10 Key Considerations When Launching A Startup
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As a startup lawyer, I have helped founders exit for tens of millions of dollars, close funding rounds, and increase valuations tenfold. But I have also had my fair share of clients in despair over agreements breaking down, or investments falling through. I've had these conversations a hundred different ways, and the fundamentals always remain the same. If you want to scale and raise capital, then you need to be proactive, and be prepared when it comes to legal.
1. START UP RIGHT
Spend time early on getting your legal set-up right. Sometimes, it might be boring, or it might distract you from honing your product, but it is essential. Get past preconceptions, and care about your legal choices. The right legal structure maximizes your startup’s chances of becoming a scalable and investable business. It is the most straightforward way to avoid problems later on. This avoids wasting precious time and money. Startups with the wrong legal structure often fail- they run out of money when VCs won’t invest. Or they need to fix their mistakes, and fast. The legal paths for startups are very similar, whatever the industry. It is your responsibility as a founder to get your company set up in the right place, divide the equity sensibly, appoint the management, and build the team. Get the legal agreements in place from day one, with goals, roles, and responsibilities clearly outlined and legally enforceable. Enforceability is key. For this reason, VCs prefer to invest in common law jurisdictions. So, say, if you're a founder in Riyadh, your holding company should be in Abu Dhabi Global Market (ADGM). If you’re a founder in Jakarta, set your holding company up in Singapore. My company, Clara, can guide you on the company set-up process and beyond, and automate many of these simple agreements, saving time and money.
2. KNOW YOUR MARKET
Founders are natural-born problemsolvers. You might have an idea for a great product that solves a particular problem. Your biggest challenge will be turning this solution into a repeatable business model. To do this, you need to know your market. And you need to assess -and regularly reassess- how the market is responding to your solution. Don’t rely on stale market research, or make an uninformed leap of faith. Validate your assumptions: what problem does your company solve? How big is this problem? Who are your customers? What demand is there for your solution? Who are your competitors? Get feedback from your early users and customers. This is invaluable, practical knowledge that can help you gauge if your product is actually what your market wants.
3. EXECUTION OVER IDEAS
A good idea is just the beginning. A good idea needs good execution to turn it into a company that can make money. And a good team can do this: to prove the concept, create the product, and excite the market. Keep up the momentum. This is what counts. If you can’t do this, your good idea will be just a dream. Above all, investors are backing teams. Your assumptions can be wrong, companies can pivot, and businesses can fail, but good teams will be strong enough to move onto the next challenge. Prepare to be challenged. Listen to feedback- and expect it to be brutal. Be open to your ideas changing. Max Levchin and his co-founders eventually launched PayPal, iterating several times in response to feedback: “You can't get married to any one particular plan. That is the biggest lesson I learned at PayPal.”
4. BE ORGANIZED
Founders are expected to keep critical corporate information updated and available. If you can't provide necessary financial reports within 24 hours of a request, don't expect to be taken seriously by investors. Founders waste too much time and money building cap tables, maintaining stakeholder agreements, and undergoing due diligence. There is a better way, if I do say so myself- Clara can eliminate these repetitive tasks. With Clara, you can create cap tables, legal health check summaries, and build data rooms to present your startup's entire legal structure in a single visual with one click, letting you get back to your customers, your product, and your team. Investors can carry out their due diligence in a fraction of the time it currently takes.
5. SPEND THE MONEY NOW ON PROFESSIONAL ADVICE
Know this now: skipping steps, or taking the cheap way is going to cost you later. Don't skimp on advice when it comes to legal, structuring, or taxes. Don’t struggle to answer these questions yourself. Your scarcest resource is your time. Get advice, make smart decisions, and get back to your mission. Investors will take you more seriously if you do.
6. RAISING MONEY TAKES TIME
Finding the right investment takes time. When you’re fundraising, founders will need to devote energy to meeting with lots of investors, and focus on pitching to those who are likely to invest. Do your research: who invests in your industry? In your region? Can you get an introduction? What is the investor’s reputation? Building relationships take time. You are looking for an investor who can bring something valuable to your business. You will want a partnership that will last for years. You need to be able to speak openly and honestly. Mutual respect, a shared values system, and an ability to see eyeto- eye are critical. Negotiate to get the best deal you can with your investor. Venture capitalists demand high returns. They are investing with other people's money. If you get a “yes,” close as soon as you can, and get the money in the bank. Remember, a term sheet is not a binding commitment: it doesn’t actually mean the investor has to fund you. Sometimes investors can be unreliable and pull out, even if they’ve said yes. You will likely need to fundraise several times, so be prepared to devote time and energy to it. Understand that you might have a few false starts, and it can be painful.
7. YOU ARE NOT A UNICORN
And that's okay- unicorns are rare. Investors are always looking for the elusive startup that promises to magically turn into a unicorn. Don’t expect investors to think you are it. Don’t expect all investors to be interested in your business. Understand the actual value of your business, or risk wasting your time. Understanding which investors are probably going to invest in your business (not just which ones you really want to invest), can help you build relationships with the right people. Be resilient. Even if an investor is not interested in investing in your current fundraising round, they might invest in a later round if your company thrives.
8. BE CAREFUL ABOUT WHAT YOU GIVE AWAY
In a fundraising round, you are giving away ownership of your company. With each subsequent raise, the total percentage you have given away becomes higher. This can significantly dilute the founders’ ownership of the company. How much you give away is a huge question. Rewarding investment with a slice of the ownership of the company is a powerful tool to raise money, but founders need to retain enough to be motivated to work hard, and be compensated for their effort. We've seen a host of up-and-coming companies fail, because when they go to raise their next round, they're deemed to be un-investable, because they gave away too much. If this is your first or second round, remember that you will have to raise again.
9. UNDERSTAND WHAT YOU OWN
Vesting is how investors can guarantee a level of commitment from founders, as founder shares are distributed incrementally over period of time, rather than all at once. It significantly increases the chances that founders and key employees will remain active in the company for some time, usually over several years. If you are a founder, and you are not currently vesting, be prepared for investors to require this as a condition in your initial funding round, and to dictate the vesting terms. Best practice is to think about a vesting schedule at an early stage when the company is set up and the shares are issued, rather than wait for an unwelcome surprise when it comes to fundraising.
10. HIRE LEGAL COUNSEL
A surprising number of founders rely on their investor's legal counsel for all legal documentation. While it is standard for the investor's lawyers to draft the documentation, you need your own legal counsel to help you navigate the process, understand the risks, and protect your best interests in the negotiation. It’s worth paying for this advice. Experienced legal counsel has been through this process hundreds of times before. One of the main advantages of this is they can tell you how your terms compare to the rest of the market.