Beyond the Pitch
5 Mistakes to Avoid When Starting a Business
Running a startup is hard. Mistakes are inevitable, but many missteps are avoidable.
Here are 5 common mistakes entrepreneurs should avoid.
1. Never sign an agreement without reading it thoroughly.
We all know that we’re not supposed to sign anything that we haven’t read from first word to last, yet it happens all the time.
- Just because an agreement appears to be “standard in the industry,” don’t assume that it is. I’ve seen a company blindly sign a document labeled as a non-disclosure agreement that also included an unusual provision giving the other party a commission on any sale of the business. That situation ended up in a lawsuit, which eventually settled, but not without unnecessary costs in time and money.
- Other parties’ “routine” agreements may contain terms that are objectionable, even harmful, to your business. Another startup signed (without reading) an agreement with an accelerator that had unlimited anti-dilution protection for the accelerator. Understandably, the anti-dilution rights created a significant issue with later investors, and the company has not received any further funding.
- Not everyone in the world is a straight-shooter. The company of a friend of mine signed an employment agreement with a senior manager that made it impossible to fire the guy. The “senior manager” snuck the agreement into a pile of other agreements that were being signed as part of a closing of a larger deal.
2. Never sign an agreement without understanding it.
Anticipate that important deals, especially those with larger and established corporate customers or suppliers, will involve complicated contracts and documentation. Even if you think you understand the agreement you are signing, assume that you may not.
- Large corporate customers and suppliers will often insist on using their own forms of agreements. Large companies have large legal departments and long agreements for a reason, and it isn’t to be nice to their vendors. Corporate agreements can contain provisions affecting the ownership of your intellectual property, covenants that will be expensive to comply with, and indemnity obligations that could bankrupt your business. It’s always exciting to sign up a big customer, and you don’t want to appear difficult to do business with, but you need to understand the reality of the deal.
- Venture investment deals also tend to involve complicated term sheets and other legal documents. These documents address issues such as anti-dilution protection, liquidation preferences, participation rights, drag-alongs, take-alongs, rights of first refusal, board rights, and a myriad of other provisions involving very complicated concepts.
- Be guided by your moral and legal responsibility to know and understand the commitments that you are making on behalf of the company, the employees, and the investors. Read every agreement to get a basic understanding and, when necessary, get experienced legal advice. Rev1 always recommends that founding teams work with experienced legal counsel when we are working on an investment in a company. As founder and CEO, the buck stops with you.
3. Never enter important agreements without written documentation formally agreed to by both parties.
A wit once observed: “Verbal agreements aren’t worth the paper they’re printed on.”
- Follow up any promises made in conversations and emails with a formal agreement. It’s all too common in startups for the CEO, who is running in a hundred different directions, to make promises without following up with a formal agreement. If there isn’t a written agreement, but at least one of the parties believes you’re operating under a verbal or informal agreement, then the situation is ripe for disagreements or even litigation.
- In formal agreements, include a merger or integration clause. Such clauses typically state that the written agreement is the full agreement between the parties, and anything said in prior conversations or written in prior emails is superseded by the written agreement. Otherwise, you will be debating the meaning of cryptic emails and year-old conversations. If that debate goes to court, your company will be at the mercy of a judge or jury.
4. Never sign agreements without considering the terms that aren’t.
The terms of a written agreement can be deficient by what is missing as well as by what is there.
- Almost every agreement, like visits from relatives, should include termination provisions. I was running a company that had entered into a commission agreement with an agent who had introduced us to a prospect that became a huge customer. We didn’t mind paying an agent commission for the first couple of years, but unfortunately, our written agreement had one important flaw—there was no provision for termination. Our company was on the hook for a commission to that agent for as long as we had that account.
- One notable exception to termination clauses: Software as a Service (SaaS). If you’re a SaaS business, it’s always nice to have agreements with your customers with automatic renewals that (hopefully) continue until the end of time.
5. Never try to get out of a bad agreement by breaching it.
Making an impulsive decision to ignore a contractual obligation that is bad for your business may feel like an empowering move. But usually, that particular bold move will cause the other party to make their own bold move.
- Breaching an agreement isn’t good for a company’s reputation, plus you might end up in court. In my company’s agent commission example, when another company bought mine, they decided to take action by stopping the commission payments, assuming the agent would just go away. The agent sued. We lost. Lesson learned.
- When faced with a contract that’s bad for your business, reach out to the other party. Be transparent. Try to find a mutually acceptable solution. You will be surprised how often this approach works. If you still think that breaching an agreement is a good strategy to get the other party to the negotiating table, talk first with legal counsel about the possible ramifications.
Forewarned is forearmed. There’s more than enough opportunity when you are starting a company to make original mistakes of your own. You don’t need to make the ones on this list.
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