3 (big) mistakes to avoid as a first time startup founder

Being a first time startup founder is a big and often overwhelming undertaking. Many people are afraid of taking the initial leap of faith because they feel that they should have all the knowledge and expertise from the get go, but the reality is that by definition, a startup is a discovery journey full of unknowns, it’s a long path of learning and growth. With that said, too often first time founders make basic mistakes which have long lasting negative impact on their business. These mistakes are easy to avoid. So, if you consider starting a startup the following are the top 3 mistakes you should avoid.

Mistake #1 — Don’t give equity right away

You and your best friend, James, from college, came up with a brilliant idea for a startup. You decide to quit your jobs and turn the idea into reality, together, as equal partners. You sign a shareholder agreement and agree to give each of you 50% equity stake in the company. Things go well and within a short few months you release the first version of your product and start on-boarding early customers. But just as business picks up James tells you that his wife got a huge promotion at work which requires her to relocate to a different country. James, of course, is going with her and will not be able to continue working with you. 7 months after starting the company, with a very long way before a potential exit, he is walking away with 50% of the company.

I’ve seen this fictional scenario play out in real life many times in different versions. More often than not, departing a co-founder doesn’t end in an amicable way, in fact, quite the contrary. Equity is a precious commodity which allows a startup to raise capital, attract talent, and if done right, keep people around for the long haul. The main mistake in the example above was to award the ownership of equity right away.

The proper and most common way to structure a shareholder agreement is to have the founders earn their equity over time. A typical vesting schedule spreads over 4 years and has a one year cliff. To simplify, let’s go back to our example. You and James sign a shareholder agreement stating that you will each earn 50% equity in the startup you’ve just founded. If each of you decides to walk away anytime before the one year mark, the cliff, you will do so with 0% equity. However, as soon as you hit the one year mark you will each own a quarter of your equity, 12.5% in this case. From there on, over the next three years you will continue to earn, on a monthly schedule, the remaining 37.5%. Each month, as long as you are still acting as an active co-founder, you will earn 1.0416% (37.5% divided by 36 months).

Setting a vesting schedule is a simple and highly effective way to ensure that the co-founders, and later other employees, stick around for the long haul, and that if they decide to leave they take with them only a share of equity which reflects the amount of time they spent with the company.

Mistake #2 — Choose your co-founder wisely

A cofounder relationship resembles in many ways a marriage. Together, you and your co-founder will do your best to figure out how to raise your little baby, your startup. As you build your startup you are likely to spend more time with your co-founder than your life partner, and just like you wouldn’t get married to someone after a first date, you should not jump into a business partnership with someone whom you barely know or trust. So many startups fail not because their idea wasn’t good, or because they failed to gain traction, but because the co-founders were not compatible and couldn’t work well together.

If you don’t know the person you consider making your co-founder, allow yourself time to get to know each other and work together before you commit to a business partnership. You can stress test how you work together by setting up certain goals and see how you go about achieving them as a team. A lot of people have the best intentions and would be willing to commit to a lot, in theory, but when it comes time to execute and put in the long grinding hours they realize that it’s not for them.

Building a startup can often feel like a long gruelling battle. One is constantly faced with extreme challenges and a million fires which all require attention. Walking into this battle with someone you trust 100% will increase your odds of coming out victorious. Of course, it takes time to get to know someone and to build a high level of trust. But if your gut tells you that you can’t trust a person, don’t make them your co-founder.

Mistake #3 — Don’t raise capital too early

A common mistake first time founders make is thinking that the main thing standing between them and success is capital to allow them to build and market their idea. While it’s true that at some point funding becomes an important part of a startup journey, in the early days it’s typically not as important as people think. Overestimating the need for capital is often related to overestimating a startup idea. What makes a good startup idea is not how great you think it is or how much your mom says she loves it. The true test for any startup idea is whether it’s something people want. It needs to solve a problem which affects a large number of people. The early days of a startup is an exploration journey to discover the right idea and validate that there’s a need for it in the market.

The wrong way to go about validating an idea is to build the product, market it and fail to gain traction. It’s a huge waste of resources and time. Instead, one should come up with ways to validate the need for the product without actually building it. There are plenty of things one can do to demonstrate early traction and typically the main cost involved is time, not money. A few examples include interviews with potential users, building mockups, getting people to sign up for a waitlist, getting customers to place pre-orders, and much more. The closer one gets to demonstrating that there is a substantial group of people willing to buy the product the stronger the validation is.

Part of the reason why first time founders get so many no’s in their early fundraising efforts is because they shouldn’t raise money yet. Investors want to see evidence of early traction, anything based on signals from the market is better than saying that they should invest because you think your idea is great. You are likely to see a clear correlation between validation and your ability to convince investors to fund you. It becomes a lot harder to say no to a product which doesn’t exist yet, but managed to attract thousands of people to sign up for a waitlist or place a pre-order in a short period of time.

I hope the tips above will help you avoid some of the biggest early stage startup missteps. You will make a ton of other smaller mistakes, and that’s perfectly fine just as long as you learn from them.

Good luck on your startup journey!