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Common Legal Mistakes That Startups Make

The Huffington Post The Huffington Post 23/03/2016 Quora
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These questions originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.Answers by Ben Parr, Author of Captivology; Venture Capitalist; Curator of Tech Caucus; ex-Mashable, on Quora.Q: What are the key points that you look in a start up when funding it?

A: Four key things I look for, and my  biggest "No". This is not comprehensive.

First, my keys:

  1. Is this product a platform? Or can it be a platform that others can build on top of? Are the founders thinking about how their product can be a platform? In my opinion, this is the difference from a billion-dollar business and the next Facebook or Google. It's core to my investment thesis.
  2. Founders with domain expertise. YC's Paul Graham once told me when he evaluates a startup team, he thinks to himself, "If I were assembling a dream team for this startup idea, would it be the team in front of me?" If you're going to tackle a complex legal startup, you better have at least one lawyer on the team. The best teams I find are ones that consist of someone with direct domain expertise and one with indirect expertise who can think about the problem their target industry faces different.
  3. Founders who have known each other for a long time. If the founders have known each other for less than 18 months, don't bother pitching me. It's a shotgun marriage and in my experience those almost never work.
  4. Is there technological or customer or user traction? Don't come to me without numbers that show people want your product. It shocks me so many founders come in with an idea and have no proof their theory might be right. You can do tests or launch a product and show that users are joining, that customers are interested, etc. and you're in a far better position.

And No:

  • Defensive founders. I am happy with founders who can absorb critical feedback or thoughtfully and politely disagree with my assessments. What I can't stand is a founder who gets heated when I look for weaknesses in his or her business model, whose thick head doesn't allow them to consider other possibilities, who isn't capable of filtering good and bad feedback. Defensive founders, I've found, always fail.

Q: What are top legal mistakes that early stage startups should avoid?A:
  1. Incorporating too early. Sometimes you don't need to drop thousands of dollars until you take investor money or have customers you need to sign.
  2. Picking a lawyer that doesn't understand startups. Good startup lawyers will defer until you've raised a round, especially if you have track record.
  3. Not including vesting for the founders. All founders should be on a four-year vesting schedule (no cliff). This is a basic, but some startups mess this up.
  4. Over-legalized structures. Too many stupid and non-standard terms in their funding documents. Too many attempts to "protect" founder equity at a stage where you're not really even a company. Etc.

Q: What is the best way to invest your savings?

A:DIVERSIFY. A diversified mix of stocks, bonds, real estate, and investments. Tools like Mint, Betterment, and Wealthfront are also great.

Also, you are not smarter than the markets. You will not beat Goldman Sachs in stock investing. So don't try.

Note: I am not a financial advisor, but everyone will tell you to diversify.

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