It's All About Mindset
I believe a startup is going to go through three very important mindsets.
Number one is validating the dream, the idea, the concept, the product or service, any or all the above.
Number two is the period for raising money. This can be a very difficult situation because it is very different and with no experience for almost all new entrepreneurs. Since this is heavy on selling, it can also be very humbling — asking strangers for money.
Number three is running a company from startup to several million dollars of revenue or at least in the plan. I have sat through over 100 presentations annually from three Angel investment groups. Generally many of the presentations are very good, but they provide very little detail for the future operation of a company. Whereas the entrepreneur founder can handle Numbers 1 and 2 above to a large degree, Number 3 takes a lot more help and support. Advisors can help, but it is important to get the entrepreneurial team to plan more on the business model. I have tried with my workshops and one-on-one recently with incubator teams to put more emphasis on Number 3. In fact, I start many discussions that their plan says you will take a company from scratch to tens of millions of dollars in revenue while learning on the job.
The first line in my last book, The Anatomy of a Growing Company starts out with “You don't know what you don't know." I always point out that this is not a putdown of the inexperienced people I am addressing the situation to help get the attention of the party I am working with.
The pitch deck usually presented to investors is heavy on validation of the product and market and this is important, but I believe it would help entrepreneurs’ mindset to be more familiar with cash flow and balance sheets.
Following are examples that I see over and over again that can be avoided in obtaining more help up front:
The forming of a company can be in the wrong state and the wrong legal form and before considering the merits and options. Some of these options can include the image, tax considerations and the friendliness of the political and judicial system. I have seen lawyers recommending just have a written agreement with stipulations defining various scenarios like for one of the team leaving for a job. I believe the agreement must have default clauses or what is called “the what ifs,” These are definitions for what happens if the terms of the agreement aren’t met.
Equal partnerships can be doomed for failure, particularly with 2 and 3 partners. It’s natural for people to grow in different directions and at different rates. I have seen small companies come apart because of difference in strategy issues or funding issues.
And then we come to ownership. It makes some people feel good to give stock away. I consider stock to be a very precious asset and should be treated that way. Many entrepreneurs do know what may lie ahead for selling and distributing of stock and certainly do not have an understanding of the value. I have seen two startups that had given over 100 percent owner. Forward thinking is essential when comes to issuing stock and ownership.
One team I worked with gave the 8% to the marketing staff member, but a year later the receiver lost all passion and took an outside job. So how do you get the 8% back. Very Difficult. The sad thing about giving stock to early contributors who move on is their energy is gone for the long haul.
I can say a good percentage of entrepreneurs I have come across have no experience with stock options, a method to distribute stock based on merits or length of service. Needless to say a lawyer is needed for helping with stock option plans.
And protecting the value of your product or service, refers to intellectual property. It is another experience for the first time entrepreneur. It is a new experience for most entrepreneurs. A lack of understanding patent law can cause problems without advice. It is a revelation for some entrepreneurs when I tell them the first person who files a patent wins, so if the inventor hasn’t filed, they are out of luck. This gives a warning of how much detail is told to people, that can cause a problem.
Someone with a new idea or product should be very careful who they tell about it or someone might steal it. Startups seldom have the funding to file a patent. Here is where advisors can help to shape what to be said and not. Most investors understand this and are not about stealing anything, but there is a need to be careful of any audience in spreading the word. Lawyers are most likely needed in applying for a patent.
If you have read this far you might think I am a lawyer, but I am not. I am an observer and I am relaying my experiences. The best advice I can give the new startup entrepreneur is to look and find all the help they can get in all aspects of business, legal, finance and marketing.