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.