The Eight Great Mistakes Founders Make (Part 1)

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.

  1. 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
  1. 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
  1. 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)
  1. 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.

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