You have a brilliant idea, found a dream partner to build your startup with, are getting a lot of excited users to sign up and venture capitalists are already showing interest. What can possibly go wrong from here, right? A lot, actually. Startup entrepreneurs sometimes need advice when it comes to legalities, financial planning and investments. What seems trivial and common sense at one point could turn out to be your startup’s Achilles heel later. Below, find some of these common entrepreneurial mistakes to watch out for and how to make sure you do not commit them while starting up.
No cofounder agreement
It doesn’t matter if you and your cofounder have known each other since childhood or if you are starting up with your spouse. A cofounder agreement puts down all your verbal agreements in print, including the equity that each of you hold, the job responsibilities, vesting schedule, etc. In the absence of an agreement, it is your word against theirs in times of conflict.
Too many overheads
When you own a startup, you do not always need a physical office. Each overhead that you add to your business expenses makes it all the more difficult to break even. Expenses are not always frivolous, though. It is always considered a good idea to invest in technology and automation in order to build traction faster. Make it a point to critically analyze the need for every penny spent. For instance, Yext has been considered a vital tool for local businesses. However, as a number of Yext reviews point out, the product is not only out of reach for bootstrapped businesses, but may also revert all listing changes when you end the subscription. A startup business owner should judiciously maintain her accounts and stay bootstrapped.
Giving away too much equity
In the initial days of your business, you may not have sufficient cash to play with. This could seriously limit your marketing budget as well as the salary you pay your employees. In this situation, entrepreneurs offer equity in exchange for lower salaries or angel investments, which is a standard practice. However, giving away too much equity will not only reduce your control on your business, but also may also reduce the attractiveness of your startup. A one percent equity on a million dollar startup is only ten grand.
Poor working capital management
As a startup entrepreneur, you want to please everybody, including your customer and your vendor. What this means is that you may want to offer a lengthy 30-day payment cycle to your customers while agreeing to a quick 7-day cycle with your vendor in order to be in their good books. This can be disastrous, as for every sale you make, you may need to figure out a way to pay your vendors before you receive the money from your customer. If not handled promptly, poor cash flow and working capital management can sound the death knell of your small business.
Not outsourcing to professionals
There are online tools that help with everything from registering a company to filing patents and managing taxes. There is nothing wrong with using them, but keep in mind that there are legal loopholes in every aspect of doing business that can hit you later. Hiring a competent accountant or lawyer for your tax and legal purposes is a good way to avoid silly mistakes that can hold you back in the future.