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Startup Formation Considerations

One of the most important things founders of a startup 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 startup out in 10 years, (3) to merge with another company when the startup reached a certain revenue level, (4) to form a joint venture with a larger company. Depending upon their objectives the founders of the startup 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 startup 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 startup 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 startup, there may be different views as to the proper trajectory of business development for the startup. 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 startup companies:

Mistake No. 1: Failing to license intellectual property owned by others.

Mistake No. 2: Failing to protect (trademark/patent) own intellectual property.

Mistake No. 3: Failing to conduct timely trademark searches and trademark clearances.

Mistake No. 4: Failing to establish trade secret protection procedures.

Mistake No. 5: Inadvertently hiring former employees of a competitor.

Mistake No. 6: Failing to properly maintain corporate organizational records.

Mistake No. 7: Selling securities to non-accredited investors.

Mistake No. 8: Failing to adopt an employee share based compensation plan.

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

Mistake No. 10: Failing to exercise section 72 exemptions.