When I started my fifth company I thought, “I’ve made all the mistakes I could possibly make. This one is going to be smooth sailing.” As I sat down to write this, I said that to my COO, and she laughed in a way that made me slightly nervous. Perhaps I’ve got a few mistakes still ahead of me.
In my last twenty years in the start-up world, I’ve learned that many of a founder’s biggest mistakes will be made in the first year. Early on, long-term consequences are inconceivable. Many founders start their companies testing ideas, uncertain their idea will hold up—just two women working on an idea over Zoom in the midst of a pandemic. Who knows what will come of it?
Of course, they’re right. Many companies do fail or fail to get started. But sometimes the greater pitfall is unintended success. A lack of planning or knowledge can lead to ruined friendships, isolation, burned bridges that block potential exits, or unintended dilution and loss of control.
About a decade ago, I was meeting with some investors about an EdTech company. Vance, a real estate developer, took me aside and said, “The one thing you need to watch out for is not what happens if you fail, but what happens if you succeed.”
Are you ready for success?
1. Not getting a lawyer
There are a lot of services that help start-ups get up and running without the use of a lawyer. I used one of them with my last company, and the result was about $50K in legal bills to fix everything the automated system had gotten wrong. In my time mentoring companies at NYU, Columbia, Wharton, Techstars, and other places, I have seen countless filing mistakes, even for the initial paperwork. A good legal team is necessary from day one.
2. Getting a lawyer that doesn’t know start-ups
Free or cheap is not always best. We worked with a firm that came recommended, but didn’t have a start-up practice. The result of that error? Close to $150K in fees to fix the countless errors the firm made. It was beyond painful.
3. Not knowing your stock options and corresponding taxes
Look them up and take them seriously. If you’re operating in the States, pay attention to the qualifying small business stock (QSBS) and the 83(b).
4. Putting off compliance in a regulated industry
Oh, the stories I’ve heard! Let’s just say that if you’re in healthcare, insurance, education, or another highly regulated industry, pay attention to regulations. If you don’t, you’ll seriously regret it.
5. Hiring people you don’t need
Filling roles is expensive. Increasing headcount when you are still throwing ideas around increases how quickly you burn through start-up capital, and too many people leads to ambiguous roles and management distractions. It can even drive down salaries (which should already be small in a start-up).
6. Filling expensive full-time roles too early
There is a right and a wrong time to fill C-suite roles. For example, not everyone agrees on this, but in my experience, until you have a proven business model, a full-time CFO is not worth the spend. As you search for that business model, you need to be flexible enough to move in the direction the market is pulling you. CFOs by nature are cautious, which can limit flexibility and creativity, making pivots difficult.
7. Hiring your friends
There is a high likelihood you will pivot more than once, and your initial hires may not be the right fit in year two of the company. Being a founder is hard enough, but losing friends on top of that will make your job much harder.
8. Being laissez-faire about your company culture
It is incredibly important to communicate clearly with early hires and articulate values, goals, and vision, or you may end up somewhere unintended.
9. Getting involved with drama and jerks
Avoid drama bybeing clear and honest, keeping your promises, and avoiding jerks and drama kings/queens. This type of person will burn a lot of time and energy you don’t have. If someone brings drama, it doesn’t matter how good they are at their role. It is never, ever worth it.
10. Not understanding equity compensation
Be careful about giving too much (or too little) equity to advisors. Too many people don’t know what equity means or how to use it, let alone the tax consequences.
11. Having too many people “helping”
Early-stage equity is valuable, so don’t give too much away. It’s easy to accidentally rope friends in by talking through ideas. I get it; it makes you feel less alone. They may be your friends, but friends won’t help for free. I’ve had “advisors” prepared to take me to court—they thought their contribution to the company was invaluable when I thought we were having friendly conversations. Be smart about your inner circle. This is a good resource to learn the basics of equity and people.
12. Having too many advisors, not enough advisors, or the wrong advisors
Your first advisor is not necessarily your best advisor. You don’t know everyone, even if you think you do. And no one knows everything. The right advisors are invaluable to a growing company. That said, advisors are not collectables. Having too many you don’t use is expensive and distracting.
13. Getting locked into name-brand VCs
There are many ways to fund a company. Many feel the only pathway is a big VC, but if your name-brand investor doesn’t invest beyond initial funds (i.e., follow-on rounds), it can be a huge problem. Consider: Is the VC strategic? Is their cost of money or control reasonable? Do you like them? If not, you may be missing out on great advice and friendly money closer to home.
14. Not communicating with your investors
Early investors, particularly angel and seed investors, are investing in you as much as your idea. They are your partner in the dream, and want to hear from you regularly—good and bad news. They are a great source of support, ideas, and help.
15. Raising too much on convertible notes
Convertible notes, short-term debt that converts into equity, can feel like an easy way to fill a gap. When overused, though, they really add up (and not in a good way).
16. Burning bridges
Everyone knows everyone in the investment world. Think twice before you burn a bridge.
17. Giving up control too early
Retain control of your company for as long as possible. You will go through lots of pivots and adjustments. Diluting control is a surefire way to end up going the wrong direction.
18. Spending too much or too little
Your personal neuroses or ideas about money will follow you to your business. Beware that personal financial habits are not always successful in a business context.
19. Confidence that’s too high or too low
Not knowing your competitors’ strengths will limit your ability to differentiate. At the same time, don’t get distracted by every competitor on the horizon. Know your differentiation, and focus on executing it beautifully.
Ultimately, the best advice for new entrepreneurs is to realize you don’t have all the answers, even if you think you do. Surround yourself with smart advisors and partners who can help you navigate out of or around the worst mistakes.