When a startup raises money, it has to comply with the securities laws. The Securities Act of 1933 specifies that a company cannot issue stock without registering that stock with the SEC, unless there is an applicable exemption. There are exemptions for private sales of securities, but these exemptions have various requirements that must be satisfied. When seeking investment from an angel investor or a VC fund, it’s crucial that the startup work with an experienced, knowledgeable lawyer, who can guide the startup through the process. It’s also a good idea to work only with “accredited investors,” who are more likely to understand the kind of investment they are making, and better able to withstand losing their entire investment. Failing to comply with securities laws can give investors the right to get their money back, and can create serious civil and criminal liability on the part of the startup and its executives.
Number 8 – Putting Off Developing Proper Management Structure
Many startups have flat organization structures, by design and preference. This may be acceptable at the early stages, but as the business grows and the headcount increases, so does the need for more structure and process. An employee handbook may seem unnecessary for a startup when there are only 3 or 4 employees, but when the hiring rate increases, a handbook is an important tool for communicating the desired culture and for setting expectations. It is also important to develop and communicate policies on harassment and discrimination, including processes for raising complaints. Clear policies in this area will help foster a productive work environment, and will help protect the company from liability. Another consideration in the HR area is creating a bring-your-own-device policy. If employees are doing company work on their own laptops, tablets, and smartphones, does the startup have procedures and policies in place to ensure data security and protection of its intellectual property? I work out of a co-work space where there are lots of startups, and I would guess that every one of them has employees and founders that use personally-owned devices. I would also guess that none of them have policies or technology in place to manage these devices (hint hint). You can read more about BYOD here.
Number 9 – Issuing Stock Options Without a Formal Stock Option Plan
Stock options can be an important compensation and recruitment tool for cash-poor startups. Stock options are securities, however, and failure to observe the formalities when issuing stock options can violate the securities laws. A company will need to reserve an option pool and create a formal stock option plan. Options will need a Section 409A valuation. Shareholder and board of director approval will be needed for all of this. There are legal and tax complexities, and a startup should consult an attorney before moving forward with stock options.
Number 10 – Failing to Consider Privacy Issues
Thank you for reading, and I hope you found it informative. If you are running a startup (or thinking about it), I hope this post gives you food for thought.
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