5 Mistakes Startups Cannot Afford Now

By: Dror Futter, Legal and Business Adviser to Startups, Venture Capital Firms and Technology Companies

Focusing on Anything but Your Runway 

  • Obsessively focus on extending available cash. All those financial projections in your pitch decks were amusing optimism two months ago. If you are still running your business with the same set of assumptions, you will not survive.  Listen, everyone’s revenue curves are going to flatten. You need to maintain a laser-like focus on cutting non-strategic expenses and maintaining flexibility. Review the termination clauses of all of your significant contracts and identify how much notice is needed to terminate and the consequences. Freeze all but the most critical new hiring and review existing staffing levels.

Obsessing on Deal Terms

  • No venture has ever died of excess dilution. However, zero cash has a near 1:1 correlation with failure. Unless you are blessed to be in a competitive bid situation, you are a term taker. The one possible deal breaker - terms that cripple your ability to raise future funding. Otherwise get as much money in the bank as you can, you will not regret it. Investor wants a convertible note, sure – whatever it takes to get money in the door. This is not the time to insist on a SAFE. 

Failing to Communicate With External Stakeholders  

  • It is tempting to hide rather than share bad news. Resist this urge, these are not normal times and everyone is hurting. Make a point of reaching out to investors and key customers and suppliers. Although the situation is changing hourly, knowledge is power. It gives you the best possibility of planning and allows you to reset the expectations of your partners. Getting new investors is about to get much more difficult, have candid discussions with your investors about their interest and ability for follow on funding. After a few weeks of adjustment to the new crazy, start fundraising conversations much earlier than you used to. It will take a lot more time. 

Failing to Pay Employees

  • Just not a legal option. You cannot delay wage payment. You cannot have employees work for free, even “voluntarily.” You cannot offer equity instead of salary. You may be able to reduce salaries with employee consent, maybe even to minimum wage, but consult with counsel. Also remember, if a venture shuts down, directors and officers can be personally liable for failure to pay taxes and wages. Don’t run the bank account to zero before making sure that you have met your legal payment obligations.

Forgetting That Your Reputation Will Survive This Crisis

  • This crisis will require a lot of painful decisions, often in situations with few options. The integrity, empathy and candor you demonstrate, or the lack of it, is likely to be remembered long after this crisis. The venture world is pretty small and a reputation is something very hard to recover. Doing the right thing is usually also good for business in the long terms. That holds true even more in a crisis.

Dror Futter is a partner in the Rimon, PC law firm. Dror’s practice focuses on representing startup companies in their financing and merger and acquisition transactions and their intellectual property, IT and internet agreements. He also advises companies with respect to Initial Coin Offerings and other blockchain legal issues. Dror was the co-founding chair of the PLI VC Law program and hosted their first blockchain legal program. He is a frequent speaker and writer on blockchain legal topics. He is a member of the model forms drafting group of the National Venture Capital Association, the legal advisory board of the Angel Capital Association and the legal working groups of the Wall Street Blockchain Alliance and the Digital Chamber of Commerce. Dror can be reached at dror.futter@rimonlaw.com


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