Corporate & Securities Law

5 Common Founder Mistakes

By Ryan Roberts

This is a re-post of an article that I wrote about common founder mistakes for StartupLucky.com and Killerstartups.com (not sure if it went out yet).

1. Spending Too Much Time Keeping Your ?Unique? Idea Top Secret. Some founders attempt to have everyone within 25 feet of them sign an NDA. Instead of spending time drafting and then obtaining signatures on a NDA, a founder should use that time to implement the unique idea. It?s highly likely the idea isn?t unique, and a founder could turn off some good investors/partners/mentors by asking for a NDA signature.

2. Not Vesting Founders? Shares. It?s easy to believe that vesting your own founder shares doesn?t help you, but take a look around the founder table. Now think how you?ll feel if your co-founder decides to try out for American Idol and take his 33% of his vested ownership with him to Hollywood while you and the rest of the founders pound keyboards all day and night.

3. Forgetting to Make the 83(b) Election. If you decide to vest your founder shares, don?t forget to make an 83(b) election with the IRS. You have 30 days to do so after purchasing your founder shares, but there?s not reason to wait more than 1 day post-purchase.

4. Issuing Preferred Stock to Minor Seed Investors Like Your Uncle Bob. Sure, Y Combinator and TechStars get preferred stock for their $18,000 seed investment, but your Uncle Bob (probably) is not Paul Graham or David Cohen, Uncle Bob is not running a startup mentorship program for your team, nor does Uncle Bob have a massive amount of relevant startup industry connections.

5. Concentrating Only On Valuation When Raising Capital. There?s a reason why term sheets are several pages long. Keep reading after you get halfway down the first page to ?pre-money valuation??there are many important terms on subsequent pages. Also, consider whether the investor or investor group is a good fit for your startup. Don?t choose an investor group solely by the highest pre-money number, if you are lucky enough to have a few term sheets in front of you.

Full post as published by The Startup Lawyer on October 23, 2009 (boomark / email).