The startup journey is filled with a myriad of potential missteps. Here are ten key issues that every entrepreneur should navigate carefully.
1. Selecting the Correct Business Structure: Many startups falter by choosing an unsuitable entity. While it may be tempting to form a Limited Liability Company or a Partnership, bear in mind that many investors prefer to deal with corporations. Engage with a financial advisor to understand which entity works best for your situation.
2) Intellectual Property Rights: It's essential to clarify the ownership of intellectual property (IP) from the very beginning. If you generate IP while still employed elsewhere, it may legally belong to your former employer. Ensure you understand the intricacies of IP ownership before embarking on your entrepreneurial journey.
3) Choosing The Wrong Investors: I think it is better to not have funding instead of getting involved with the wrong investor, especially at an early stage. If this goes wrong you could be facing more in legal fees than you raised and could face issues raising capital in later rounds.
3. Lack of Founders Agreements: What happens if one leaves, gets divorced or quiet quits? There could be an anchor tied to your startup that you may have trouble getting rid of. Startups should negotiate equity splits among co-founders based on past contributions and future expectations, rather than dividing it equally. Have the tough talk and also gain investor respect as a result.
4. Compliance with Securities Laws: The issuance of securities must be carried out with utmost diligence and in accordance with both Federal and State law. It's critical to ensure compliance with applicable laws to avoid dire consequences like the right of rescission for security holders, penalties, and potential criminal charges.
6. Employment Issues: Founders need to diligently manage employment matters on top of the million other things they do. When hiring, consider creating offer letters and confidentiality agreements to safeguard your company's interests and protect IP rights.
7. Failure to Timely File Your 83(b) Elections: Founders may overlook the opportunity to make an 83(b) election on time and it can come back to bite you later. 83(b) permits founders to accelerate taxation of restricted stock to the grant date, potentially leading to considerable tax savings down the road.
8. Doing Your Own Legal and Accounting: Although it's tempting to cut corners by using online legal sites and templates, such websites cannot provide the nuanced and customized advice of a dedicated lawyer in your corner. Likewise, it is strongly encouraged to have an accountant review your books and help you setup proper distributions, payroll and tax filings. Founders get burned later when they do not pay enough taxes throughout the year. 9. Not Having A Plan: A business plan is essential for your startup and is a crucial first step in validating your idea and figuring out how you will execute on it. Founders need to take the time in drafting and continually revising their plan along the journey. You will uncover new ideas and go-to-market strategies if you do.
10. Mixing Business with Personal: Founders need to establish clear lines between their business and personal funds and expenditures. Be careful in using business funds for personal use. Likewise, track everything you personally put into the business and keep a clean record of every expense.
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