6 Biggest Mistakes Entrepreneurs Make

The motivation for starting a business can vary greatly. For some it is about escaping corporate life, for others it is about maximizing income, and yet for others it’s about a more creative expression. Whatever the reasons for starting a business there are certain truths I’ve come to understand that effect all startups across the board to one extent or another.

1. Startups fail to spend money intelligently on marketing.

Many new business owners fail to maximize a return on their marketing investment. For instance, buying advertising space is often, at least for most businesses, money thrown out the window, especially if it is not placed properly. Advertising helps with brand recognition so yes, it has value. But for most startups a better way to spend money is to build relationships with centers of influence and to get found online. The easiest way to accomplish those goals is to pump money into your website, maximize the search engine optimization, and join networking groups and associations that see your company as an asset.

2. Startups fail to spend money on viable resources.

Piggybacking off the prior criticism of startups, many business owners try to cut costs wherever possible. However, as the saying goes, sometimes spending money is the only way to make money and break past the financial plateaus that most startups face. So the question is, where do you spend money? The answer is simple … in people that can perform the services that take away from your time building business, networking, or performing more meaningful/expert tasks. As a business owner, I don’t spend my time doing bookkeeping or taxes, or developing my website. Instead, I pay people to perform those services so that I can spend my time focusing on building relationships and networking. Even when it comes to more menial tasks, hiring a part time associate to perform those tasks ends up leaving room for more productive things.

3. Companies fail to set a standard for the target client they want to attract.

I see this all too often especially with those in the service industry. Don’t just take on any and all clients you can. Sometimes, a client will cost you more time and money then they are worth. Set a standard for who you want as your target/ideal client, and mold your services and fee structure to cater to that type of client.

4. As a business owner, simply failing to take care of yourself.

If you can’t take care of yourself, you can’t take care of others. When you lose sleep, don’t eat well, don’t exercise, get too stressed, your work product is the first to feel the impact. How you live gets reflected in your daily presentation. Failing to take care of yourself becomes a reflection on your professionalism for certain. But more importantly, if you don’t take care of yourself, then you’re missing the point of working hard. Work-life balance is an important concept. Don’t lose focus of what is important in life. When it comes to your clients, being responsive, reliable and professional are all very important. But unless you’re walking into surgery tomorrow, client issues can wait. The key is balancing the expectations of your clients. If you don’t want to be stressed at 11:00 pm then don’t answer the phone or client email at 11:00 pm. Your personal time is about recharging and becoming fresh for the next day. Your clients will respect your boundaries and you’ll be a more fulfilled business owner.

5. Absorbing too many financial sacrifices in order to gain favor with a client.

I represented a few contractors that will especially identify with this scenario. Yes, there are times you want to discount your services in anticipation of maintaining a long term relationship. However, there’s a fine line between treating a long term client to the occasional discount and letting your clients take advantage of you. Furthermore, when you continually provide non-requested discounts, you undervalue your services. Be confident in your services and project a sense of positive self-worth. You’ll be less frustrated in your business and your clients will respect you for it.

6. Failing to accept failures as a normal part of business.

All businesses experience failures. Failures are a natural part of the business life-cycle. What’s important is that you learn from your mistakes and set a concrete plan for rectifying the issues. Dwelling over your failures is not healthy, but analyzing them and approaching them with practical approach, or the right professional, is in fact a healthy business practice.

Is your proprietary info safe?

One could argue that a company’s intellectual/proprietary property walks out the door every day when its employees leave the building. The information that is entrusted to a company’s employees is its lifeblood. All too often, however, start-up companies do not do enough to protect their own intellectual property and customer goodwill after their employees leave the company, or even leave the building.

Unfortunately, some companies take a superficial approach to this critical issue. Many emerging companies use a standardized offer letter and intellectual property agreement, focused on non-disclosure of information, assignment of inventions, and, in some instances, non-competition and non-solicitation restrictions. As a starting point, this may suffice, but planning and vigilance are necessary to ensure that companies are in an optimal position to enforce such agreements down the road.

Companies should give careful thought to tailoring restrictive agreements to particular employees or job classes, rather than using a boilerplate agreement provided to many categories of employees, as a more focused, narrowly tailored agreement is more likely to be enforced in court. One size does not fit all.

Companies should also consider defining what they consider to be “competitive” activity rather than simply barring employees from joining any employer that “competes” with the company.

Companies should also give careful thought to defining what they consider to be confidential, proprietary information, beyond the typical (and important) boilerplate about “inventions and developments, customer lists, business plans, etc.”

