Start-up companies face many unique and difficult challenges when first starting out in the business world. It is widely estimated that 50% of all start-up companies fail in their first year. That is not a promising statistic to any start up looking to enter a chosen market. Start-up failures can usually be boiled down to a few common mistakes, with that in mind, Nigel Greenaway, Corporate Director and Founder of Greenaway Scott takes a look at some of the top mistakes made by start-up companies and how to avoid them.
When starting a business, it is very easy to overlook certain aspects of the company and make mistakes. Entrepreneurs can for example get caught up in the excitement of their idea and as a result the legal requirements that come with running a business can take a back seat to the more exciting steps such as product development and marketing. However, a failure to address the essential legal issues from the start could result in significant liability for the company and its founders, halting the business in its tracks before it has a chance to get its feet off the ground.
Attempting to go at it alone
Having the right people in your team can be the difference between success and failure. Make sure you take on people who share your drive and enthusiasm for your brand and who will work together as a team to grow the business. It is equally important to ensure you have a strong legal team behind you to walk you through the basics. When starting a new businesses many people make the mistake of trying to do everything by themselves to save costs but getting the right legal framework will save your business time and money in the long run especially if things don’t go exactly to plan.
Not getting the formation right
One of the very first decisions you will need to make is what legal form to operate the business in. There are a number of ways to set up a business for example, as a sole trader, a partnership or a limited liability company. The requirements for setting up each type of business vary, as do the costs and tax repercussions so it is important to take advice and chose the one which is right for your business. Once your company is formed you will need to have a think about the standard form contracts that your company will operate under. This can include your terms and conditions, company policies and supply of services contracts. Getting these documents properly drafted in accordance with your businesses specific requirements can go a long way in preventing potential future disputes.
Shareholder Relations – not planning for when it goes wrong
Many entrepreneurs start off with the belief that all of the individuals involved in the company will be on the same page and so make the common mistake of not putting plans in place to cover what happens if it doesn’t all go to plan. It’s important to have these discussions at the start especially if you are going into business with family or friends. Some of the key deal terms to hash out are:
- What are each individuals responsibilities and what will their roles be;
- What percentage of the company will each individual get and what specific rights will they have (if any);
- How much time is each individual expected to put in to the company and how much will they be remunerated for their time;
- What happens if someone leaves; and
- Under what circumstances can someone be removed.
Not protecting your IP
If you have developed a unique product, technology or brand, you need to consider taking steps to ensure that your intellectual property rights are protected to prevent potential future infringements. There are several ways in which you can do this. Firstly, patents are the best protection you can get for a new product. A patent gives provides a right to exclude others from making, using or selling your specific product.
Secondly, a copyright gives an exclusive right to make copies of work (such as art books, articles, music, movies, software, etc.) and to prepare derivative works (such as sequels or revisions) based on the work.
Lastly, trade mark rights protect the symbolic value of a word, name, symbol, or device that the trademark owner used to distinguish its good from those of others. You obtain rights to a trade mark by actually using the mark in commerce.
Intellectual property applications can be technical and as such it is advisable to get an IP lawyer to help ensure your IP is adequately protected.
Every start-up will make a mistake (if not several) at the outset, but whatever the mistake, the key is to analyse what went wrong and make sure you don’t repeat it. It is often the case that the mistake can be easily rectified, the important thing to remember is that a setback doesn’t automatically mean failure – behind every successful business there will always be mistakes.