Five tips for entrepreneurs
The following tips were originally designed for entrepreneurs looking to raise money to fund their business, but experience has shown that they are applicable in other contexts, including entrepreneurs interested in selling a business. Many of these suggestions may seem obvious; however, each is representative of unfortunate experiences of other companies. While they are presented in no particular order, each can be (and has been) critical to a venture’s success or failure.
1. Take care of your intellectual property position.
Whether you are creating your own intellectual property assets or licensing them from another party, make sure that you have secured and protected those items that are critical to the operation of your business. Even if your business does not involve technology development, failure to maintain applicable licenses can be a crucial error. Have all employees and consultants sign agreements assigning the ownership of any work product to your company, or enter into formal licensing relationships that provide you with the rights you need.
2. Be careful how you raise money and from whom.
Securities laws apply even in tough times. While you may think that raising money from friends and family is always acceptable, that is not necessarily true. Federal and state securities laws apply to virtually all types of financial investment in your business. Beyond securities law compliance, understand that each new shareholder is a constituent to whom you will have a fiduciary duty. Generally, the less sophistication that your investors have, the more time and energy you will have to spend answering their questions and “managing” them. Furthermore, sophisticated, experienced investors are more likely to understand the risks of early-stage investment and can better afford to lose their investment dollars, albeit no more willingly.
3. Understand the cash side of your business.
Never lose sight of your cash reality and have backup plans in place from the outset. When raising money, pay attention to exactly what money you need and how far it will get you. If you develop a $2 million short-term operating plan when you are only raising $1 million, you will need to address the projected $1 million near-term shortfall, and you should start planning for that now rather than when you run out of cash. Once raised, spend the cash prudently and in the manner you said you would treat that cash as if it came from your own savings account. If possible, try to raise money when you have cash in the bank. Coming to investors when you are already running on fumes leaves you no room to negotiate and sends the wrong signal to your potential investors about your cash management abilities. If you have demonstrated poor cash planning by burning through your own money (or that of your friends and family), why should an investor believe that you will do any better with theirs?
4. Be prepared to share management.
Entrepreneurs seeking to raise money often struggle with the concept that investors sometimes want someone else to help run the company (now or in the future). This is not to say that a founder is necessarily the wrong person to run a company. However, you should understand that the investment opportunity is the company and whatever the investors believe is in the company’s best interest is what they will push toward. If you remain steadfast in your position that you are the only person who can run the company (or that it can only be run your way), you should be prepared to be the person who funds it as well.
5. Do sweat the details (or have someone sweat them for you).
Whether it is someone on your management team, your corporate attorney or some other professional, ensure that someone is paying attention to the details of commercial contracts, stock ownership, board membership, etc. Gaps or problems in these areas can be extremely costly to remedy later on and in some cases cannot be cured. Inability to present an organized, well-managed operation to an investor or acquiror is often the first sign of trouble (and sometimes the last thing they see as they walk away).
Working with an experienced attorney can help you navigate these complex areas and put you in a position to succeed. You should take care that your corporate counsel has experience in representing start-up and emerging growth enterprises so that they will be familiar with the types of problems you will face and potential solutions that have worked in other contexts.
David Garcia is a shareholder at Hale Lane practicing primarily in the fields of corporate and securities law. He earned his bachelor’s degree from Stanford University and his law degree from Harvard Law School. Contact him at 327.3000 or at email@example.com.
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