Five of the most common dangers for startups – and how to avoid them

by Startacus Admin

Harper James Solicitors work with startups throughout their evolution, seeing first-hand some of the biggest issues that will come their way! Here, the team highlight the often hidden mistakes and dangers that may impact on a startup's success.

If you’re new to the world of startups, there’s hidden mistakes that you could make as a result of an understandable lack of foresight. We’re here to enlighten you on these dangers and how to avoid them.

Choosing an incorrect company structure

The most common company structure for a start-up business is a private limited company. Owned by shareholders and run by directors, you can issue different classes of shares to give owners a variety of special rights. This is particularly useful if you intend to seek funding from outside investors. 

For professional service and activity companies, such as law firms and accountants, an LLC may be more appropriate.  Similar to a private limited company, an LLC has limited liability but differs in that it follows a partnership rather than a shareholding model.

Your hiring decisions

Constant high staff turnover costs both money and time. Ensure that you hire the right people by utilising your network, fulfilling employment practices, carefully selecting marketing tools and using your gut instinct. When you find a good fit, check their previous job history, roles and responsibilities and check references.

Draft an offer letter that covers all the main terms of employment and serves as a basis for the contract of employment. For directors, you’ll need to send a draft service agreement for them to review. 

If you make a wrong hire, don’t be tempted to take shortcuts with the dismissal process. Employees who have been with you for less than a year may have fewer protections, but you will still be expected to follow a fair and open process in your dismissal procedure. Not having the right team is a common reason why startups fail. Read this advice from Harper James Solicitors for some of the key personalities and soft skills you'll need in your initial start-up team.

Partnership problems

If you’re going into business with a colleague or co-founder, you need to solidify the details of your partnership early and in writing using a partnership agreement. The agreement should cover:

• How you intend to divide up the business in regards to shares and ownership
• Business contributions in terms of finances, expertise and time
• Business expectations
• How disputes will be resolved
• Exit plans

The agreement will form the basis of a legally-binding shareholders’ agreement. Keep this up-to-date and flexible and you’ll minimise the disruption of founder disputes.

Fumbling the finances

Whatever your mathematical skills, you can’t ignore the fundamentals of accounting for your business. Luckily, as well as hiring finance staff there are online software systems which can help you monitor all aspects of your finances. If you’ve just started a new business, the concept of funding will be both necessary and daunting. Find out more about the different funding stages for startups here. 

You’ll also need a crash course on how to read financial statements and profit and loss accounts, as well as setting up a regular review procedure. Potential investors and banks will expect you to be able to answer on the following:

• Your revenue projections and the assumptions you used to reach these figures
• Your company capitalisation, and the debt and equity will you need to achieve your projections
• Your intentions to create share options for employees
• When you expect to become profitable
• Your burn-rate for cash
• The profit/loss on each sale
• Your key performance indicators (KPIs)

Finding and keeping customers

Few things are as nerve-wracking as trying to achieve your first sales. When looking at finding and retaining customers, try these tactics:

• Focus on the product and your USP when promoting
• Use social media effectively
• Harness the power of email outreach
• Consider strategic partnerships to piggyback off reputations and customer bases
• Use data and metrics to keep tabs on your customers, retention rates and trends
• Providing great customer service
• Streamline to reduce hassle for your customers to a minimum

Also, while it’s important to have a loyal customer base, building a business on the back of just a few key clients can be counterproductive, so make sure you have a variety of contacts.

About: Advice provided by startup specialist law firm Harper James Solicitors, a full-service national commercial law firm who provide genuinely affordable, high-quality advice to entrepreneurs and high-growth companies in England and Wales.

 

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Published on: 12th November 2019