I would say that one of the biggest common mistakes made is forgetting that the money won’t last forever. It is extremely important to get rid of the mindset of “I can always continue to fundraise” and spend when it isn’t necessary. Remember that the more investors you get, the more debt you’ll have or the more equity that you’ll lose. Yes, angel investors exist, but even they want to know that their money makes a difference. Continue to focus on the core of your business. Spend that money as if you are spending your own money.
One big mistake in companies that issue stock or membership interests to investors, family, and friends is not following securities law. If you sell shares, you must be in compliance with securities law. This means that you make certain disclosures and that you use certain forms (unless exempt). If you don’t do this, you could face heavy financial penalties or your company could be forced to buy all the stock back.
Not having the right (or any) employment documentation is also a big problem. You must maintain employment documentation. And it needs to be the right kind. You should use an at-will employment offer letter that is signed by both the company (and the employee if they take the job) that states the employee or the company can end the relationship at-will. You need to make sure that you’re using a non-disclosure (confidentiality) agreement that fits the laws in your state. You need an employee handbook that explains the policies that you want followed. You must have a USCIS Form I-9 on file to verify the identity and employment authorization of every employee. You need a W-4 on file for each employee. You need to have copies of all benefits forms as well. You should also keep written records of any disciplinary proceedings and terminations.
Thinking that you can worry about protecting your intellectual property later is also a big mistake. Depending on what you offer, you may want to consider a patent, trademark, or registering a copyright. You definitely need to mention intellectual property in your non-disclosure agreement, but intellectual property is so important, that’s why it gets its own little paragraph. One more thing about intellectual property – regardless of whether you get a patent, trademark, or copyright issued, it is up to you to enforce your legal rights. You should also have an assignment agreement for each employee.
Deciding not to worry about local, state, or federal taxes from day one is also a big mistake. State and federal tax agencies can and will shut you down if you’re not paying your taxes. Get a good accountant from the very beginning. Also, make sure that you keep your receipts, records, and completed tax forms. Make sure that you know without a doubt whether you’re supposed to collect sales tax.
There’s a lot to think about when it comes to giving a startup the best possible chance for success. Sometimes, the best solutions depend on details about your startup that weren’t discussed here. One of the very best investments you can make is into a good business attorney.
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