When your startup takes shortcuts in the name of bootstrapping, it can cause irreparable damage to its future value and exit strategy. Despite your best intentions, day-to-day events can get in the way of pulling your company together--legally and organizationally. Whether your long game is to merge, sell, or gain access to funding, the decisions you make early on determine the success or failure of your plan. And when you hold a vision of becoming a multi-millionaire when it comes time to sell, these beginner mistakes could alter, and even destroy, that dream.
Dave Bookbinder is a valuation expert and author of The New ROI: Return on Individuals. As such, he has seen every shortcut, mistake, and misguided intention that can lead to failure or significant financial loss for startups (and mid-sized and larger organizations). I, too, have worked with many founders who have made poor financial and organizational choices that have caused upheaval down the line. With this in mind, I spoke with Bookbinder about how to build and preserve a startup's value. Here's what we discussed.
1. Find the appropriate legal representation.
Pay for the best advice you can afford. Don't rely on a family member who's a personal injury lawyer, for example, to craft a partnership agreement, buy-sell agreement, or stock option plan. You'll put your company at great risk if you craft your own legal documents-- worse if you go without. You may save a few dollars now, but if your governance documents aren't prepared appropriately, you could end up paying the price in multiples to repair the damage.
2. Hire a reputable accounting firm.
To maximize your company's value in the eyes of a buyer or investor, you must have reliable financial data. When I ask new clients for financial data, I'm often met with excuses, since they don't have their books in order. Attempts at organizing your financials in-house are unlikely to be successful, and potential buyers will expect financial data prepared by an independent firm instead of by your company. Bookbinder recommends that you work with a professional right from the beginning to get the numbers right.
3. Know the value of financial forecasting.
According to Bookbinder, valuation is a forward-looking exercise--it's "the present value of the future income stream of the business." To investors, this factor is a mathematical representation of risk, and forecasts provide insight into what really drives the company's growth. Of course, historic data is important, but it's prudent to forecast sales and profits to reduce your company's risk in the eyes of a potential buyer or investor.
4. Play to your strengths.
You may have launched your business because you're excellent at your particular trade or skill. Unfortunately, you might not have much experience in running a business. Therefore, it's likely that you'll focus on the tasks you love and are most comfortable with, but drop the ball on vital administrative items like returning calls, preparing invoices, and delivering engagement contracts. If these tasks aren't your strong suit, find someone who can help. You'll want to hire your team as soon as it makes financial sense to do so. Choose employees wisely and give them the tools and resources they require to do their job so that everyone is playing to their strengths, yourself included.
5. Build a culture that makes you proud.
My top advice to entrepreneurs is to build their company culture with intention. Otherwise, it will build itself--and you might not like the results. Bookbinder stresses that, on the way to your ultimate exit, it is imperative to be intentional about building an environment where your employees are thrilled to be your brand evangelists. A great corporate culture will allow you to attract and retain the right people who are eager to go above and beyond for the business.
6. Plan your exit, succession, or sales process early.
Know that the exit is a process--one that takes several years to orchestrate. Unplanned events, such as a co-founder's early exit, could force a move sooner than anticipated. If you have not done any of this pre-planning, you will not be prepared for what comes next. Button-down the incremental risk associated with taking shortcuts and ill-informed attempts to save money, and it will help you in the transition and a stronger valuation.