9 Costly Financial Mistakes Every Startup Founders Should Avoid

These blog deals with mistakes to be avoided by startups founder on daily basis, in order to avoid hindrance in your daily working.

9 Costly Financial Mistakes Every Startup Founders Should Avoid

Working with hundred of companies and founders over the years, the Jordensky team has seen many instances where better information from the start could have avoided poor decision making and painful lessons for Startups.

Jordensky provides founders with the necessary tools and information to help them build their startups in a proactive manner. Here is a non-exhaustive list of early mistakes that founders should be aware of in order to avoid them and increase their chances of future success.

Startup Founders Should Avoid These 10 Early Mistakes
Startup Founders Should Avoid These 10 Mistakes

1. Not Paying Taxes

Direct Taxes and Indirect taxes are the two main types of taxes that every company must pay. Also startup may be subject to a variety of other types of taxes, depending on its operational and financial circumstances (quarterly tax returns, GST taxes, and payroll taxes). Failure to file and pay corporate taxes can result in a variety of late penalties.

2. Issuing too Many Authorized Common Shares to the Founding Team

It is important to note that authorized shares do not indicate who currently owns the company; instead, issued and outstanding stock determines who owns the company. If a company issues all of its authorized shares, it must amend its AOA to allow for the issuance of additional common shares. The amendment procedure necessitates a shareholder vote as well as an additional filing fee. This type of time-consuming and unnecessary work is usually avoidable with a little forethought and issuing the correct number of shares from the start.

3. Granting Fully Vested Stock to a Cofounder

As mentioned earlier in this list, most startups will issue vesting founder stock. This mechanism exists to align incentives, as the primary reason for a cofounder receiving stock is to contribute significantly to the startup over a long period of time. If a founder leaves the company before the stock has fully vested, he or she will only keep the vested shares, with the company repurchasing all unvested shares at the price the shares were granted at.

A vesting schedule protects against a scenario in which a cofounder joins the company, receives a substantial fully-vested stock grant, and then leaves the company shortly thereafter. Without an automatic repurchase mechanism in place, the company has a shareholder with significant equity on their cap table whose total contributions to the company do not match their level of ownership. The only way for the company to repurchase those shares is to negotiate with the former founder. Repurchase negotiations can be extremely costly and an unnecessary distraction for a startup.

4. Not Complying with Laws

Securities compliance refers to the laws, regulations, and practices that govern the collection of funds from investors. The consequences of failing to comply with securities regulations are severe. Penalties can include an automatic right for investors to demand their money back, spenalties, and criminal investigations, as well as the company's officers and directors being personally financially liable to repay the investors. When a startup considers accepting funds from a potential investor, it should consult with an lawyer to ensure that it is in full compliance with securities regulations.

5. Leaving Due Diligence Prep Until the Last Minute

If angel investors or venture capitalists are serious about investing in a startup, they will request extensive and detailed information about the business. The investors (along with their lawyers) will go through all of the materials to verify the claims made by the company up to that point. Due diligence is typically performed just prior to the closing of an investment.

Investors take due diligence very seriously and expect all materials to be accurate and comprehensive. Failure to produce materials when requested slows down the process and can frustrate potential investors. Startups should prepare their documents before beginning due diligence to help speed things up and increase their company's chances of closing an investment.

6. Investing too Little or too Much Money in your own Company

Investors want to see that the founders have made a financial investment in their businesses. This shows investors that the founders are dedicated and believe in their product. There is no magic number for determining how much to invest; the amount is determined primarily by the founder's personal financial situation.

Carrying too much personal debt, on the other hand, can cause issues with investors. Having an overly leveraged founder sends a signal to investors that the founder may be forced to seek a premature liquidity event in order to cover their personal debts.

7. Seeking Investment before the company is ready

A company obtaining angel and venture capital investment solely on the basis of an idea is extremely rare (almost statistically impossible). Before considering investment, investors require a company to have met some basic product milestones and metrics. Furthermore, the company must have some basic materials prepared, such as a business plan and a pitch deck.

A company that seeks investment too early is not putting its best foot forward because it does not understand what types of companies certain investors typically invest in. Furthermore, many angel investors require time and effort from the company to prepare applications. Submitting an incomplete application or failing to prepare materials is a sure way to be overlooked or rejected by investors.

8. Lying

Don't get caught up in the moment when pitching your company or answering tough investor questions. Being caught lying or misleading investors is the simplest way to sink an opportunity. The leadership team is a major consideration for most early-stage investors. Investors prefer to work with companies whose founders and officers act with integrity in order to establish a trusting relationship.

9. Be Professional

Finally, avoid being a jerk. You only get one chance to make a good first impression, so don't blow it by being rude or unprofessional. Investors primarily invest in their home markets, and the social and professional circles for early-stage investment are much smaller than you might think. It can be difficult to overcome a reputation for being difficult to work with. Investors will check your references and people you have previously worked with. Do yourself a favor and treat everyone with professionalism and respect.

About Jordensky

At Jordensky we want to ensure that small businesses continue to thrive while we provide them the best inputs using the latest technology and tools.

Jordensky helps you in accounting, taxes, MIS, and CFO services for Startups and growing business and are focused on delivering an experience of unparalleled quality.

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