The 3 “Keeps” - simple rules for building and retaining value in your start-up

So you’ve taken that leap of faith and founded your start-up. Congratulations! The world is for the taking and with hard-work, focus, attention and a healthy dose of luck, this time next year a tech titan will surely be knocking on your door offering to snap up your business for millions of euros. You hope.

The path to success for  an entrepreneur is fraught with risk. As an entrepreneur, however amazing your product or service may be, whatever commitment, grit, ambition you apply or sacrifices you may make, it is likely that you will trip over any number of issues along the way. Unfortunately, all too often in my experience, entrepreneurs stumble or fall over issues of their own making. I have been helping startups for nearly twenty years and in that time I have often repeated a simple bit of advice that can help entrepreneurs avoid some of the most common issues that stand in the way of success. I call it “the three keeps”:

Keep it simple

Your decision on how to structure your business is an important one. Avoid unnecessary complication. Complicated group structures, special rights for relatively small investors, multiple classes of shares - I see it all. Try to keep keep your group structure straight-forward. Your share capital at an early stage should be a single class of share with no special rights granted to any one party.

The more complicated your structure, the harder it will be to persuade future investors to commit to the business. If an investor can’t understand a structure quickly or see how their investment will be realisable in future, you risk limiting your ability to raise further capital for growth down the line. There is plenty of time for life to get complicated in your business! Avoid it as much as possible at this early stage. Sometimes you need to make difficult choices of course.

Take advice about what is “normal” before committing yourself and be mindful what might trip you up down the line.The early stages of any new business can feel mad, but take a step back, breathe and consider how your setup will work with your long-term strategy. How tied are you to the structure you choose? Don’t forget, your personal circumstances will change over time as will, hopefully, the (increasing) size of your business.

Keep it organised

When your company is moving at the speed of light, it’s easy to lose track of what is happening and where everything is. The less organised you are, however, the less valuable you are. Know where your key assets are, where the value is derived from and talk to your team. Regularly ask them “What have we done? Have we got it sorted and saved?”

In a tech start-up, intellectual property is almost invariably the most valuable part of your business, so hold onto it and have a good view of where it is being developed.  Have you ensured that everyone who has had a hand in developing your IP has properly assigned the relevant rights to the company? Could you prove it to an investor?

By creating a smart filing system, you will give yourself and an enormous advantage and inspire confidence in the value of the business. Many of our clients use the CMS due diligence questionnaire as an index. Due diligence questionnaires across the world follow a similar format and structure. So it makes sense to prepare yourself by organising your filing system against the questions you will inevitably get asked if/when you find yourself talking to a potential investor or acquirer. Then regularly check with your team that they are keeping the filing system up to date. Set a regular time each month to focus as a team on whether you  have answered all the questions fully, identify gaps and fix them.

Keep it!

Don’t give away your equity like sweets. When you’re starting your business, there can be a real temptation to use your equity to “pay” for assets, services and people you so desperately need to get your business off the ground. Be careful though, using your equity can, in the long term prove to be one of your most expensive mistakes . Make sure you leave enough for yourself.

You may want to prioritise your cash over your equity today. Imagine, however, that someone offers you €20 million for your business. How will you feel about sharing that with everyone you have given away equity to along the way? Will it feel like a fair division of the proceeds given what each person with equity has brought to the business? In that context, one percent can feel like a very expensive percent. Ask people to earn their equity, and stipulate that they have to stay with the business. Capital can and often should be shared with investors and VCs but do still be careful and take advice along the way.

How we can help?

At CMS, we want to change the way that early-stage companies access legal support. We want to put the resources of our firm to work, supporting startups grow and scale nationally and internationally.

CMS is one of the largest law firms worldwide and our more than 4,500 legal professionals work in cross-border teams around the world to offer you business-focused advice in law and tax matters.

Ask about the CMS equIP programme, giving support to early-stage companies, which operate in Austria, Germany, Luxembourg, Central Eastern Europe, Singapore, Scotland and England. Send us an email to equip@cms-cmno.com - we would love to hear your story and be a part of your growth story.

If your venture is a high-risk proposition that might struggle to acquire an investment, then you should have a compelling story that will help convince investors. Screaming disruption everywhere you can will help in that case. But if you feel the venture’s main risks are less in the idea than in its execution — then maybe you should try to avoid making disruption your narrative and talk more about your experience and capabilities.  You’re more likely to get the amount you need.

The content above was originally posted on CMS Digitalbytes - CMS lawyers sharing comment and commentary on all things tech.