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.