Hey everyone, Alex here with some stories to share on some pitfalls for founders to watch out for. While not an exhaustive list, here’s a list of common mistakes I’ve seen founders make that harm the ability to raise funds, maintain a productive workforce, and eventually sell the company.

Cutting Corners. This includes, but is not limited to, obtaining the necessary professional advice to build the proper compliance, tax, financial, and legal framework to limit issues investors or a prospective acquirer will discover during due diligence and could kill the deal. Dozens of times a year we have clients come to us who used online services and screwed up important things during the formation stage. They then end up paying new attorneys two to three times more than they would have paid had they worked with a competent attorney from the beginning.
Lack of a Data Room. The failure to create an organized data room with company records exposes the company to day-to-day operational issues and hinders long-term success. A cap table management platform can be very helpful, and we also advise our clients to set up a company email such as dataroom@[startupname]. Then, whenever the company has signed contracts, scanned copies of corporate records, or financials, leadership can email it to the dataroom@ email and it should help eliminate corporate records from slipping through the cracks. I had a CEO tell me he was up all night trying to close out a deal because he had to track down NDAs, signed employment agreements, confirmation of 83(b) elections, etc. that were requested by the lead investor’s counsel during due diligence. Utilizing a simple alias like dataroom@ email may have eliminated such a stressful evening.
Understanding the Time Commitment That Goes Into Raising Capital. Raising capital can be a full-time job, and founders wear multiple hats. Finding an appropriate balance between product development, establishing the company culture, and making appropriate hires, all while also attempting to track down investment, is extremely difficult. Having a plan of attack that allows founders to manage their time wisely helps reduce burnout and preserve important cash and resources.
No Network. As the saying goes, your network is your net worth. Founders can have a great idea, but no track record or connections. You learn a lot when it is not your first rodeo, and that includes making important connections to help open doors. Having advisors who can make important connections goes a long way to creating a path for success.
You Need A Story That People Can Get Excited About. When you’re raising capital, you’re actually a salesperson who is convincing investors why your company and vision are a good investment, and getting investors excited about and invested in where the company is going.
For example, startup founders come to me often and say, “I’m going to raise money using a SAFE, should it be a discount SAFE or a valuation cap SAFE, I see these are the two popular options”. When this happens, I encourage them to take a step back and ask first if a SAFE is even a smart vehicle to use.

The SAFE form was created by YCominbator, a prestigious incubator. Therefore, if you’re a startup that is graduating from the program, you’re going to have a lot of investors interested in investing. However, if you have no track record, a SAFE may be a tough sell as (i) it has no interest rate, and (ii) there is no majority date. Therefore, sophisticated investors may want you to consider a convertible note, which may be a more attractive proposal for the investor.

However, let us say you are using a SAFE and need to decide on if you’re going to use a discount SAFE or a valuation cap SAFE. The decision is tied to your narrative and what and how you’re selling your company and your vision. If your pitch to investors is that you are raising a bridge fund to float you until a large, fixed price round in the next 3-6 months, then a discount is appropriate. You’re selling that you’ll offer a discount as a “thank you” for investing a few months before the round. However, if your pitch is that you’re doing a SAFE round now and then a larger round in 12-18 months, then unless the discount is very large, investors will expect their investment to offer a bigger return than 10-25% increase in value during a period in which the money was tied up in a SAFE and not earning any interest. They’ll want to lock in a valuation cap to achieve a higher reward as an early investor who invested when the company was at its most risky state.
Get a Co-Founder with Different, Complimentary Skills. Starting and building a company, and doing so while trying to avoid the pitfalls mentioned above, takes a varied skill set (and a lot of time). Most people will not be able to unilaterally have a great idea, keep company documents organized, negotiate contracts, manage finances, find and utilize a strong network, tell a great story to investors, and raise capital, all while also building a new product or service. While hiring an effective team can take a lot of this off of your plate, having a co-founder whose skills compliment your own will strengthen company leadership and effectiveness.

Hopefully, after you’ve read this article you’ll be able to avoid these kinds of common mistakes. That said, raising money is complicated, so if you still have questions or are looking for help with legal issues for your business, you are more than welcome to contact us at hello@archetypelegal.com.