“Entrepreneurs are the action athletes of the business world.” Stephen Kotler made this observation in his book, The Rise of Superman. Kotler founded his writing on the importance of “flow” for action athletes to be successful in their endeavors. You might have heard of the concept of “flow” being referred to as being “in the zone” or “dialed in”. One aspect of being in flow is the pure focus that the person achieves when working in that space. As an entrepreneur, you will find yourself in flow as you do the things necessary to bring your product to market.
Starting a business is an exciting time. You are making your life dream into a reality. Truly, there are more things to get done than there is time. You have your business plan all mapped (well, maybe) out but what’s next? Google is a great asset in helping you find information but how can you search for what you don’t know? Despite the modern DIY (do-it-yourself) way of thinking of many entrepreneurs, hiring a lawyer should be the priority on every startup’s to-do list.
Lawyers should not be suited up individuals who bill you for every phone call and question you may have. [For one, we have combated this notion by offering flat rate billing and a-la carte services, but we digress.] Lawyers should strategic partners who can add value and help you avoid early mistakes. Think about it this way, you wouldn’t wire the electrical system at your building if you are the financial advisor for your firm. Let the experts do their job where you lack expertise. Indeed, one of the most frequent “I wish I did that sooner” comments from our clients is about overcoming resistance to delegating or outsourcing.
When growth and funding are top priorities, it is wise to not let legal soundness fall to the wayside. Not surprisingly, 90% of startups fail and overlooked legal issues is one of causes for this failure. Without a lawyer looking out for your best interests, it’s easy to miss common legal mishaps that pose a threat to any startup. We have rounded up the top 3 mistakes startups make and how to avoid them.
Mistake 1 – Using Legal Templates
Recently, a new client personally handed me a blank binder that had their entity’s name embossed on the spine in gold letters. There were probably 250 pages of text dispersed between the several tabs. The client visibly glowed as she believed she aced my question about having foundational documents in place. More on this client in a minute.
Many startups rely on legal templates that are easily downloadable online to “cover their bases” and save money. What seems like a wise choice from an economic perspective can lead to significant liability down the road. Tax forms and incorporation documents might be free to download, but most entrepreneurs don’t have the knowledge of how to properly use these forms. Minor errors or oversights in those free legal templates can spell disaster down the road in the form of lawsuits or worse.
Also, many of these templates and forms are not specific enough to be used in all the different types of businesses that entrepreneurs start. When you add state law requirements, the result is that the template document is usually completely ineffective. You would not provide your customer with a product that was ineffective, so why would you treat yourself that way?
As you might have guessed, this client was a victim of the assumptions that because she purchased an incorporation kit from an online vendor, things were good. But, those 250 pages? They were full of blanks and they were unsigned. The wrong structure was used for the entity. As I pointed out these issues, her glow plummeted into disappointment.
Mistake 2 – Raising Capital
For many startups, bootstrapping the growth of the business may not be an option so raising outside capital is the next step. Any time you raise capital you need to make sure that you are complying with any applicable securities laws. These laws can be very complex and a misstep on any of these could mean a potential early exit for your startup. The last thing you might want is to be accused of is fraud or misrepresentation.
Raising money is easier said than done. It’s actually easier to raise $100M than it is to raise $1M or $10M. There are things you can do to improve your chances, though mostly those things can be boiled down to one word “preparation”. You will increase your chances of raising money if you have:
- Chosen the right structure
- Have a business plan
- Have a pitch deck
- Have a minimum viable product
- Show positive revenue and ROI
Mistake 3 – Choosing the wrong Structure
Should I be and S Corp or an LLC? Why not both? The S Corp/LLC question is the most common and most misunderstood concept in entity structuring. An LLC is a hybrid entity that attempts to put together the best parts of a corporation and a partnership into a single entity. An S Corp is a taxing method. Yes, you can be an LLC taxed as an S Corp. One does not form or create an S Corp, you elect it.
As a small business owner, you can hurt your business and maybe even yourself if you don’t understand the basics of business entities. Seek the advice of a business attorney to get you started in the right direction. A common misconception is thinking that your business entity protects you against all risks. It is true that one of the main reasons for forming a business entity is to protect your personal assets but not all entities are created the same. There is a difference between external and internal liability protection. It is important to meet with your trusted business attorney and your insurance agent to discuss the potential liability you face and cover the holes.
Enlist a business attorney to act as your trusted legal counsel. Adding this expert to your money team will do so much more than simply handling legal documents such as terms of agreements, employee contracts, & owner and vendor contracts. For brand new startups, it might seem overwhelming to invest in the cost of ongoing legal counsel, but the cost is nothing compared to the cost of losing your business altogether due to simple legal mistakes. Indeed, if you have to go to court to sort out a problem, it will likely cost you at least 30 times what it would have cost to correctly set things up at the beginning. Oh, because of the sheer volume of cases pending in courts across the country, you can expect a lawsuit to last about 30 months.
Startups need legal protections from the many risks all businesses face. When your focus is on growth and development, be sure to put developing an ongoing relationship with a trusted legal advisor at the top of the priority list. Online templates are no substitute for personalized legal counsel from a trusted business lawyer who will anticipate issues before they become problems and provide tailored guidance as your startup grows.
If you want to protect your business interests, limit your liabilities, and ensure your business is set for growth, start by sitting down with us. We are experienced in helping new and established entrepreneurs achieve success through careful financial and legal planning. Schedule a planning consultation here.
Thanks in advance. See you soon!