Startup myths | 5 assumptions to reconsider

There’s a lot of information out there on how to best run a startup, and many commonly held assumptions. Clara breaks down 5 of the most common, so that you can go forward with confidence, knowing what’s fact and what’s fiction.

 

1. IP belongs to a company, not its employees

If your employees create your logo, website content or code, the intellectual property (IP) automatically belongs to the company, right? Not necessarily. Unless you’ve had your employees sign an Intellectual Property Assignment Agreement (or include IP assignment provisions in another agreement, like their Employment Agreement), their creations might belong to them (depending on the circumstances and applicable laws).

It’s best practice to put these agreements in place with every employee or consultant that works with your startup, to prevent future challenges to your IP. Potential investors will want to see that any IP associated with the business has been transferred to the startup – another reason to generate this agreement and keep your business safe.

 

2. All your founders will always be on the same page

As the saying goes, times change, and people change too. You and your co-founders may all agree now, but it’s still advisable to take precautions to safeguard the future of the startup. Putting a Founders’ Agreement in place early helps do this, by clearly setting out governance arrangements, the equity split, roles, responsibilities and expectations.

It also ensures that the founders’ equity is subject to vesting, avoiding any issues with them unfairly keeping all their shares if they leave before making their full contribution.

A Founders’ Agreement will also get you thinking about how you want your startup to operate. For example, use it to set out decision-making processes at board and shareholder level (including director appointment rights and which key decisions require the approval of all founders).

 

3. Cash is the only form of payment

Rewarding your team with a decent salary in return for their hard work is one way of retaining talent. Another is giving them a stake in your company. This can be done through a Share Incentive Plan (SIP), which sets aside a pool of share options that can be allocated to employees, directors, advisors and consultants, and a Grant Agreement, which allows you to then allocate options from the SIP pool to a particular participant.

Putting an equity plan in place and allocating these share options incentivises team members and encourages growth. Making your employees part-owners is a great way to empower them and aligns everyone’s interest to grow the value of the startup.

 

4. Any investment is a good investment

A venture capitalist (VC) has shown interest in your startup – time to celebrate? Not so fast. While the attention might be gratifying and well-deserved, it’s important to consider whether this investment, and the terms attached, are right for you.

Most VCs will ask for a percentage of the company (usually around 20-25%). It’s usual to issue preferred shares in exchange for the investment. This means that the VC will in effect be part of the team going forward, so carefully consider what they’d be like to work with and what expertise they can offer your startup. Are their growth, return and exit expectations aligned with your own?

Still want to work with them but can’t get on board with their term sheet? Remember that everything is negotiable, and that this is a normal (and key) part of the investment process. It’s advisable not to use the same lawyer as your potential investor, to ensure that your interests are best represented. The term sheet itself is a relatively short document which sets out the key commercial terms of investment, agreed between your company and the VC. More in-depth agreements will usually be based on the skeleton laid out in this term sheet. Ensure that enough time and energy is spent on agreeing its wording, and that you’re happy with the final version.

 

5. IPO is the ultimate goal

For many startups, an initial public offering (IPO), or “going public”, is the dream. This is understandable – an IPO is seen as the ultimate success for a startup and typically means higher valuations, better financial returns for founders, employees and investors, as well as more publicity for your business.

Going public also offers greater liquidity in the company’s shares, meaning they can be bought and sold more easily. However, the company will no longer have control over the identity of its shareholders and takes on the pressure of producing quick results. Plus, IPOs come with costs, such as those involving compliance with regulatory requirements.

Consider all exit options before taking the leap. Other popular routes include a sale of the business, an acquihire or a merger, each with its own advantages and disadvantages.