Don’t Get Clever…

It’s axiomatic that the simplest ideas are often the best.  This can be true in technology, where complexity adds cost and often unreliability.  But it’s equally true of that other fiddly dimension of startups, the legal framework.

Time and again we come across new ventures with such complex arrangements in place that they are effectively uninvestable.  No-one is going to take the time to unpick it.  And we shudder at what must have been spent creating it.

Why do startups let this happen?  My guess is that two temptations get them;  most new venture leaders will have seen these before, and some of us will admit to having fallen for them!

Temptation #1, the eternal human desire to fiddle.  To be too clever for our own good.  In startups, there just isn’t time for this.  Near enough is good enough.

Temptation #2 is more subtle.  This is the temptation to allocate resources to risks we can get a handle on, at the expense of larger risks we cannot define.

I’ve seen seed rounds where almost 20% of the funds invested went in legal fees.  Every what-if problem the negotiation flagged up was chased down and written in by the helpful lawyers.  Everything was covered.  Very diligent.  Problem was, these weren’t the real risks the business faced.  An order of magnitude larger was the risk that they wouldn’t make the needed sales before the money ran out.  And they now had 20% less time to achieve it.

The conclusion?  New businesses face many risks, and the biggest of these are almost always market risks.  Keep in view the relative importance of each category of risk.  Don’t let your money get spent on smaller risks just because they’re the quantifiable ones.  Keep your legal structure and agreements short, standard, and simple.  Use the savings to talk to customers.