Goodwin Procter tech partner Dave Cappillo recently led a discussion at Harvard Innovation Lab focused on how to avoid eight missteps that entrepreneurs commonly make in the early stages of a company's life cycle. Here are Dave’s first four “great mistakes.”
To follow along with the video of Dave’s presentation, scroll to the minute markers noted next to each mistake.
- Failure to pay attention to corporate formalities (03:27 – 07:31)
- Form the company correctly (make the appropriate filings with the state in which you incorporate). Use the documents found on Founder’s Workbench!
- Issue stock to the founders
- Enter into a Founder’s Agreement
- Incorporate early enough
- Complicating the formation process (07:32 – 25:31)
- Keep it simple
- Weigh the benefits of a LLC vs. a Corporation
- Weigh benefits of an S Corp vs. C Corp
- Decide where to incorporate: most companies incorporate in Delaware because legal precedents and laws there are well understood
- Failure to appropriately address founder equity issues (25:35 – 39:09)
- Founders need to have specific, transparent discussions about expected contributions early on
- Bad decisions about allocating founder equity can kill companies
- Founders stock should be subject to vesting
- Each founder should earn their way into stock issued to them over time. If they leave, the unvested portion should revert back to the company
- 83(b) elections are critical
- Transfer restrictions should be put into place (Right of first refusal and IPO lock-ups)
- Dwelling on valuation (39:12 – 41:18)
- Goal for a founder should be to reach a reasonable deal/outcome both on valuation and other terms as quickly as possible, because the fundraising process can be all consuming
Stay tuned for a look at the next four “great mistakes!”
This post on Start-up Issues was authored by Founders Workbench.