05 Jul TOP FIVE MISTAKES OF NEW ENTREPRENEURS (SECOND IN A SERIES)
MISTAKE NUMBER TWO. LACK OF EXIT STRATEGY I love entrepreneurs. Despite the overwhelming odds against a business, they never seem to imagine the possibility of failure and for all of my talk of optimism, a good lawyer should also serve as a sounding board and counsel of doubt. Mistake number one and mistake number three are really a subspecies of this as well. It’s an utter lack of discussion about an exit strategy for the principals in the business.In my experience, this seems especially prevalent in situations where the principals used standard boilerplate legal forms, which frequently do not discuss exit strategies. The boilerplate forms do not discuss exit strategies because each is unique depending upon whether a person acquired the interest by their service to the company (and how essential that service is to the continued operation) or by capital investment.Remember this rule: life changes. Two years into your new company on a routine vacation, the developer you hired in part by granting a substantial ownership stake in the company meets a beautiful brunette on the flight to Paris. Or, a year into the business, your CFO receives an incredible offer from Big Corp that she can’t resist, but she also insists upon keeping her ten percent of the company. Or, your friend and co-founder runs into a tree while skiing and everything in his estate (including his shares in the company) is bequeathed to that wife of his who always hated you. She’s now insists on attending every shareholding meeting.None of the above are really predictable, per se. But the better agreements address contingencies with buyout clauses, predetermined valuation formulas, transfer restrictions, schemas for third party valuations, rights of first refusal or some combination of all of these. Even negotiating them at the outset is a sensitive matter, so imagine how difficult it can when one of the contingencies actually occurs.The Lesson. There’s only one contract I know that’s “‘til death do us part” and even 50% of those end in divorce! Circumstances will change and discussing these in advance often protects you.