31.07.2020

Start-ups: five dos and don’ts for founders (2/2)

Part 1 of this article contained five recommendations as to how start-ups can save expend-itures, costs and time. This part is about five mistakes that are frequently made by the founders and managing directors of start-ups and which should be avoided for the same reasons, if possible.

Background

1 - DON’T take every shortcut

Have you ever decided for yourself that 80% is sometimes just enough instead of 100%, or preferred to let something pass instead of being overly precise? This can, of course, also be the right way for your business in appropriate cases – but only in appropriate cases. In certain matters, however, founders and managing directors should make sure they do not employ this practice under any circumstances. This applies in particular when it comes to financing the business, protecting intellectual property, or complying with statutory obligations, especially if their violation can result in the managing director(s) being held personally liable. In matters such as these, the rule should always be: thoroughness before speed.

2 - DON’T put off problems

Many things take care of themselves. Many others don’t, however. And some problems even become bigger if not timely tackled. During the next financing round or an unannounced tax audit or the periodical social security audit, at the latest, any homework not done will have to be paid for. It will affect the rating, delay the financing or, in a worst-case scenario, give rise to personal liability on the part of the managing directors. Any shortcomings, mistakes or defaults discovered in legal matters should, therefore, always be addressed promptly or be at least made the subject matter of an adequate risk analysis within a short time.

3 - DON’T disregard your contractual or statutory obligations

“Contracts are there to be broken” and “laws are rather guidelines” are not principles that should be applied in the conduct of a business. This is, of course, true on a large scale, but also on a small one. After all, even minor violations may have significant economic consequences, from a customer or investor being put off by non-observance of contractual clauses up to and including a multi-million euro fine for data protection breaches. Experience shows that if you adopt the approach for your business that following all rules is impossible as you would otherwise be unable to act, you will have to pay for this during the next financing round, at the latest, when your investor discovers violations and decides to refrain from making an investment. Consequently, even though it is important to adopt a pragmatic work approach, you should also keep a watchful eye on the legal framework and risks.

4 - DON’T sign anything unexamined

Conversely, however, founders and managing directors should also be careful about the obligations they assume and the (negotiable) rules they intend to accept. No matter how good an offer seems and how big the (alleged) pressure for time is: there are contracts that should not be signed carelessly, quickly or under pressure without realising their significance or, if necessary, obtaining the appropriate advice. This certainly includes articles of association, partnership agreements, shareholders’ agreements, participation agreements and any other financing, supply or customer contracts that are important for the business. Otherwise, it can quickly happen that a poorly drafted NDA affects your own acquisition of customers, or that an investor is granted special rights that it would not have obtained from a third party. Unfortunately, the devil is often in the detail and the significance of a contract for other, seemingly unrelated circumstances is sometimes not immediately apparent. Therefore, better look twice before you sign anything.

5 - DON’T overestimate your skills

The preceding recommendation is closely related to this last one. Founders and managing directors are always well-advised to critically examine their own skills and knowledge, focus on their own strengths and, if in doubt, obtain external assistance. There will always be decisions whose importance not only justifies but even requires external support. In such situations it is important not to make false economies. Especially if you know that your business partner is also supported by advisors, you should ask yourself whether you really want to face them alone.

Author
Dr Moritz Mentzel

Dr Moritz Mentzel
Senior Associate
Berlin
moritz.mentzel@luther-lawfirm.com
+49 30 52133 24650