The Most Common Mistakes Made by Start-Ups [e152]

February 16, 2015

Nasir and Matt list off the biggest mistakes they see start-ups make and offer their advice on how to avoid these issues.

Full Podcast Transcript

NASIR: All right. Welcome to our podcast where we cover business in the news and also add our legal twist to those news stories. My name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: And we’re here today, we are talking about messing all the bad mistakes that you business owners make all the time.

MATT: Yeah, it’s coincidental because I know you messed up Valentine’s Day which was two days ago so we’re talking about more business-related mess-ups.

NASIR: Yeah, not personal mess-ups.

MATT: This is a nice fit for you though, I think, but we’re not going to get into personal stories on this podcast.

NASIR: Thank you.

MATT: There’s a lot of ways that businesses can mess up and I guess we’re going to focus more on start-ups specifically and, you know, obviously, there’s ways you can screw things up at all stages in your business, but there’s crucial things at the beginning that could really be big impediments down the road. To me, one of the biggest things that could happen for a company, especially if they don’t really know each other beforehand, is not having any sort of agreement in place or at least something in writing saying who is doing what or I guess, more importantly, what the ownership is of the specific individuals because, oftentimes – not oftentimes – sometimes, you’ll have a couple of people get together, you know, start working on a project together, it turns into something, maybe even goes so far as to even file something with the state and become an actual entity, but don’t come to an agreement on who owns want or if there’s a majority and just kind of more defined roles, I guess. To me, that’s one of the bigger things where I can see a start-up just not getting it right from the onset.

NASIR: I think we’ve talked about this – at least a couple of weeks ago or so – about how partners get together and they’re excited about their business idea and they’re like, “Okay, let’s just do it 50-50.” But then, down the line, that ends up not making sense or you have more than two partners and everyone expects it to be equal when, in reality, that may not make sense when one person may be putting a lot of money in than the other or they have this somehow vague agreement and, whether it’s in writing or not, it usually needs to be a little more specific than that and that requires, frankly, tough conversations.

MATT: Sometimes, when companies start up, they need some money and so they’re kind of willing to do anything to get that money and sometimes they have to give up equity to do so. So, I know you recently wrote a really nice post that we’ll link in the notes of this episode about ways to keep control while still maybe achieving some of those other things.

NASIR: I do like control because, to me, the control aspect is actually worth more than the equity itself. I mean, obviously, you need equity – some kind of equity ownership – to make it worthwhile. But, when you have control, sometimes, the only person you can really trust is yourself. When I say “yourself,” it doesn’t necessarily mean you can’t be with other people and you can’t share control with other people. But, when you’re dealing with outsiders or people that you haven’t been in business with for a while or don’t have a tremendous amount of trust then it’s risky, right? I mean, I’m not saying that you’re doomed to fail, but there’s a level of risk in there. Yeah, I like that.
I think some of the other things that start-ups just we see over and over again is they do do-it-yourself incorporation processes – whether they go through LegalZoom or otherwise. You know, we’ve seen a number of weird things, but some of the basic stuff that you would think would be covered are things like – I don’t know – filing an S corp and then having an entity, or a foreign person owned a share for the S corp which you can’t do, or even if you’re a professional corporation and you file as a corporation instead. LegalZoom is not going to guide you through those kinds of things.

MATT: In certain instances, I think you can get by with that but, more times than not, you’re probably going to have to go back and at least change things so you’re spending time and more money just fixing the mistakes and you spend more money and time than you would have had you just done it right at the beginning. I don’t want it to make it seem like we’re saying, “Hey! We’re attorneys; you need to have this stuff done by attorneys!” I think it’s just as important – maybe even more so – on the accounting side and especially the payroll side, too. If you try to handle your own payroll or your own accounting and taxes, I mean, you need to find professionals to do that work because I know you’re possibly trying to run that lean start-up model but it’s just not worth it, in my opinion.

NASIR: Yeah, I agree, and it’s interesting how you mention taxes, too, because, you know, obviously, we’re coming up to April soon and, for most people, before they own a business, they’ve maybe at least done their own taxes once, you know? Obviously, it depends on your circumstances, and maybe some of them even have at least done their own taxes using some kind of tax software, whatever, and they even have tax software that is fitting for businesses, but I’ll tell you, you know, 1040EZ is a simple form to file. But, once you start filing other forms related to your corporation, your S corp, your LLC, taxes in S corp or not, it get complicated. I mean, most attorneys don’t do their own taxes even if they try to configure it out. It’s just leave it to the professional that that’s all they do, you know? That’s what they do.

MATT: Yeah. I mean, it’s likely if they haven’t done it before, especially when you have the corporate side. If it’s an actual corporation, they’re going to miss out on forms that they need to file and it’s not just, “Oh, I screwed up on my own taxes.” You’re screwing up on the other owner’s taxes as well. Someone’s got to prepare these scheduled K1s and it gets into a whole murky area but, yeah, it’s just worth it to have someone who’s a tax preparer or CPA accountant, et cetera, look at that stuff. I’ve actually noticed some billboards – I don’t know if it’s in Texas, too, but – here in San Diego, there’s billboards urging people to look up whether their tax preparer is a registered tax preparer that has a PTIN number – Prepared Tax… I don’t know, PTIN.

NASIR: I don’t know.

MATT: But it’s urging people to make sure that the people that are preparing their taxes are actually able to do so. That’s something you have to register with the IRS – to sign off on, at least.

NASIR: Wasn’t there a new change for tax preparers in 2014?

MATT: It’s possible. I don’t know.

NASIR: Of course, it’s possible.

