GTAN|EDUCATION – The Top 10 Mistakes for Startups Seeking Funding

May 17, 2019 / Source: GTAN

On Tuesday, May 7th, Viona Duncan and Duncan Snyder of Gowling WLG hosted GTAN|Education for Entrepreneurs – The Top 10 Mistakes for Startups Seeking Funding.

Viona and Duncan shared their expertise and experience with investors and entrepreneurs alike,  focussing on pre-financing, financing and equity investments.

These are the top ten mistakes they see when working with startups seeking funding:

1 – Poor capitalization structure

• Incorporation:
  • minimize share classes and have a reason for multiple share classes
• Cap table: keep it simple, understand the implications and don’t be too generous with share/option insurances
• Decide on incentive award programs (less than 20%), everyone should not get equity

2 – No voting controls

• Unanimous Shareholders’ Agreement
  • Failing to have any shareholders agreement at all
  • Failure to use appropriate terms in shareholder agreement such as obligation to vote in accordance with terms, appropriate veto rights, appropriate threshold for amendments/waivers, restricted stock
  • Must be unanimous

• Voting trust agreement
  • Contractual arrangement
  • Better than non-voting class of shares
  • Those subjected to trust are only economic participants anyways

3 – Failure to maintain proper document management practices

• Minute Book
  • Be prepared for due diligence paperwork from day one
  • Have an up-to-date minute book
  • Have signed and well thought-out shareholder agreement
  • Be prepared to produce consents, preemptive rights waiver
  • Option grants
    • keep track, keep register, track to option pool
  • Resolutions for approvals required
• Contract management
  • Keep contract copies
  • Understand clauses in contracts
  • Track renewals, extensions and amendments

4 – Ignoring securities laws

• Consequences of non-compliance:
  • Statutory – monetary fines, rights of recessions
  • Most importantly, leaves a bad impression on investors
• Compliance = prospectus or exemption
  • Exemptions are common and easy
  • Prospectus is expensive

5 – Failure to address IP issues

• IP Documentation
  • Rollovers of founders
  • Ongoing development and IP assignments
• Representations and Warranties
  • Understand financing requirements
  • Dedicating resources
  • Company makes definitive statements to the investor about its business (regardless of due diligence undertaken)
• Avoid open source issues
  • Know what you are using
  • Know the open-source license terms
  • Implementation of practices and protocols
• Use formal protection if possible
  • Patents
  • Copyright
  • Trademarks
  • Domain names

6 – Not considering all options

• There are many financing options:
  • Bank facilities
  • Government Grants
  • Convertible debentures/SAFEs
  • Shares
• Consider how future financings are affected

7 – Failure to prepare for financing

• Know your pitch, industry, competitors, weaknesses, risks, burn rate, financial needs
• Understand your customers

8 – Having unrealistic expectations

• Timing
  • Be realistic
  • Deal with skeletons in closet
  • Understand and respect your shareholders/lenders

9 – Not understanding terms

• Independent directors could be a trap (re: voting)
• Dividends: accusing vs. declared at board discretion, cumulative vs. non-cumulative
• Liquidation preferences: participating vs. non-participating and priority or payment  

10 – Not understanding costs

• Diversion of management time and attention
• Legal costs for lender and investor
• Non-monetary costs on business/shareholders (ie. time)

Contact Gowling WLG for more information or advice on how to avoid common mistakes when seeking funding for your startup.

Do you have a fresh, new idea and are looking for investors? The next GTAN|RAW event is on Tuesday May 7, 2019. Learn more about pitching at GTAN|RAW here.