Launching a business is a thrill: you have a great idea, a solid business plan, and are ready to incorporate. Unfortunately, the rush of starting a venture is so intoxicating that most founders gloss over key details and make significant mistakes right at the start. These errors make it harder to get funded, handle important employee issues, and manage the books. Here’s our top-ten list of founder mistakes, and valuable information on how you can avoid them.
1. Not incorporating as a Delaware C-Corp
There are so many ways to incorporate and so little time! Most startup founders are so eager to get going that they make a massive mistake right out of the gate: incorporating as an LLC. LLC’s make it difficult to properly distribute ownership or even grant options to employees. Also, most investors will only invest in Delaware C Corps, because:
- The concept of stock is central to a C Corp, making it easy to create, modify, and maintain a cap table.
- LLC’s complicate tax forms, since income passes through the LLC to the partners.
- C-Corps are immediately eligibly for the Qualified Small Business Stock (QSBS) exemption, which shields investors from up to $10M in Capital Gains tax in the event of an exit.
For these reasons, it’s critical to incorporate as a C Corp, but it’s also hard. Fortunately companies like Gust Launch are making it easy with incorporation services and more. Fill out the form below to learn more – Techweek readers get a 15% discount on their services!
2. Pitching before you’re ready
You’ve got the intro of a lifetime – one of the biggest investors in your space has taken a meeting with you! It’s a dream come true for most entrepreneurs, but few stop to ask themselves, “are we at the right stage to talk to this person?”
Techweek Chicago Panelist John Haro, founder of PartySlate, faced this exact situation when he pitched to juggernaut Andreesen Horowitz too early. His co-founder “could get a meeting with anyone,” but they found themselves at too early a stage for the investors. Unfortunately, taking meetings too early can also reduce your chances of getting a meeting with those investors later if they write you off.
What’s the right way to do it? Research who you’re talking to, make sure you’re at right stage, and try and figure out what they look for in the investments they make before you show up to the meeting. That way you can anticipate questions and set yourself up for success.
3. Starting a company with your best friend
Co-Founder drama is a real thing. You hang out with someone all the time, care about each other and see the world the same way, so why not start a company together, right? Wrong. The old saying about mixing pleasure and business often holds true, as Techweek Chicago Launch Panelist Rebecca Sholiton discovered after founding Wise Apple with her best friend. “We fired each other,” she said.
4. Not putting in important co-founder safeguards
We’re realists. We know a lot of you will read the above but start a company with your friends anyway. So what can you do to make sure you’re protected if the relationship sours down the line?
- Don’t split equity 50/50: “modern wisdom is that even splits are not ideal and that co-founders should divide equity according to the value they’ll create for the startup.”
- Do have a clear cap table: obviously, you don’t want any confusion about who owns what – another important reason for having a C-Corp.
- Do have an employee handbook right out of the gate: this can help mitigate against legal issues down the line.
5. Not having proper accounting practices
Wait, Accounting wasn’t your favorite class in college? Unfortunately, despite its often tedious nature, there’s nothing more important than accounting for a growing business, especially when income starts rolling in. Investing in an accounting solution, and a competent accountant or outsourced team, is vital. Fortunately, Gust Launch can help with this too.
6. Misclassifying employees as 1099 Independent Contractors
This mistake can cost you. The IRS is allowed to implement additional taxes up to 3% on wages paid to the misclassified worker, as well as FICA taxes of up to 40% if the IRS deems the error to be intentional. Further, this error allows the IRS to hold officers at the company personal responsible for payroll taxes.
7. Forgetting to subject founder stock to vesting
If founder stock isn’t allowed to vest, one of the founders could pick up and leave at any time and maintain significant ownership of the company, which means everyone who stays is “effectively stuck building a company for their retired team member.”
8. Taking on personal debt
As a founder, don’t collateralize yourself. Keep business accounts and personal accounts wholly separate. It makes sense to open a business account immediately after you incorporate, as this ties the two events together and increases transparency.
9. Hiring too fast
Kaitlin Reimann, founder at UBack, made this point at Chicago Techweek this year. “Hire slow, fire fast.” At a small startup, bringing someone on to a team that isn’t a good fit can have bad consequences not only for the role they’re hired into but also for the productivity of the entire team. It’s better to take your time, and if it isn’t working out, fire quickly.
10. Using Apple Maps to get to your meeting
A cheeky one to end this list: John Haro from PartySlate shared another story at Techweek Chicago about having a meeting with an investor, and showing up late thanks to the bugs in Apple Maps. We love you Apple, but just to be on the safe side, use Google Maps for now.