Rarely talked about in courses, workshops, and at other events are the messy things that almost always happen with early stage companies. These messy things often leave first time founders feeling like they have made a critical mistake and they should have avoided something, when in reality it is just something that is ‘normal’ and ‘fixable.’
Short of committing a crime, almost all mistakes and grievances are able to be fixed. This is where management and administrative skills get developed (and sometimes a good lawyer). Sure, if there is a pattern that shows very poor judgement it is unlikely that other important things are going right. But at the start with limited resources, no one expects you to be perfect, and often the fix is just part of building a business.
The issues tend to be three buckets: things that have to do with shares and early investments, IP and employee agreements, business execution and tracking.
Shares, equity, and early investments are oddly allocated
The first and very common set of mistakes that come when a company is formed is properly setting up the incorporation, shareholders agreements, and any early investments. Even with lawyers offering startup packages, early assumptions are often wrong and things change:
Advisors don’t show up (and have too much equity)
An odd collection of promissory notes exist on small loans
What that leads to is a heck of a messy cap table. That can trigger risk signals with some Angel investors or accelerator staff. They aren’t real risks but they are annoying and they can be expensive to fix. Founders should know that this is rarely as clean as other founders' projects. Talk to peers and make a plan to fix it.
Generally speaking, the way to avoid this is to establish equity ‘agreements’ with longer vesting schedules at the start. I tend to agree with the view that founders should get an even split at the start, advisors with vesting schedules and early investors should be kept in the 2-5% range. For each situation it is different. The really important thing to do up front is understand the value of vesting along with clear expectations of what that person is doing for the company.
IP and employee agreements do not exist
Related to the equity is a clear understanding of the expectations for each person involved with your company. Early on people wanting to help is a big emotional boost that gives you the validation you need to keep going. Over time that can get really messy as the company changes. Because that early stage takes a long time, people often come and go.
Defining expectations up front (preferably in a document) along with specific compensation (equity, dollars, etc) is invaluable. Know that for different jurisdictions (provinces, states, and countries) you may legally require different legal words in your documents. The template for your region is pretty easy to find for free, use it.
This goes for advisors as well. All too often you see someone with over 10% of equity on an early stage companies cap table. Someone that has experience in business, who knows more or is better connected. That person might do very minimal work and sprinkle inspiration and social capital, they may also do a lot of heavy lifting and be a valuable member of the founding team. But without a document and a clear understanding of expectations on both sides, it creates a difficult situation. Advisors should put it in writing and founders should ensure it vests.
...and make sure it covers IP. Rarely anyone has an issue signing those documents and if they do you probably do not want them helping you out.
Business execution and tracking
Startups pretty much always start off as projects. Those projects grow and eventually someone wants to pay for it and you are paying for a growing number of things to support that project. Suddenly it is a business! Usually, early on, it is a very unpredictable business and founders tend to not want to track or plan too far out.
Over the last 15 years working with founders I don’t think I have met a company that has anything resembling a cash flow projection before they get some level of funding. Those that have it tend to be very shy about sharing it for a number of reasons -- I think it is largely the feeling of being judged or wrong about projections or knowing the numbers in the 5 year pro forma are just fiction.
At Eigenspace we focus a lot on developing what we call an execution table for your business. That table incorporates assumptions about major and minor events that influence your cash flow. That includes your sales funnel, the people, the activities, investment, other business expenses, etc. It becomes a living document that looks out at least 12 months. Ideally it also looks back at the last 12 months.
It evolves your project into a business. For founders it empowers them to make better decisions and develop more control over their business and it can be applied to what you are doing even at a very early stage. The earlier you are, the more it looks like project management, but as you make assumptions about timing and impact on cash flow over time it can evolve with the complexity of your business.
Focus the feeling of chaos at the early stage… but not control it
Startups are messy. Building momentum is not a straightforward process, there is no manual on how to do it in a predictable way, but you can limit the intensity of some of the chaotic events that can hurt your momentum.
Taking care of your equity, IP, and the people that help you build it while developing the habit of measuring the things that help you grow will set you up for success.