There are three types of mistakes that startups frequently make in early funding rounds that could easily be avoided.
Representing startups is a lot of fun. Entrepreneurs have a great energy about them – they want to get things done and they are often blazing new trails. Their enthusiasm is contagious, but sometimes in their haste, they do things that a mature company would avoid.
The 3 most common mistakes
I’ve seen these mistakes when helping these companies raise money, but these are mistakes we all make from time to time.
1. Leaving things until later. My client raised $100,000 from one investor in 2012. In 2013, they raised another $100,000 from the same investor. In 2012, they neglected to draft and sign a share purchase agreement. In 2013, the investor demanded rights on the shares he purchased in 2012. Under the ‘Golden Rule’ (not to be confused with the philosophical concept of the Golden Mean) he who has the gold makes the rules, meaning the company had to give the investor any rights that he demanded. Had they signed an agreement after the 2012 round, the investor would likely never have asked for new rights on his shares purchased in 2012.
2. Overdoing “Do it Yourself”. Entrepreneurs love to do things themselves to save money. Unlike established companies, they can’t spend their precious cash hiring experts and consultants to do things professionally. I like to help my clients save money. If there are things they can do themselves, I tell them. Sometimes, that has unintended consequences.
In one example, my client filed to incorporate in New Jersey. Attorneys handle this, but really anyone can do it on the State’s website. However, since my client isn’t an attorney she forgot to save/download (or misplaced) the documents she should have received from the website. When she needed those documents she called me. In this case I was able to locate the documents and it took so little time that I didn’t charge her. Next time, she may have a problem that takes longer and the savings that she received from doing it herself will be paid (plus) in legal fees.
3. Neglecting the Final Touch. I’ve often seen this with fundraising documents. They are drafted, negotiated, edited, finalized, money is transferred, shares are recorded and…the documents don’t get signed, by either party. This doesn’t happen with large transactions because the attorneys in those transactions are paid to make sure the documents are signed. But, with small money raising rounds, it happens. The company doesn’t want to pay their attorney to chase signatures and once they have the money, they shift their focus away from the fund raising process.
At least, this one is easy to remedy. You sign what you need to sign and you pester the investor until he or she does the same.
The two common denominators in these three mistakes is that:
1. They could be solved by investing a bit more in legal services. Oftentimes, companies raising small sums don’t want to engage lawyers because, frankly, lawyers are expensive. If you raise $20,000 you don’t want to pay a lawyer 10-30% of that to paper your transaction. I would encourage companies to reach out to their lawyers and ask for a price commensurate with the round raised.
2. We all make these kind of mistakes. We procrastinate, we fail to consult experts and we neglect to finish tasks fully.
Legal counsel for startups
If you want to grow your startup while avoiding the most common pitfalls and get quality legal advice at a reasonable rate, call Avrum Aaron or fill out the contact form.