There are thousands of start-ups out there trying to make it big with a game-changing idea. But, it’s only the ones with sound execution that can turn that idea into a success story. Often, businesses simply need to take one step back and incorporate a bit of extra planning to avoid common mistakes that can derail their business.
From our daily interaction with countless early-stage founders and entrepreneurs, we have pinpointed the four biggest legal mistakes a start-up can make, and how you can leapfrog these common stumbling blocks.
1. Failing to incorporate the right legal entity or even completely neglecting it
Don’t send your clients invoices with the details of your personal bank account you opened back in 1999. Set up the right legal entity and open a business bank account as soon as possible.
In South Africa there are quite a few types of legal entities to choose from, but anything other than a private limited liability company (the so-called ‘PTY’ limited) and investors start feeling ill at ease. So, if you’re looking to raise venture capital soon, a private limited liability company is the way to go.
Another benefit of a private limited liability company is that you only risk losing the money you’ve put into the company. It is seen as a separate entity from you and so your personal assets, including your bank account, car, and house, will remain secure.
2. Failing to formalise the founder’s relationship
Possibly the most important first step in a new start-up, other than registering your company, is formalising the relationship between the founders. Sometimes due to the eagerness to get started, founders don’t stop to think carefully enough about the following four key principles:
- Commitment: the success of the business you have embarked on will take commitment from each of the founders. Define it! How can each of you be sure that all the founders are committed? What do the founders need to bring to the party?
- Control: Avoid disputes by asking these questions early on. How are the big decisions taken by the company? Who really has the power to make these decisions? Who really controls the company?
- Economics: who owns the company, and in what proportions? Then, how can the founders get the value created by the business – how are the profits of the company distributed to the founders and when can the founders sell their shares?
- Funding: how will the company initially be funded – loans from founders? Working for a low salary, or no salary at all? Or possibly Angel funding?
3. Failing to negotiate and consider proper vesting mechanisms for founder shares
How would you feel if you are foregoing a higher paid job to work on your start-up and one of your co-founders leaves the company for a lucrative position, and gets to keep all of her or his equity after leaving? Not great, right!
Be upfront about what you expect from each other and how long you agree to be tied up to the company. In comes “Vesting”. Vesting is the process by which a founder receives the economic rights in the shares of the start-up over time.
A typical founder vesting schedule works like this: A Founder needs to be with the company for a minimum period of 12 months (called the “Cliff”) to receive 25% of his shares, and thereafter his remaining shares vests in equal percentages over a 36-month period. So, if a co-founder quits before the ‘Cliff’ /12 months, he or she leaves with nothing.
In practical terms, vesting protects founders from the risk that a co-founder will prematurely leave with his or her slice of the company, which he hasn’t ‘earned’ yet.
4. Failing to properly document employment relationships
Start-up founders often overlook the importance of intellectual property assignment and confidentiality agreements – falsely assuming that anything their employees create is owned by the start-up. This can create a whole host of problems which are likely to come up when an investor or buyer is conducting due diligence.
Protect your start-up’s intellectual property by requiring all employees to sign proper intellectual property assignment and confidentiality agreements at the very beginning of their employment. At minimum, these agreements should include language expressly stating the employee’s rights to the intellectual property that the employee creates during his or her employment. Furthermore, it should include a confidentiality provision, requiring the employee to keep the company’s proprietary information confidential.
These are only some of the issues to consider as you launch your start-up. And if you are in your second or third year of business, and realise you missed a few steps – rest assured that it’s not too late and it doesn’t have to be complicated. Find people with the right expertise to help you identify your legal gaps, so that you can get back to what is most important – building your business.
Put On Your Wellies: It’s Time To Wade Into Risk
Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…
You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.
Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.
It is also unrealistic to assume that it isn’t worth taking this risk.
There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…
Step 01: Do your research
No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.
Step 02: Understand the costs
Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.
A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.
Step 03: Know when to walk away
As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.
You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.
Mind The Gap
The entrepreneur’s guide to finding the gaps and building the right solutions.
Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.
Here are five…
It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.
2. Look for pain
Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.
Be the Panado that fixes these pains.
This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.
4. Luck needs courage
You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.
Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.
5. Pay attention
This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.
5 Things To Know About Your “Toddler” Business
As you navigate this new toddler phase of your business, here are five things to bear in mind.
Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.
Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”
As you navigate this new toddler phase of your business, here are five things to bear in mind:
1. This too shall pass
Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.
2. Appreciate what this phase brings
The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.
3. Establish boundaries
Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.
4. Take a break
Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.
5. Give it space to make mistakes
While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.
During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.
While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.