Companies should be mindful of using a “one-size fits all” strategy when they have locations, employees, or independent contractors in different states. Non-compete agreements for California employees will not be enforced to the same extent as non-compete agreements for New York employees. State law can vary significantly with respect to these matters. As a result, companies must consider formulating agreements tailored to the specific laws of the states in which they have employees.

Companies should also be careful about the process by which these agreements are signed. For instance, when a company fails to have a new hire sign a non-compete agreement at the time the employee is hired, then there is a significant argument that the non-compete agreement is not enforceable because of lack of consideration. This can be true even where an employee signs the non-compete agreement just a week after being hired!

Ultimately, when attempting to enforce a restrictive agreement in court, the company will be arguing that its confidential information is at risk based on the former employee’s actions; agreements should be drafted to maximize the likelihood that this argument will be accepted.

So, what are some things a company can do to ensure enforcement of restrictive covenants and protecting valuable proprietary or confidential information? Here are a few steps you as a business owner can take:

  • regular dissemination of a confidentiality policy,
  • education and training of employees on intellectual property issues,
  • restricting access (via passwords, locks, etc.) to sensitive information to those employees who need such access,
  • and labeling confidential documents (both hard copy and electronic),
  • create an exit process (a termination process) such as the consistent use of a termination checklist that reminds workers of their obligations under existing policies and agreement.
  • create an exit process that ensures the company immediately collects company property such as laptops, PDA’s, storage media (discs, drives) and hard copies of documents. If the company has any suspicions about the outgoing employee’s conduct and/or intentions, immediate consideration should be given to actually investigating the employee’s computer-related activities prior to his or her departure.
  • In many instances, retention of a third-party data recovery expert may be advisable both because of the technical challenges involved in investigating electronic activity and because of the need to preserve evidence of that activity,
  • Consider implementing an IP protection process such as communicating to your former employee and his or her new employer about the existence and continued applicability of the employee’s restrictive covenants and the company’s expectations about compliance with those promises.

Taking all of these steps will significantly improve a company’s chances of protecting its intellectual/proprietary property especially following a valued employee’s departure.

 

Loans or Investors?

Determine the Funding and Capitalization of Your Business

Your business plan should adequately address the funding requirements of your Company in order to get the Company off the ground and running. Funding can come from various sources but basically broken down as follows:

(a) loans

(b) investors

Here, we discuss generally some of the pros and cons of each type of funding strategy.

Loans

If funding is coming from lending sources such as a bank, or private lending sources, then commercial loan agreements will need to be drafted or reviewed.

Your business attorney will have to either draft or review most, if not all, of the following documents: loan security agreements, note, personal guarantees, global certification, opinion letters, pledge agreements etc.

Qualifying for a loan will depend on a list of factors such as, prior related experience, current assets, credit, who is guarantying the loan, prior financials, the depth of your business plan, and having the right business governance documents and business contracts in place (to show you have mitigated risks).

The clear advantage of a loan is you do not have investors who have a piece of the pie and to whom you as a business owner will owe a fiduciary duty. It’s a clear cut financial relationship.

However, that does not mean that your loan cannot come with restrictions on your business activities. Lenders rightfully may want to restrict your decisions if those decisions have a significant impact on their investment.

Investors

The types of investors can be broken down into multiple categories such as founder investment, seed investors, Series A, Series B, Series C, etc.

If your business funding will come from individual or corporate investors you will need to properly document the rights and obligations of those investors in a well drafted and probably extensive business governance documents (i.e. shareholders agreement, operating agreement, buy-sell agreement, etc.).

Of course your funding can also come from venture capital sources or angel investors which will largely be documented according to those investor’s preferences.

Funding can also come from private and public offerings which are governed by State and Federal regulations, are generally very expensive, and will require the planning and expertise of numerous legal and tax professionals.

The draw back of investors is that unless they opt to be passive they may require a say in the management of your company which may or may not be desirable depending on your goals.

Sometimes you have no choice but to take on investors. Say for example you are a very early stage startup with not much directly related experience, so-so credit, and insufficient assets to even be considered for a loan. You may initially turn to friends and family for seed money as your only option.

However, regardless of the type of investor or stage of investment, your investors will want to know (1) that you’ve considered all of your potential risks (2) that you have a plan for making money (3) that you have as many necessary business contracts in place that are properly drafted to protect the business and (4) that you have a viable business plan.

Conclusion

Choosing a loan vs. investor oriented approach will, like anything else, depend on your personal and long term business planning goals.

Like just about every other aspect of this post, having a business attorney, consultant, and CPA to discuss and analyze your options is a highly recommended first step.

