After years of working with early stage companies, I have seen the good, bad, and the ugly. Every company has problems. And, a lot of them are preventable.
To make this practical and learn from the mistakes of others, I have compiled a list of the top 13 mistakes that early stage technology-based companies make. Each of these deserves deeper analysis and can often be avoided with early, informed decisions.
If you have questions about any of these issues or want to discuss your specific situation, you can schedule time with our team here:
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If you prefer a walkthrough of these concepts, you can also watch the video overview included below, which covers the same material at a high level.
Mistake #1: Starting a Business While Employed Elsewhere (With Overlap)
Launching a startup while still employed can create conflicts, especially if there is overlap in industry, intellectual property, or customer.
This can trigger:
- Employment agreement violations
- Intellectual property ownership disputes
- Potential litigation
To learn more about this particular mistake, read our full blog post here: Startup Mistake 1 of 13: Competing With Current Employer.
Mistake #2: Poor Choice of Entity
Choice of entity matters. Selecting the wrong legal structure can lead to:
- Tax inefficiencies
- Investor resistance
- Governance complications
Entity choice should align with long-term fundraising and operational goals.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 2 of 13: Poor Choice of Entity.
Mistake #3: Improper Founder Share Vesting
Failing to vest founder shares, or structuring vesting improperly, creates risk. Life events happen. Vesting is a way to address an unanticipated founder departure.
Standard practice typically includes:
- Time-based vesting, often four years
- A one-year cliff
Without this, equity distribution can quickly become misaligned.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 3 of 13: Failing to Properly Vest Founder Shares.
Mistake #4: Missing the 83(b) Election Deadline
Failing to file an 83(b) election on time can result in significant tax consequences.
Key point:
- The filing must occur within 30 days of receiving restricted stock
Missing this window can dramatically increase future tax liability and complexity.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 4 of 13: Failing to Make a Timely 83(b) Election.
Mistake #5: Not Securing Intellectual Property Properly
Without proper agreements in place, a company may not actually own its core intellectual property, even if people have been paid for their work.
Common gaps include:
- No invention assignment agreements with employees or founders
- Improper wording or no intellectual property assignment language in contractor agreements
To learn more about this particular mistake, read our full blog post here: Startup Mistake 5 of 13: Not Locking Up Intellectual Property.
Mistake #6: Over-complicating or Misunderstanding Complexity
Some founders over-engineer legal or financial structures unnecessarily. Others underestimate issues that are genuinely complex.
Both situations lead to inefficiency, risk, and cost to either implement and maintain or fix.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 6 of 13: Overcomplicating or Underestimating Complexity.
Mistake #7: DIY Lawyering on Critical Matters
For cost and other reasons, not all legal work of startups can be handled by an experienced lawyer. But, certain work absolutely should be when possible. Those areas include sales of securities, important intellectual property matters, strategic contracts, and company sales.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 7 of 13: DIY Lawyering for Critical Matters.
Mistake #8: Not Understanding Investor Deal Structures
Many founders lack a working knowledge of:
- Preferred stock terms
- Liquidation preferences
- Anti-dilution provisions
This can result in unfavorable deals that impact long-term outcomes.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 8 of 13: Not Understanding the Basics of Investor Deal Structures.
Mistake #9: Over-Focusing on Valuation
Valuation is only one term of a financing deal.
Other terms can have more meaningful, long-term impact on a company as they become the basis of terms in later rounds.
A high valuation with poor terms can still be a bad deal.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 9 of 13: Focusing Only on Valuation for Investor Funding.
Mistake #10: Short-Term Capitalization Strategy
Raising capital without considering future rounds can create:
- Cap table fragmentation
- Investor misalignment
- Down-round risk
A long-term capitalization strategy is essential.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 10 of 13: Raising Capital with a Short Term Mindset.
Mistake #11: Misclassifying Workers
Incorrectly labeling employees as independent contractors can lead to:
- Tax penalties
- Wage and hour claims
- Audit risk
Classification must align with legal standards, not convenience or the parties’ intent.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 11 of 13: Improperly Classifying Personnel.
Mistake #12: Violating 409A and Deferred Compensation Rules
Improper handling of stock options or deferred compensation can trigger:
- Severe tax penalties
- Compliance issues
Regular, defensible 409A valuations are critical.
To learn more about this particular mistake, read our full blog post here: Startup Mistake 12 of 13: Running Afoul of 409A or Other Deferred Compensation Issues.
Mistake #13: Poor Corporate Recordkeeping
Inadequate documentation creates problems during:
- Due diligence
- Financing rounds
- Acquisitions
Key areas include:
- Board minutes
- Stock issuances
- Cap table accuracy
To learn more about this particular mistake, read our full blog post here: Startup Mistake 13 of 13: Poor Corporate Records.
Final Thoughts
Have thoughts on what you just read, or want to explore how it applies to your situation? We’d love to talk: