DUNAWAY BUSINESS LAW
10 Basic Mistakes Young Companies Make
By Rob Dunaway
1. Failure to use contracts and confirming emails.
Everything is rosy in the beginning of a venture. There is a lot of excitement and energy and, as a result, entrepreneurs often feel that all verbal promises will be kept and so they don’t need agreements in writing. But there has never been a company in the history of business where everything went exactly as planned. Something inevitably goes wrong here and there, and having written contracts in place can save a company from getting sidetracked by disputes and difficulties. Furthermore, a well-designed contract provides a valuable reference and accountability as to the performance. Ever watch Judge Judy? People without contracts and/or confirming emails covering the details of an agreement almost always lose in a dispute. Listen to Judge Judy. Better yet, listen to Rob.
2. Failure to start your accounting from the beginning.
Entrepreneurs often postpone setting up their accounting system because, well, it’s boring, confusing and initially time-consuming. Save yourself a lot of corrective time and money later by setting up an accounting package early, or at least hire a bookkeeper to do your early accounting. If you don’t, and you are successful, when you go to raise money from investors or to sell the company, you are going to get hammered on the price because the lack of solid accounting records is a major deduction to the value of the business. Poor accounting records could even cause investors or buyers to lose confidence in management and pull out of the deal entirely. Rob will set you up with an experienced, affordable CPA and/or bookkeeper.
3. Failure to get written agreements with your employees and contractors.
Agreements with employees and consultants are crucial for three basic reasons. One, they document the compensation and service expectations. Don’t put yourself in a position where an employee can claim additional compensation is due beyond what was agreed upon. Two, they document who does and who doesn’t own the equity in the company. Don’t put yourself in a position where an employee can claim that they were promised equity in your company when that was never the agreement. Three, they document who owns the fruit of their labors, their work product. Unknown to many, consultants control the intellectual property ownership rights to their work product absent a written agreement to the contrary. And even employees , whose work product within the scope of employment belongs to the company, may come up with a new idea that the company would own if there was an appropriate agreement in place. This is standard practice for a reason and Rob’s document library covers every possible situation.
4. Failure to include non-disclosure clauses in your employee/consultant agreements.
Employees and consultants learn everything about the company – details of the business plan, product and service pricing details, names of key customers and suppliers, etc. That information is a key asset of and belongs to the company and its ownership and disclosure should be controlled. Add non-disclosure clauses to employee and consultant agreements to protect the company from a disgruntled or greedy person walking out the door with the means to create a dangerous competitor.
5. Failure to include equity vesting clauses in Founders’ equity agreements.
Entrepreneurial groups not only need an agreement for allocating equity ownership, they need a clause in that agreement covering what happens if a founder leaves early. It’s not fair for a founder to take off early and be fully vested in their equity position. Typical equity vesting clauses allow the company to buy back some or all of a founder’s equity depending upon how long they stick around. Everyone can agree on a schedule that is fair and prevent a huge headache when a founder leaves the company.
6. Failure to transfer title to key assets to the company at the beginning.
Entrepreneurs often forget to transfer title to key assets to the company when starting a venture. This can cause significant embarrassment and even lawsuits down the road. Avoid having a bank loan denied because key assets are in the entrepreneur’s personal name, or having a lawsuit filed when an investor learns the company’s key product rights were never assigned to the company.
7. Failure to raise enough working capital.
The number one reason for business failure is lack of working capital. Be realistic about the capital needs of your business. Can you and your team really go 6 or 12 months without any salary and survive? Will your product or service offering still be as competitive if development is slowed down for a year because your team has to work after hours and on weekends instead of putting in 50 hours a week for the company? Can you really afford to pay for product manufacturing, marketing and sales, customer support, facilities, equipment and all the rest without some working capital? Rob knows how much money to raise, where to raise money and how to structure the deal so that the company gets the best possible deal.
8. Failure to delegate.
Entrepreneurs often have a fatal management style flaw. They have a problem delegating tasks and try to micro-manage everything. The inevitable result as the company grows is that the entrepreneur drives him or herself crazy along with the rest of the team. Nothing gets done on time and the company’s potential progress starts bottle-necking as tempers flare. No one person can micro-manage a young company beyond the $5,000,000 revenue range and be successful. Learn to delegate. If you just can’t learn, turn the CEO position over to someone that can. You will make a lot more money that way because the company will grow much faster.
9. Failure to pay payroll taxes.
That last thing an entrepreneur wants is to get on the IRS radar screen. One of the easiest ways to do that is to pay people like employees but not reserve money to pay the accrued payroll taxes. Plus, payroll taxes will likely be a personal obligation of the principals even if you are organized as a corporation or limited liability company. Pay the taxes on time. Or pay people as consultants. You can do that for several months before deciding that employee with-holdings make sense for that position.
10. Failure to use advisers properly.
Entrepreneurs are often independent thinkers which certainly has benefits. However, that same go-it-alone, it’s-my-baby mindset often overlooks the availability of very experienced and valuable mentor/adviser assistance. Particularly in the areas where the entrepreneur’s own experience is lacking, a good board of directors or mentor relationship can provide free or low cost, top quality guidance to the company. Reach out and tap into those resources; the company will grow much faster for doing so. Rob can help you find the right individuals to help drive your venture forward.
To contact Rob Dunaway, you may email him at firstname.lastname@example.org, or call 602-468-5751.