The Importance of Documenting Your Biz Relationships

Document the Partnership

It is always worth discussing time and time again, the importance of business governance and why these documents are critical to survival of your business especially if there is more than one business owner involved.

Often problems come into play with the closely held or family owned business where documentation is lacking (because of over-dependence on prior relationships and trust). In these cases, the business suffers when the business owners can no longer agree on how to properly operate the business. Internal disputes or “business-divorce” cause the business to hemorrhage money internally as operations come to a halt and the business owners spend tens of thousands of dollars on legal fees, forensic accounting, and expert valuations.

More often than not these types of disputes can be avoided substantially when the business owners take the time and spend the money to properly document their business governance. Solidifying and identifying the expectations, goals, and responsibilities of the respective business owners will ensure continuation of the business as a going concern when the business owners come to a point of disagreement as to management.

One of the most important documents available to a closely held or family owned business is the buy-sell agreement. Usually funded by insurance or disability policies, the buy-sell agreement sets forth an objective mechanism for valuing the business which in turn significantly reduces the costs of any business-valuation related dispute. Business governance documents including an operating agreement (for the LLC), shareholder agreement and bylaws (for the corporation) and a partnership agreement (for a partnership).

Document Employment Relationships

Business governance also includes governing the employment relationships including the relationships between the Company and its consultants.  Employment relationships are typically documented in the following types of agreements: basic employment agreement, executive level employment agreements, indemnification agreements, independent manager agreements, and employee handbooks. Remember that from a tax perspective failing to properly treat an individual as an employee (and instead treating them as an independent contractor) can have dire consequences.

Document Your Client Relationships

Creating the right service contract for your business should start with the issues specific to your particular industry whether it be food distribution or manufacturing, construction, real estate development, fashion, auto repair, computer services or financial services. Not all industries are created equal. The challenges of one industry can differ greatly from another. The needs of one business may also vary from the needs of another business within the same general industry.

For example a construction company that focuses primarily on residential design-build will have different clients and contract management requirements than a construction company that focuses primarily on large commercial projects. Having an open discussion with your business attorney about your services, clients, and general concerns is a valuable starting point.

The service contract tailored for your business doesn’t have to be a long overly complicated instrument. However, it should address the contract basics such as price, scope, performance, acceptance and default.

The Basics of a Business Plan

A business plan consists of a narrative and several financial worksheets. The narrative template is the body of the business plan. It should address hundreds of questions regarding the company purpose and description, products and services, marketing strategy, operational plan, management and organization, personal financial expenses, startup expenses and capitalization, and a high level financial plan. The business plan will also consist of an Executive Summary, which should be done last.

The real value of creating a business plan is not in having the finished product in hand; rather, the value lies in the process of researching and thinking about your business in a systematic way. The act of planning helps you to think things through thoroughly, study and research if you are not sure of the facts, and look at your ideas critically. It takes time now, but avoids costly, perhaps disastrous, mistakes later.

It typically takes several weeks to complete a good plan, depending largely on the type of business and time you have to devote to the business planning. Most of that time is spent in research and re-thinking your ideas and assumptions.

Creating your business plan should also start with a consultation with the holy trinity of business consultants:

the business attorney, CPA, and financial planner.

The value of the process is in the research and systematic self-analysis. So make time to do the job properly. Those who do never regret the effort. And finally, be sure to keep detailed notes on your sources of information and on the assumptions underlying your financial data. This is something your investors will want to see.

Here, we discuss a few elements of a well drafted Business Plan. Take the time to process this information and see how you can incorporate it into your business planning solutions.

Determine Your Risks

As a startup if you’re going to have any conversation about profit then you better have twice the conversation about risks and specifically the things that can otherwise impact your bottom line. Risks might be the competition, the existing market conditions, anticipated market conditions, political issues which may impact your market or your specific business etc. etc.

Determine Your Start Up Costs

Aside from costs of the formation of the business (from a filing perspective) which are briefly discussed above you should also consider the following costs as they are applicable to your business: (a) legal fees for documenting business governance, (b) costs associated with trademark filings (discussed in a separate article), (c) commercial leases, (d) costs associated with securing and building out a desired space for your new business venture, (c) costs associated with funding of the Company and transactional costs of funding, (d) costs of licensing and permit requirement, (e) costs associated with employees or outside consultants, (f) costs of commercial and personal insurance, and (e) the costs of creating a comprehensive contract management process (discussed below).

A great guide for estimating your startup costs can be found on the SBA website.

