These are the most common mistakes we at LawTrades have seen first-time entrepreneurs make when they incorporate their tech startup:
1. Failing to get confidentiality and intellectual property (IP) agreements executed.
One of the very first things you need to do as a tech startup is to get your founders and employees to sign confidentiality agreements. This will protect your proprietary information that falls outside the scope of IP material. It should encompass everything from they way you bill, to marketing strategies and anything else your company does that is confidential about the way you conduct your business, and gives your company an advantage over the competition. Additionally, securing the assignment of all IP work and development is crucial. As a tech startup, it’s vital that the company owns all the legal rights to patents, trademarks and everything IP related in order to prevent the possibility of departing founders or employees from sharing your information with your competitors or keeping the rights for themselves.
2. Failing to ensure that stock issuances have vesting periods with cliffs.
If you issue stock to founders or employees and they exit before one year without any restrictions on their shares, they’ll own an important piece of your company without making the contributions that were expected of them. If the company gains in value, the result is that you will have given them free money – and perhaps more. Vesting requirements will protect the company by requiring the stockholder to be with the company for a certain amount of time before they can begin to claim equity ownership rights and financial benefits.
3. Failing to consider the high risk of securing too much funding too soon.
Raising too much money too soon exposes founders to multiple risks: (1) surrendering too much control to external forces who don’t understand your business, your values or corporate culture; (2) diluting ownership to an extent that it derails your exit plan; and (3) imprudent spending as a result of being inexperienced with how to wisely allocate expenditures.
4. Failing to build a supportive team.
Many entrepreneurs believe they’re capable of doing most things – if not everything – themselves. The most successful tech startups build teams with passion and expertise who are eager to help grow the company. On the other hand, starting with too many co-founders can also be a mistake. Too many cooks in the kitchen can make decision-making challenging and lead to expensive breakups. It’s best to limit the number of co-founders, and at the same time gather a solid core of employees who can help you build your company.
5. Failing to be flexible.
When you start a new enterprise, it’s easy to think that you’re the only one who knows exactly how things should be done. Failing to listen to the feedback of other members – as well as to outside colleagues, peers, advisors and others with valuable insight – is one of the most prominent mistakes that first-time business owners make. Invite the opinions and constructive criticism of others, brainstorm with staff, ask for outside coaching (formal or informal), but be open to listening for important information that could help your company succeed.
Hope that points you in the right direction.