MATT: Pretty much every year, I register and get my PTIN number. I think it’s only $63.00 a year so it’s not bad. But, I think, as an attorney, you can pretty much automatically get one. I have a background in tax so I actually have more familiarity with it than most attorneys. But I have many friends that are attorneys that have no idea, anything with taxes, and they can just get their PTIN number and move on, but I think most of them are smart enough to realize they shouldn’t do that. But there’s probably some out there that that’s not the case.

NASIR: No, that’s true. I mean, I know quite a bit about tax, but preparing taxes is different than, you know, understanding tax, I think, too.

MATT: Yeah, definitely.

NASIR: Attorneys have a little bit, they already have a fiduciary responsibility, ethical rules that binds them to be competent with whatever they’re working on.

MATT: Well, we spent way more time on taxes that I forget what we were even talking about – the wrong decisions that start-ups can make.

NASIR: Yeah. So, what else? I’m sure there’s a bunch of others, right?

MATT: You know what’s a good one? And this is very early stage and I’ve actually seen this happen multiple times and it works on two different phases. So, you have to have a name, obviously, for a business and so they’ll come up with a name and not realize that (1) it’s taken. I mean, it’s one thing to have your URL, to have the domain name taken – you can get around that but – (2) if the actual name itself has already been registered with the state, or even worse, if there’s a trademark and the name’s already trademarked then you’re kind of just screwed. Maybe you’ve already paid to have a brand created and everything like that, and then you realize that you’ve wasted time and money. I mean, I know some businesses that are in the branding and creation like that don’t necessarily screen the names for any sort of conflict to see if anyone owns that. So, you might just assume, “Oh, I paid this and they created this name, logo, et cetera,” but they don’t always screen those to make sure those aren’t taken already.

NASIR: I think that should be a practice and I know some of them actually do that as part of their process. Obviously, they’re not attorneys, but they’ll kind of just do a quick search just to make sure. We just experienced this about a month and a half ago. We had a client that was developing a product. It was a new client and they had already developed and started marketing it. The problem was that, when they approached a trademark attorney at that time, they were like, “Well, there’s a competing mark here that could be of issue so, if you file it, it may bring more attention to it, so it may not be a good idea to file it,” which, in theory, could make sense, but the problem is that the answer should have been, “You have to change your name if you want to make this trademarkable to enforce this early in the process.” Now, they don’t want to do that because they’ve been marketing it now. So, no matter what, it’s going to be costly. Now, they have to decide, “Okay, should they trademark it and go forward and risk a competing claim in opposition and may have to change it later or do they just change it now?” And so, they’re making the decision to just take the risk and see if they can get it through because it’s costly either way and it would delay their launch and so forth. You know, even in that case, they went to an attorney to try to figure it out, but identifying your trademark, intellectual property of all sorts – not only your name but whatever intellectual property you may have in your business.

MATT: Yeah, that’s a good point. I have a couple not-as-legal ones. This is just from my perspective. For start-ups specifically, you’ll see, you know, they might not always know the direction and that’s fine to some extent, but I see some start-ups just try to do wait too much at the beginning and say, “Oh, we have all these different revenue models. We go this way, this way, this way.” It’s like, well, maybe, to me, you need to focus on one thing – or maybe two things. You need to focus down on some things and get those running efficiently and then maybe you can expand after that because I like the idea that you do one thing really well as opposed to doing five things that are average, if that makes sense.

NASIR: And not only is that good business advice even from a legal perspective, every service that you provide, every contract, every single little aspect or division or phase of your business has different legal consequences. And so, just from my perspective, from our legal perspective, that in itself may be a reason to simplify it. You know, for example, if you’re launching a service, do you want to launch it locally in your state or launch it everywhere in the world? The legal consequences are quite different, depending upon the type of service that you’re providing and the regulatory implications of all that.

MATT: A lot of start-ups also love this lean start-up model. It’s just a way that everyone says that all the time, I feel like I hear it constantly. “We’re a lean start-up. We’re a lean start-up.”

NASIR: And I think half the people know what it is and half of the people just pretend they know what it is.

MATT: It’s fine. Obviously, your money is tight at the beginning, whatever. But you’ve got to be able to spend money too when you need to.

NASIR: Well, okay, hold on. To be fair, the lead start-up gurus would be chiming in right now. They’ll say, “Well, lean start-up doesn’t necessarily mean cheap,” or so forth. Again, there’s a lot of misunderstanding of what lean start-up is. But I think what they would say is that you have to spend money but make it efficient and get to the point where you’re making sure you’re not throwing good money after bad as fast as possible.

MATT: Yeah. Can’t make these mistakes at the beginning – some of them are going to be worse than others but they can all come back to haunt you to some extent.

NASIR: Let’s sum it up. What’s the number one mistake that you think is probably the most detrimental?

MATT: I think it’s probably the first one I said. It’s a combination of not understanding what the ownership divides are and then who’s necessarily in charge in doing what specific roles.

NASIR: Yeah.

MATT: I think that’s central and it can affect everything. If that’s an argument, then everything’s going to be an argument because the ownership is going to be thrown off.

NASIR: Yeah, that’s one problem that can literally destroy a business, you know. If you incorporate it incorrectly, that’s fixable, you know. If you didn’t trademark your business name right away, maybe you can do that later, maybe you can change your name and rebrand. You know, whatever the other ones we mentioned, most of those are fixable problems and – you’re right – if there’s a dispute amongst partners, that’s a dead end. You know, there’s nothing more toxic than fighting founders. I mean, that’ll kill any business.

MATT: Yeah.

NASIR: Thanks for joining us. Have a good one, everyone.

MATT: Keep it sound and keep it smart.

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Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
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