Research), maker of the BlackBerry, how onerous that can be.

As you start to share your ideas with outsiders, you also want to protect your intellectual property. For that, consider filing for a provisional patent; it doesn't require the formal claims of a full patent but allows you to lay claim to an idea as "patent pending." Submitting a provisional patent application costs about $200 if you do it yourself, while a full patent application costs $12,000 to $15,000, including legal fees.

Keep in mind that there are two main types of patents. Technology patents describe and protect how a particular device, mechanism, or software program works -- the classic "better mousetrap." Business process patents describe and protect a mechanism for making money and how it interacts with underlying technologies. Amazon.com (Research) holds such a patent for its one-click shopping feature.

Objective: Formalize the network of people who can help you most.

Your advisory board is a group of six to 12 people who will provide expertise in the industry you hope to tackle, useful connections, potential funding, or (ideally) all three. At this early stage, it makes sense to load the board with people who can provide technical insight about your product, but you'll also want a few startup veterans who can answer questions about running a young company. In exchange for equity in the company -- typically 0.1 to 1 percent -- you should expect at least four hours a month of their time. Avoid big group meetings; they're inefficient. Instead, bring in specific advisers for task-oriented discussions as needed.

Objective: Take your product out for its first test-drive.

Prototyping is an iterative process. Start simple, with a basic mock-up, artist's rendering, or Photoshop screen shots. Show these to a few potential customers and use their feedback to define the specifications of your working prototype. Hire independent contractors if you need specialized expertise to build or code the thing, but it's best to stay local. You'll be gathering input on a daily basis and making revisions almost as often, so you'll want your contractors nearby -- in town, if not under your roof. Keep them close, but be paranoid. Your attorney should draw up confidentiality agreements and noncompete clauses; make all contractors sign them.

The essential prototyping tools include a design and photo editing program like GIMP, which is an excellent and free alternative to programs like Adobe (Research) Photoshop; a product design tool like QCad, which sells site licenses for $260; and collaboration software -- Subversion is an open-source tool for tracking changes in files or code.

• Phase three: Develop the beta product
• Searching for angel investors
• What a VC wants to see in you