4 Legal and Financial Mistakes Startup Founders Make, and How to Avoid Them
Mistakes are inevitable on the startup journey, but there are some mistakes you should do everything in your power to avoid. Legal and financial missteps are at the top of that list. Jim Antes, partner at Venture Advisors, which provides CFO services to startups and venture-backed companies, shares his insights on the most common and costly missteps he sees founders make, and how you can avoid them.
Mistake 1: Assuming you and your cofounder(s) are on the same page about timeframe
Your cofounder or cofounders probably share your passion and mission-driven attitude, but are you all in the company for the long-haul? Antes has seen many a duo or group have serious issues when one founder decides the venture is taking too long to get off the ground and wants to walk away, or decides they need a more stable income and can’t stay with the startup any longer. “You don’t want to look on the downside, but things happen,” Antes says.
The solution: Draft an agreement that states the minimum time frame you’re all committing to the startup and lays out a process for what happens if someone leaves before that time is up. “You don’t need to get as specific as outlining the distribution of stock,” Antes says, “but there needs to be an understanding that if it’s not working out, here’s how the discussion would go and here’s who would we have arbitrate the situation.”
Mistake 2: Going off-plan and not telling your investors
One of the biggest errors Antes sees early-stage founders make is “doing things that aren't originally in their plan, so they end up not being focused and they spend money on things that they didn't forecast for,” he says. Part two of this mistake? Not keeping your investors in the loop, like neglecting to tell them that “the runway changed from 12 months to six months because of things that weren’t in the original plan,” Antes says. “People who put money in your company don't want surprises.”
The solution: Create a formal process for updating investors on progress, changes, or key financial news. You can structure that however you like, but Antes recommends “having a single shareholder representative so you only have one person to update and it’s their job to update everyone else.”
Mistake 3: Not enlisting professional legal help to incorporate your business
“Make sure you have good counsel,” Antes says. “It’s easy to find that. Big firms can help you incorporate, and can help with a cap table, bylaws, and initial documents.” For early-stage finances, you can rely on tools like Quickbooks to help you stay on top of things, but legal matters are another story. (Antes does recommend getting an accountant for tax help, though.) And if you’re thinking, how will I pay for that legal help?, Antes says many firms will give you an “abeyance on paying them until you raise money so you can get some deferral on what your advice will cost.”
The solution: Reach out to local firms or ask people in your network to recommend ones they’ve worked with, and be upfront about your ability to pay now versus asking for an abeyance. Either way, it’s an investment in the future health and protection of your company.
Mistake 4: Failing to protect your secret sauce
It’s true that filing a patent is expensive, and if your company is more sales and marketing or execution-driven, this may not apply to you. But “if you have something really fundamental to your business, like technology, and some really broad base of claim, then you ought to spend the money,” Antes says. “You may not have the money to defend it later, but it gives you table stakes when you negotiate. People [who are potentially infringing on it] will have to talk to you.”
The solution: If you’ve created technology that is unique and critical to your company, talk to a patent attorney about how to proceed with filing for a patent on it. Or if you’ve already enlisted a firm to help you get set up, ask if they have a patent or IP team that can assist you. (Learn more about design and utility patents, and copyrights and trademarks.)