5 Common Mistakes Made by Startup Founders… and How to Avoid Them

Starting a company is one of the most exciting and challenging journeys an entrepreneur can take. However, the thrill of launching a startup often comes with pitfalls that can create serious roadblocks down the line. At Palmer Financial Wellness, we’ve seen firsthand how financial and structural missteps can cause unnecessary stress and even derail promising businesses. Here are five common mistakes startup founders make—and how to avoid them.

1. Not Protecting Intellectual Property (IP)

Your idea is your company’s foundation, and if you don’t take the right steps to protect it, you could find yourself in a difficult position. Whether it’s your branding, proprietary software, or a game-changing product design, failing to secure intellectual property rights could allow competitors to copy your work or, worse, lock you out of using it yourself.

How to Avoid It:

• Ensure that any work done by employees or contractors is properly assigned to the company through an IP agreement. This is critical and often the number one reason investors will decline to fund your startup!!!
• Use non-disclosure agreements (NDAs) when discussing your ideas with potential investors or partners.
• Consider registering trademarks for your brand name and logo early on.
• If you have a novel invention, consider filing for a patent.

2. Forming a Startup as an LLC When Planning on Seeking Outside Funding

Many founders default to forming a Limited Liability Company (LLC) because it’s simple and offers liability protection. However, if you plan to raise venture capital or issue equity to investors, an LLC can be problematic. Most investors prefer C corporations (C-corps) due to their stock structure, tax advantages for investors, and scalability.

How to Avoid It:

• If you plan to seek outside funding, consider incorporating as a C-corp from the start.
• If you’ve already formed an LLC and need to switch, consult a startup-savvy lawyer to convert your business structure efficiently.
• Work with a financial advisor to understand the tax implications of incorporation.

3. Splitting Ownership Exactly 50/50 Between Co-Founders

While an equal ownership split might seem fair at the outset, it often leads to conflicts when tough decisions need to be made. If both co-founders have an equal stake and disagree on a major issue, the business can become deadlocked.

How to Avoid It:

• One of the two co-founders needs to officially own a majority of the company, even if it’s 50.1%.
• Establish a decision-making process in your operating agreement to prevent deadlocks. Typically the majority owner serves in the CEO role.
• Consider implementing a vesting schedule to ensure all co-founders remain committed.

4. Creating a Large Board of Directors

Some founders believe that having a big board of directors will add credibility and expertise to their startup. However, an oversized board can slow down decision-making, create unnecessary bureaucracy, and lead to conflicts.

How to Avoid It:

• Keep your initial board small—typically three to five members, including the founders and key investors.
• Focus on quality over quantity; choose board members with relevant experience who can provide valuable strategic guidance.
• As your startup grows, you can gradually expand your board when necessary.

5. Working with a Lawyer Who’s Not Familiar with Startups

Legal guidance is crucial for any business, but working with a lawyer who doesn’t specialize in startups can lead to unnecessary complications. Traditional business lawyers may not be well-versed in venture capital deals, equity compensation, or startup-specific tax structures.

How to Avoid It:

• Seek out a lawyer who specializes in startups and has experience with venture-backed businesses.
• Ensure they understand key issues like SAFE agreements, equity distribution, and intellectual property protection.
• Don’t just rely on the cheapest option—investing in the right legal expertise can save you from costly mistakes down the road.

Final Thoughts

Every startup faces challenges, but avoiding these common mistakes can put you on the path to long-term success. By protecting your intellectual property, choosing the right business structure, making smart equity decisions, keeping your board efficient, and working with experienced legal counsel, you’ll set your startup up for sustainable growth.

At Palmer Financial Wellness, we help startup founders navigate the financial complexities of building a business. Need guidance on structuring your startup for success? Let’s chat about how we can support you on your journey.