Start-up Formation Considerations

[Pinskylaw.ca]

Start-up Formation Considerations

One of the most important things founders of a start-up should do before launching the company is to determine the exit strategy. The founders have to decide whether they want: (1) to go public; (2) to sell the start-up out in 10 years, (3) to merge with another company when the start-up reached a certain revenue level, (4) to form a joint venture with a larger company. Depending upon their objectives the founders of the start-up could have radically different underlying strategies in achieving their objectives.

For example, many legal, financial and business decisions would be made in a certain way if the goal were to go public within three years, as compared with staying private indefinitely. Certified audits by a reputable accounting firm experienced in Ontario Securities Commission (OSC) accounting are required if the start-up plans to go public. On the other hand, if the founders' goal is to be acquired by a large company, perhaps a strong research, development and patenting effort to expanding market share is more important than building up earnings per share. The founders and the board of directors (usually the same individuals), have to determine these priorities and goals in order for the start-up to achieve them.

At the outset, the founders, owners and managers are usually the same individuals. However, when angel or venture investors invest in the start-up, there may be different views as to the proper trajectory of business development for the start-up. Accordingly, if the founders are looking to go public and continue to operate independently, whereas the investors are planning for the company to be acquired, the founders should ensure that the investors are fully informed in the investors' disclosure document as to the true goals of the startup management, to avoid misleading of the investors. Thus, unless the founders take the time to summarize their short-term and long-term objectives, they maybe moving down the wrong path, with adverse legal and business consequences.

Bellow are 10 the most common mistakes made by start-up companies:

Mistake No. 1: Failing .

Mistake No. 2: Failing .

Mistake No. 3: Failing to conduct timely and .

Mistake No. 4: Failing to establish .

Mistake No. 5: Inadvertently .

Mistake No. 6: Failing to .

Mistake No. 7: Selling securities to .

Mistake No. 8: Failing .

Mistake No. 9: Creating a "cheap share" problem.

Mistake No. 10: Failing to exercise .

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