As we operate as a startup ourselves, we understand more than traditional law firms what a startup should avoid both when setting up and during its lifecycle. Our CEO, Lachlan McKnight, lets us know what are the six things your startup should avoid, and why.
1. Ridiculous Business Structures
You don’t need to set up a complex business structure before launching your startup. It’s generally better to spend time, effort and capital on building your product, getting customers on board, and raising capital. Keep it simple. Set up a holding company and an operating company. If you’ve got some spare personal cash set up a discretionary trust and own your shares in the holding company through the trust. That’s it!
2. Disputes Over Tiny Amounts of Money
Don’t pay a lawyer to litigate a small dispute. Don’t worry – you’ll find a lawyer to take your money, but it’s not going to be worth it! Settle and move on. Life’s too short.
3. Incorrect Standard Terms Which “Can’t Be Amended”
This is something we see all the time. Big businesses often have standard terms and conditions they enter into with suppliers or customers. Often those terms and conditions have been drafted poorly, but if you (or your lawyer) picks up on this poor drafting, and suggests amendments, the standard answer is often “these are our standard terms and cannot be changed”. This actually means “I have no idea what these terms mean, and so it’s just easier to say they can’t be changed”. There’s nothing more frustrating than having to agree to terms that are blatantly incorrect. Welcome to the real world!
4. Overlooking or Underspending on Legals
One thing I find frustrating is clients who are purchasing multi-million dollar assets, or buying companies for very large amounts of money, but who want to spend as little as possible on legal representation. LegalVision is a fixed-fee, cost-effective solution, but it’s fair to say that we do sometimes deal with potential customers who have completely unrealistic price expectations. The reality is if you’re buying an expensive asset, a great deal can go wrong. Working with an experienced lawyer is worth the cost – you’re effectively mitigating your risk if something goes wrong.
5. Professional Advisors Who Don’t Get Startups
This is a big pain point for the LegalVision team. Startups are different. They’re not small businesses. They’re not medium sized businesses. It’s so much easier to deal with professional advisors who understand burn rates, startup valuation methodologies, and most importantly the end game for each stakeholder. Many accountants and lawyers have never dealt with a startup throughout their careers. They can be very difficult to deal with as they don’t know what’s market practice and what isn’t.
6. Not Vesting All Founders
Often founders don’t like the idea of their shares vesting. I can understand that, but at the end of the day, the vesting provisions protect you as much as they do the company and investors. It’s not at all uncommon for founders to fall out. If your co-founder’s shares are not vesting, and they leave the company it’s going to be very hard for you to make it successful – you’ll not be able to bring on new team members for significant equity chunks without accepting significant dilution yourself. If you’re at the beginning of your startup adventure, it makes a lot of sense to have all founders shares vest.
Are you a startup founder or investor? Think we’ve missed something? Tag us on Twitter @legalvision_au and let us know.