Determine the Funding and Capitalization of Your Business

The business plan will address the funding requirements of your Company in order to get the Company off the ground and running. Funding can come from various sources: (a) personal assets (b) loans or (c) investors.

Choosing a loan vs. investor oriented approach will, like anything else, depend on your personal and long term business planning goals. The draw back of investors is that unless they opt to be passive they may require a say in the management of your company which may or may not be desirable depending on your goals. Having a business attorney and CPA to discuss and analyze your options is a highly recommended first step.

Determine Your Commercial Space Requirements 

Securing a space for your business, like anything else we’ve discussed thus far, entails research and planning.  Finding the right space for your business means researching zoning issues, marketing considerations, costs of leasing, costs of building out the space, etc.

Some of the basics of commercial leasing are discussed in a separate post however suffice it to say having an attorney review a commercial lease is important for two reasons:

(1) negotiating the terms of the transaction to ensure they are commercially and legally reasonable, and

(2) providing you the business owner with the assurance or detailed explanation of the liability you are about to incur (and probably personally guaranty to some extent).

Terms such as Rent, Additional Rent, Use, Real Estate Taxes, Default and Good Guy Guaranty, will be issues that your attorney should take the time to address with you in as much detail necessary so that you are comfortable with the transaction and your obligations as well as rights under the lease.

Set Short Term and Long Term Goals

First, set realistic goals.

Second, map out the steps to each goal.

Three, recognize that goals, like the nature of your business, will change on a year to year basis and that it is important to re-evaluate your goals and processes periodically.

Fourth, determine if your past strategies have been successful or are even applicable to the changing needs of the business.

Document Your Business Relationships

Your business has multiple levels of relationships, each of which are integral for the survival of the business. When these relationships fail the business is subject to tremendous risk. To put it another way, when you have not clearly set forth the parameters, terms and conditions of each of these relationships your business profitability is at risk.

Establish Contract Management Protocol

Contract Management Protocol is the process of dealing with every new client or customer. It is the process you adhere to when engaging new clients or customers and it is the standard for whether you consider accepting a new client or customer. It is also the process of determining when it is time to cut ties with a customer and when to take (or threaten) legal action in enforcing an obligation. Contract Management Protocol is discussed in greater detail in a separate post.

Why Your Business NEEDS Contract Management Protocol

Contract Management Protocol (CMP), is an often overlooked process.  Most small businesses take a “wait and see” or “play it by ear” approach to dealing with new clients.  Why? It makes little sense. Instead it is worth discussing your contract review strategy, intake processes, operational forms, and accounts receivables practices etc. as it pertains to the various types of clients you intend to target in the operation of your business.

Even as a law firm the documentation and contract management forms I use in the functioning of my business varies depending on the business type, size of the business, general billing practices associated with the type of matter (e.g. transaction flat fee billing or litigation hourly billing), client’s personalities and level of sophistication.

In short, your contract management needs will depend on factors such as (1) client type (2) industry (3) your billing needs (4) general billing practices and (5) size of the engagement, just to name a few.

This is a discussion you want to have internally and with the assistance and analysis of a business attorney and perhaps a business consultant/coach.  The attorney brings an objective and analytical approach to the process which further compliments your practical and performance based approach.

Tips on Setting Goals for Your Business

Setting goals is an integral and crucial aspect of financial success for any business. It is important that you set both short term and long term goals. Here we set forth a basic guide for goal setting.

First, set realistic goals. Goals should be or represent solutions to problems. They shouldn’t be arbitrary. You may need to research comparative goals or discuss your goals with the right marketing, financial, or business consulting expert.

Second, map out the steps to each goal. In other words, how to you plan to achieve your goals? What is your plan of action? What will you do every day to see to it you are inching closer to your goals on a daily, weekly, or monthly basis? For example, if you wanted to train for a marathon, you wouldn’t just run the marathon. You would have a daily plan in place for how you are going to increase your endurance and properly fuel your body. With businesses it is the same thing. How will you strengthen and properly fuel your business on a daily basis?

Three, recognize that goals, like the nature of your business, will change on a year to year basis and that it is important to re-evaluate your goals and processes periodically. Being flexible in your approach also has value. If you are training to increase your bench press, you may be hitting the bench press every day. However, tweaking the number of reps, the number of sets or your grip might help you see bigger gains. The same analogy applies to business. Minor tweaks in your approach help you stay flexible and can lead to better gains for your business.

Fourth, determine if your past strategies have been successful or are even applicable to the changing needs of the business. The definition of insanity is doing the same thing repeatedly and expecting different results. If over a reasonable period of time your strategies are not producing results and not helping you achieve your goals then it is time to determine a different approach. This is not always as easy at it sounds. It may be wise to discuss your approach further with professionals such as business coaches, CPA’s, business attorneys, or business consultants.

