DON'T DO THIS: 5 Dangerous Mistakes Start-ups Make.

When I first envisioned this newsletter, I saw it as a powerful tool to connect with startups swiftly and guide them toward having a successful venture, ensuring they don't lose their hard-earned investments. The pain of every business is not meeting the expected results, and I'm here to help you avoid that.

Hi, I’m Abidemi Peace, a seasoned business lawyer and advisor dedicated to supporting your startup ventures.

My mission is this: To help you navigate the complex world of business and prevent common pitfalls that could jeopardize your success.

First, understand this,

''Business collaboration isn’t solely built on mere trust. It’s about doing what's right, ensuring every aspect of human transactions is documented, and every partnership is fortified.''

Sometime in the year 2023, I encountered a startup founder (a client) who faced dire consequences by involving family and friends without clear boundaries. He involved his family and friends as directors and shareholders in his start-up. He made them co-founders and conducted all transactions implicitly with them based on trust. He believed in the adage that 'The devil you know is better than the angel you don't.'

He went ahead placing unwavering trust in his loved ones and forgoing the need for formal documentation. Unfortunately, his business faced a tragic loss. At a point, he could not function with his resources anymore. He thought he had a smooth business deal with friends and family, but his startup is currently facing imminent closure. Why?

It became apparent that at the commencement of his business, his friends and family contributed almost nothing in terms of physical resources, skills and expertise needed as expected. Yet, he made them part of his business team. They were also absent from critical activities and meetings demanded for the business growth. It was more like a solo business practice when not positioned to be so and the worst was that a few sought benefits and rewards by threatening him that they must get their equity in the business before they are dismissed.

While it's understandable to lean on family and friends for support when building a business, it's essential to recognize that they too are human and may not always honour the trust placed in them, just through some handshakes.

Some, for a selfish reason, may demand what they shouldn’t be entitled to thereby leading to the closure of the business.

In the above scenario, my client happened to have made a few dangerous mistakes in his startup:

1. He conducted every transaction solely on mere trust,

2. The parties involved didn’t have the expected contribution to offer the startup (it is wrong to consider such a party as a partner or co-founder in your start-up) and,

3. He also neglected to document any agreements with those he valued and trusted.

4. He failed to get himself conversant with the relevant start-up agreements to secure his business investment early.

5. He waited much longer to consider what to do to resuscitate the start-up business from sinking.

To come to my client’s rescue, I first made him realise that two critical elements were lacking in his start-up venture. One was the lack of a proper business administrative structure in line with his startup’s vision. In the first place, this should be the basis upon which every business should operate for growth and the other is the lack of legal compliance for security purposes. This I wished he had from the very beginning.

It is terrible that my client had no documentation outlining the roles, responsibilities, contributions, benefits or dispute resolution mechanisms for those involved in his startup. Now, he is contemplating removing the shareholders and partners to go ahead alone with his business. However, he had lost a lot in the business – in terms of money, manpower, time and other resources that could have been used to record something substantial and rewarding. Then again, the process of removing these co-founders as desired isn’t a walk in the park either.

This is the reason why I have compiled this first article of my newsletter to start-ups emphasizing the importance of documenting all your business dealings by avoiding 5 major business collaborations. The reason is that I don’t want any startup that aims to thrive to make the same grievous mistake.

Prospective start-ups and existing ones, here are 5 major business collaborations you shouldn’t venture into:

1. Business Deals Without Specified Goals or Benefits:

When families and friends decide to enter business, deals are sometimes based on assumption rather than facts. It can lead to disastrous outcomes. Without concrete information about the business benefits or gains for both parties, claims made by any of the parties may not align with implied agreements. For example, my client's partner who is a friend requested equity vesting before it was time for his percentage to be allotted. They acted based on this knowing my client had no proof otherwise.

2. Business Deals Without Identified Roles and Executed Responsibilities:

When roles and responsibilities aren't defined or clear, misunderstandings and conflicts can quickly arise. Family and friends might even assume their involvement is flexible due to their close relationship with you. If they fail to deliver on their roles and there's no clear documentation of their expected duties, it can lead to chaos. Clear documentation and communication are essential to prevent this.

3. Business with Misaligned Visions:

Being close to you personally doesn't mean someone is the right fit professionally. Many founders appoint siblings or best friends as co-founders due to the encouragement and goodwill they offer them, despite their lack of relevant experience. For instance, appointing a Chief Financial Officer or Chief Technology Officer without a background in finance or technology can be detrimental. Assessing compatibility in terms of vision, culture, and expertise is crucial. My client failed to ensure his co-founders had the necessary skills or resources, leading to friction and turning the start-up into a solo venture. Collaborating with incompatible partners can drain resources and hinder progress. Make sure their skills and commitment match the needs of the business.

4. Business Deals with Strategic Misalignment:

When family and friends do not align with your long-term strategic goals, collaboration can be challenging. This misalignment can distract you as a founder and impede the growth of your startup. Hence, every collaboration and partnership must align with your goals on it long-term basis. This helps build your core competencies and drive your objectives forward.

5. Business Without Solid Data: Implied Conduct/Informal Agreements:

In the excitement of starting a business with loved ones, many entrepreneurs overlook the importance of solid legal documentation. This can lead to severe problems down the line, as it did with my client's start-up. Ensure that all agreements are formalized in well-drafted contracts that outline roles, responsibilities, contributions, benefits, and dispute resolution mechanisms.

By avoiding these dangerous collaboration techniques, you can safeguard your start-up’s future. Hence, collaborators wisely document everything and ensure that every partnership is strategically beneficial and legally secure.

As a start-up, you can also earn the unstoppable income you desire and create a lasting legacy that has a sustainable impact by avoiding these dangerous collaborations. Even business investors are more driven to invest in start-ups that prioritise protecting their interests and ensuring their expected benefits are safeguarded.

One effective way to achieve this, no matter the type of business relationship they have with you or your startup industry, is through well-documented contractual agreements that sustain relationships. This doesn’t exclude your employees, independent contractors, customers and many more involved in your business.

In my next article, I will help explore the types of contract agreements that would ensure the success and longevity of your start-up in this regard. We will discuss how these documents can build a strong business structure and answer critical questions about their benefits for your start-up’s lifespan.

Stay tuned as we delve into these above topics in the next edition of STARTUP & SMEs LEGAL NAVIGATOR Newsletter – Your start-up’s guide to unlocking vital legal insights to safeguard your venture, navigate regulations, and build a thriving business by collaborating rightly!

I am Abidemi PEACE,

Your Business Lawyer, IP Enthusiast and Business Advisor.

Convener, The Secured Business Growth Community.

Business Lawyer, MP Legals.

Independent Contractor, Barinaada Legals.

I desire to see start-ups and SMEs well-secured legally while they are properly guided towards building sustainable global impact.

Email: [email protected]