Avoiding Common Startup Mistakes
Small startup teams often step into the process with brilliant ideas and varying levels of experience. Some are starting a second or third company after growing and selling prior ventures, and some are in the process of turning ideas into capital for the very first time. And while more experienced business owners typically face a smoother path, we still see the same avoidable errors taking place, even among those who have already traveled the road from initial fundraising rounds to a successful sale or IPO. Here’s how to avoid the three biggest errors that drain time and money away from new founders and often stand in the way of promising plans.
Establish clear contracts—from the start.
From the very beginning, co-founders should have a clear and written understanding of ownership distribution, roles, and responsibilities in the company. Long before shares of the company hold very much value at all, co-founders should identify the percentage of their return on everything they plan to invest in terms of money and time. Exactly how much will each founder commit? Who will have the final word on company decisions? How will salaries be determined? And what will happen to a founder’s shares if he or she leaves the group? These seemingly small decisions can derail a business if they aren’t worked out ahead of time.
Determine an appropriate legal structure.
Your company can be legally established as a sole proprietorship, an LCC, limited partnership, general partnership, C corporation or S corporation. Your choice of business format can help you avoid a long list of financial liabilities, and the right decision can help you fit into a tax structure that can support your financial footing over the long term. A sole proprietorship, for example, exposes the founder to direct action by creditors, whereas a more appropriate choice of corporation or LCC provides founders with a level of protection.
To form a corporation, LCC or Limited partnership, you’ll need to file forms with state agencies, which can come at a cost. But the benefits are well worth the investment, since they protect your team financially and legally and they also ease the path to fundraising.
Carefully follow securities laws when issuing stock.
Far too often, startup founders face headaches and expenses—including fines and legal penalties—when they take a casual attitude toward stock distribution among friends and family during early investment rounds. All sales of stock and limited partnership interests are subject to state and federal securities laws. Rules for disclosure, filing and form completion must be followed, and all sales—no matter how small—should be legally documented.
Take your legal and financial responsibilities seriously from the start, no matter how small your budget may be at the beginning of the process or how distant your long-term goals may seem. Launch your company with serious intention and build a strong foundation by making sound decisions from day one. Contact our legal team today and we’ll place you on the path to stability and success.