Ask the Expert: Harsh legal lessons for startups, Part II

Even the most seasoned entrepreneurs stand to benefit from learning about the experiences of other startups and the professionals that advise them. This article is part two of a two-part series that describes five difficult legal lessons learned based on experiences gleaned from advising startups and their owners on a variety of issues.

Lesson Learned #6: Only take the good advice — and use it accordingly! Talk is cheap, so you should expect to receive lots of advice from many sources. Inevitably, some of the advice you receive will be conflicting. In that situation, how can you sort the good advice from the bad?

First, don’t assume that the quality of the source and the quality of the advice go hand-in-hand. Good advice can come from those who have tried and failed just as it can come from those who have achieved success.

Second, consider an adviser’s experience and background. Advice from those that are more familiar with your business and industry are generally much more relevant and important than feedback you get from other sources (even those that have been successful in their own right).

Finally, consider challenging those that provide the advice. This will allow you to better judge for yourself how well founded and thought out the advice is. Doing so can help illuminate which advice is worth listening to.

Lesson Learned #7: Only take the smart money! Not all money is created equal. When it comes to choosing the right investors in your startup, the best money comes from those with something else to offer, like subject matter expertise or valuable connections.

Ask yourself: Is this investor someone I would want on my board of advisers even if they were not providing me with any funding? If the answer is yes, that is a great start. You should also make sure the investor is one that also shares your vision for the company in terms of growth and exit strategy. Investors should be seen as partners in the business, so mission alignment is important.

Lesson Learned #8: Control your cap table! Resist the urge to grant equity to everyone who provides goods or services to your startup. Understand that while granting equity is cashless, it is not free. It will cost you in the form of dilution of your ownership in the company, and while some dilution may be tolerable early on, it is important to look ahead to future funding rounds that will involve further dilution.

When building your capitalization table, plan ahead for future issuances and the effect they will have on ownership levels. Capitalization tables can become unwieldy as a company issues different kinds of equity to different investors, at different times, and subject to different terms and conditions. Also, keep in mind an important lesson from Part 1 of this series (Don’t talk in percentages!) and Lesson Learned #10 below (Keep things simple and plan ahead!).

Lesson Learned #9: Be conservative in your estimates! Believing in your business plan is one thing, but be sure that you do so in a realistic way. As a general rule, developing your product, raising funds and marketing your business will all take more time than you initially budget. Costs will be higher than anticipated and revenue, if it comes at all, will come more slowly than expected.

Create a plan that creates a path to success and is sufficiently grounded so that others, who may not share your passion or have the same level of enthusiasm for your ideas, can also have confidence in the path forward.

Lesson Learned #10: Keep things simple and plan ahead! This final lesson summarizes an underlying theme of many of the earlier lessons in this series. By tackling a few key issues early on in the life of your startup (like founder contributions, intellectual property protection and the other lessons included in this series), you can keep things relatively simple and avoid the often complicated process of untangling problems as they grow bigger down the road. Also, the smaller you can keep the group of key decision-makers (board of directors, etc.), the more streamlined and nimble the company will be early on. That said, it is important to plan ahead. Make decisions based on the information you have at the time, but be prepared for change.

These lessons (and those described in part one of this series) are important to keep in mind to avoid problems and unnecessary hurdles, and to pave the way for your startup to succeed.

Matthew H. Benson is a partner at Cook Little Rosenblatt & Manson in Manchester, where his practice focuses on representing startup and other entrepreneurial companies with various business and commercial matters. He can be reached at mbenson@clrm.com and followed on Twitter @matt_benson.