How to Split from Your Business Partner

Splitting up from your business partner is discussed in a few other posts on this website. First we discuss the friendly break up, then we address some of the aspects of the not-so-friendly divorce. The following is another look at your options for either splitting with your business partner or leaving the business altogether. These options assume a two-partner business i.e. a closely held company.

Option 1: You buy out your business partner

Option 1 is to buy out your business partner. This option is simple and in many ways ideal. It allows you to continue your business with no restrictions. You would have sole ownership of the Company provided that you satisfy the payment terms of the buy-out agreement.

Option 2: You sell your shares in the Company to your business partner (or 3rd party).

Option 2 is to sell your shares of the business to your business partner in which case your business partner will continue under the current business name/entity.

Here, if your business partner agrees to purchase your shares then it will likely be subject to a buy-out agreement which will typically come with restrictive covenants such as non-competition provisions and non-solicitation provisions.

The result is, you may be able to establish a competing business but your activities may be extremely limited.

Option 3: You gift (transfer without receiving any money) your shares in the Company to your business partner (or 3rd Party) and start your own competing business venture.

Option 3 is to gift your shares in the Company to your business partner. In this case, you receive no money for your shares.

The problem aside from not getting paid for your shares is that while you can start a competing business, you will not be able to directly solicit your prior clients without subjecting yourself and your new company to liability under a theory of tortious interference with contractual/prospective business relations.

This option assumes there are no restrictions on transfers either in an operating agreement or a buy-sell agreement.

Option 4: You dissociate from the Company (Voluntary Dissociation)

Option 4 is to dissociate from the Company. The decision to dissociate from the Company permits a dissatisfied business owner to extricate him/herself from the business and cut off any obligations he/she might have for future endeavors, subject only to the terms of a relevant shareholder/operating agreement.

The freedom to dissociate from a Company may come at a steep price however, particularly where neither the statute (Business Corporation law, Limited Liability Company Law, or Partnership Law) nor the relevant “shareholder agreement” compels the repurchase of the dissociating business partner’s shares in the Company.

Therefore, while you may seek to dissociate from the Company, absent something in a written agreement between the business partners, there is no requirement that the Company or your business partner purchase your shares. So, if you dissociate you may not receive any money for your shares.

The other problem aside from not getting paid for your shares is that you will not be able to directly solicit your prior clients without subjecting yourself and your new company to liability under a theory of tortious interference with contractual/prospective business relations.

Option 5: You and your business partner agree to dissolve the business

Option 5 is you both agree to dissolve the business (hence “voluntary” dissolution) and you go your separate ways, probably splitting the clients and assets after you paid the Company debts. After the business is effectively dissolved, you can start another business and solicit previous clients without concern about interference with contractual relations issues.

Dissolution is the most common means of effecting a split between business partners. Dissolution happens in one of two ways. (1) Voluntary Dissolution or (2) Involuntary Dissolution.

Voluntary Dissolution, as described here, refers to the situation where the parties voluntarily agreed to dissolve the business and essentially go their separate ways. Dissolution must comply with statutory requirements and procedure. After the parties agreed to dissolve the business, the company enters what is called the winding up Winding up basically refers to the process where in general, a company winding up without court supervision must discharge its debts before it can distribute anything to its stockholders. Therefore, in order to wind up the company in most instances the company must pay off its debts first before distributing assets to the business partners.

Option 6: You dissolve the business by judicial dissolution

Option 6, Judicial Dissolution, is also referred to as Involuntary Dissolution. Involuntary Dissolution of a Company occurs where the parties cannot agree on whether/how to dissolve the business.  As a result one party (the petitioner) files a petition with the Court seeking to dissolve the business on some statutory grounds. Those statutory grounds will vary but basically they are either:

  • deadlock between the parties or
  • some oppressive conduct from your business partner(s)

These are the possible outcomes of a petition for dissolution:

  • the court denies your petition – in which case your business proceeds.
  • the court grants your petition and the business gets dissolved and the assets/clients get split
  • the court allows your partner to buy you out at “fair value”

The result will depend on the basis for seeking dissolution and other facts and circumstances which are difficult to ascertain at this time.

NOTE: “Fair value” may not be what you have in mind. Therefore it is a risk to put “fair value” in the hands of the Court to determine.

The following are Not Viable Options:

You expel your business partner out of the business (Involuntary Dissociation). This may be an option in some states but in New York it is not a viable option.