Startup lawyer Michael Hool walks through ten legal mistakes founders make during formation, founding, and fundraising. Picking the wrong corporate structure, mishandling founder equity, and failing to secure IP can tank deals. Early legal planning saves money and keeps investors focused on your business, not fixing your mess.
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Okay, so the way I look at these, to me, I'm a person who likes to organize and put things in a box so I can deal with them when there's a lot going on and there's a lot of issues. So I look at these in kind of 3 different areas. At the time you're forming your company, at the time you're founding it, and that means bringing in the founders and things associated with that, and when you're funding your company. If you could think of it along those lines, I think it would be helpful. At least that's how I think of things. I guess this is a double clicker. I'm not sure how— there we go. That's all of them. We'll go back. Don't worry, we're going to cover these, but I want to just kind of throw it out there. First one, it's not self-serving, it's real. You really, really are making a mistake If you don't work with counsel when it's time for counsel, someone who's really active in the space, because there's just so much institutional knowledge. There's just even terminology, how people behave in the ecosystem, how certain types of invest— how venture capitalists work with angels, how angel groups work with other institutions, how strategic partners work with different investors. A lot of things like that are just— it's just money that you don't have to spend by getting the right counsel. I can't say enough about that. That is actually one of the top things on all the lists. I'll just kind of quickly go down these and then we'll talk about them in the context. There's creating the right type of entity, and for the most part it's In the United States, it's— you're going to be a corporation or an LLC. And we'll talk about some of the pros and cons. Another one is just if you're a business that either your customer is regulated or your business is going to be regulated in some fashion, especially if it's designed— if the regulation is designed to protect consumers, then you need to be acutely aware before anybody else is aware that you're talking to about what the regulatory environment is that you're in. Another big one is just in the founding, bringing the founder's equity, figuring out, working out the problems with that. There's a lot of, in the United States, federal and state tax issues associated with equity. So it's really important to be aware of that. We were just talking a little bit about some IP ownership issues. Title to your IP, a lot of mistakes are made just in the beginning stages by doing things not in the correct way and not documenting things properly. If you're going to spend a lot of money on branding, if you're going to sink anything in a brand or a couple of brands, then You absolutely need to protect that. I'll talk about— I'll give you some more stories around that. Capitalization plan. What that means simply is you need to understand what your plan is. You need to be able to think it through and articulate it for your company's growth if it's going to involve raising money from outside investors. You need to think about that early. In fact, when we're forming entities, One of the things I always try to remind the client on the other side is, what's your trajectory likely to take you to? What types of people will you be sitting across the table from? Because that— I know what kinds of questions they'll be asking you, and it's really important to plan now, even if that's 2 years down the road. Have a structure in your mind. Know that when that question is posed, you've thought of it correctly and you've structured yourself in the right way where it's not going to be an issue. Remember when I said in the beginning, the most important thing I think that I've observed for startups is you want to be in a position where anybody you're talking to that's a valuable relationship, whether it be an investor or a customer or a strategic partner, You want them to focus on the opportunity and really on the economics, the market, the exciting things and the reasons to partner, the reasons to put money in. Anything else is a distraction. If you think about it, this is a very competitive— and you guys are international, so you understand this probably more than a lot of people who aren't in communities where there's so much international attributes reflected in the communities. In this case, I think it's really important just to understand that delays will cause problems for you. I can't stress that enough. What you want to be is simple. You want it to look as, depending on who your audience is, if you're talking to a VC, You want your company to look pretty much kind of garden variety, something they're used to seeing in a structure. You never want people to get hung up on something because you're unique, something unique about your structure. You want anything unique to be about your market and your ability to make a lot of money, maybe the passion, maybe the stuff about your— The entrepreneurs on your team. You never want the thing to be unique is something about your structure. That's because that causes pause. And like I said, delay kills deals. That relates to the capitalization. Again, it's just planning correctly. How much money am I going to need? X dollars is going to get me to a certain point. How do I want to structure that? What's my cap table going to look like? I'll give you an example. We'll talk about it some more. Poor decisions on startup funding. To me, that really relates to if you have the luxury and you're not in a desperate situation, making right decisions about the types of investors that are going to come in, how you approach them, who the right partners are for where you want to go. We'll talk about that in a little bit of detail. The final one, this is one that is probably in that category that could destroy your business, and it could cause a significant problem for you personally. The fundraising is highly regulated. It's probably one of the most regulated things that you can do in the United States, at least. So you just need to be aware of the context and aware of the downsides of not doing things the right way. And this gets back to having the right kind of startup lawyer. You definitely need to have somebody who understands the securities laws. Because it can be very complicated. It is very complicated. But the reality is if someone knows how to work their way through the process the right way, it can be relatively simple for you as entrepreneurs. Thank you.
