Being an entrepreneur is not easy. In order to succeed, you need a marketable idea, a solid team to rely on, and an incredible amount of energy and determination. You also need the wherewithal to avoid some of these common startup mistakes.
1) Building something that nobody cares about.
Many entrepreneurs confuse the drive necessary to build a company with the need to push an innovative idea and create a market. While there are iconic examples of ideas (e.g. Google’s PageRank) that succeeded in absence of market demand, generally it is better to employ customer discovery in vetting a new development, process, or technology through programs like Lean Launchpad.
2) Believing in Family First or that Friends are Forever.
If you’re not the biggest fan of lawyers, you can ensure the demise of probably 10% of them by remembering to contract for everything early on in the development of your company. This is especially relevant in the control and ownership interests of early stakeholders. If you think that it would be offensive to your high school sweetheart and wife of ten years to ask for a contract, remember that half of all marriages fail. And then try to imagine how much more offensive it will be when her lawyer and your lawyer and your investors’ lawyers are fighting about ownership issues during divorce proceedings. Say, you think that you and your twin sister have a spiritual connection and can sit in separate rooms and simultaneously blink on cue, choreographed, and therefore would never let a silly little startup come between you. Just consider what could happen when a freeloading boyfriend enters the picture and wants to play ‘I can help, I’m so smart’ (while slowly moving from his frat brother’s couch into your sister’s apartment). Because these situations actually happen, it’s critical to memorialize interests early on, before the filing of charters or creation of accounts. You don’t need a legalese dictionary for this, just jot down on paper the basic mechanics of your startup. Most of it, if common sense, will transfer to operative documents, if not hold up in court.
3) Using Boilerplate Forms.
When I started my law practice, I opted for the $26/month Squarespace hosting service, as opposed to the custom built $20k website SEO’d for the masses. Budget matters, and I get that. However, in saving money through use of generic templates you may be doing yourself a great disservice. For instance, in Tennessee you can file your corporate charter electronically with mostly just identifiable information. Theoretically, with charter in hand you could just shop online for some bylaws and call it a day. However, the inexpensive forms for purchase are rarely State specific, and in the event they are it is almost inevitable that some nuance will be overlooked. As an example, in Tennessee you can deviate from the many of the default State statutory provisions that govern your electronic charter filing, but only if you know which alternatives to invoke and how to invoke them on the front end in your charter.
4) Using a Clueless Attorney who uses Boilerplate Forms.
Here’s a dirty little secret. Many lawyers today through paid subscription services can access compliance and contract forms authored by someone else and positioned outside of the lawyer’s areas of expertise. Unless you are severely pressed for time, you should always speak with a few attorneys before deciding upon which one to secure for representation in a given matter. If an attorney you are considering does not ask many questions during your consultation and/or doesn’t seem comfortably familiar with the subject matter of your call, then that attorney may try to wing your representation through some third party forms. When obtaining any sort of transactional document like bylaws or a service agreement, make sure that your attorney walks you through the entire agreement and competently explains each section.
5) Failing to Conduct a Proper Analysis of Potential Intellectual Property.
It’s easy to understand why entrepreneurs (and artists) fail to dive into intellectual property considerations early on in the development and launch process. The Manual of Patent Examining Procedure contains about 3,000 pages of mostly unreadable legal and technical jargon, and the federal copyright and trademark guides are only slightly less grotesque. However, there are user friendly guides out there written for entrepreneurs such as the Nolo Press intellectual property series, and Lerner and Poltorak’s Essentials of Intellectual Property: Law, Economics, and Strategy. If you don’t take necessary steps to protect your innovations early on, and you are in an intellectual property intensive technology field like the life sciences, then you may quickly encounter investors that flee when you cannot confidently address IP questions. In the tech industry, you could equally be undone before you’ve begun by failing to consider the stacked licenses and restrictions that make their way into promising code sets, particularly those built upon “open source” platforms that are not as SF circa ’67 as you might think.
6) Failing to identify capturable, non-dilutive funding.
Did you know that in FY17 there is about $2.5 billion set aside for startups by the federal government, in one program alone? Read more about the SBIR program on my blog. I’ve worked with SBIR recipients on everything from toothbrushing video games to hypnotherapy workshops. Investors tend to love grant programs such as SBIR because they provide flexible, sizable funding without the baggage of attaching equity interests.