Protection for founders: how to keep your startup YOUR startup

I get a ton of individuals asking me how to keep control of their startup. So I want to give a checklist on how to do it.

First, you must know these underlying principles. Don’t be lazy about it. At a minimum read the articles and understand these underlying points.

A. Understand the framework and know what stock is

You have to know the bare minimum and know the basics. Know what stock is. Founders get common stock. Investors get preferred stock (that has rights over common).

B. Know the math

You will be outgunned if you don’t understand the mathematics of share price.

C. Offer vanilla terms and be reasonable with investors

People forget that investors and founders are going to be on the same team.

Vanilla terms are sexy. Don’t get too fancy, especially if your startup is in Texas.

D. Have a startup lawyer watch your back

Have your own startup lawyer for your startup.

Check these off and you’re in good shape to keep control of your startup

Since you have the underlying principles down pat, now for the more nitty-gritty.

___ 1. Make sure IP belongs to the startup

If your company doesn’t own its own IP, what does it own?

___ 2. Vest founders’ shares

Founders’ shares need to be subject to a vesting schedule. You don’t want someone to run off with the company.

___ 3a. Realize that you will never have 100% control of your startup

You have to realize that. The startup will never be yours completely. You have to share.

___ 3b. Use proper anti-dilution provisions

Be prepared to be diluted. But control that process. Here’s how.

___ 4. Raise money at the right time

If you raise money too early you’ll have to give a huge amount of your company in return for investor funds. That will result in you losing control. The flip side of that is this— you will have to give equity in exchange for funds in order to help grow your company. In other words—timing is important. Additionally, run a good business with strong fundamentals. People try to get too fancy. The best companies I’ve seen are those with good fundamentals.

___ 5. Pick investors wisely

Too many founders jump at the first investors that show any interest. It’s like over-eager dating.

___ 6. Get the right valuation for your startup

Know the math really well. I’ve already linked to this article, but if you didn’t read it before, read it now.

___ 7. Choose board seats wisely & don’t let shares get passed around

Share and board control is important. Don’t let these things slip from your fingers.

___ 8. Don’t allow a high liquidation preference and don’t allow for participating preferred stock

While these don’t totally affect control at first, it definitely has an effect on the control of money later.

___ 9. Limit legal troubles and lawsuits. Follow GDPR and other regulations.

A huge legal dispute has the potential to make you lose control of your startup. Here’s how to limit that from happening.

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Regulations like GDPR are coming down the pipes with heavy penalties and consequences for tech companies. If you get hit by these, then problems may spin out of control.

Do those things and you’ll be fine. Don’t overthink it. Keep focused on making your startup a better startup. Remember: you need to share control of your startup if you want to grow it. Just do it intelligently. Contact me and let’s get some coffee if you want to talk about it.