If you are thinking to solve any problem in society and building a business around the solution or you want to build a business around your creativity; this article is for you.
Here we are discussing the 10 most common startup mistakes and the ways to avoid them.
Starting up on your own has never been an easy task. It requires a lot of patience and a hell lot of energy.
The show “Shark Tank India” on Sony television has created a dramatic awareness about the word “Start-up”. Even people in small towns and cities of the country are now looking after the possibility of becoming an “Entrepreneur”.
If you are a fresh graduate or an office goer and thinking of doing a start-up,
You need to know the “10 most common startup mistakes” normally done by startup founders so that you can avoid them and prevent your start-up from “failure”.
1. Co-founder
I have seen start-up founders who want to start on their own without a co-founder.
Start-up is a business that requires passion with lots of energy.
When the business is small it faces a lot of problems.
You can say that start-up founders generally cannot predict the problems that they may face during the initial period of starting up.
When they face problems they try to find out the solution by discussing those problems with other people.
Discussion is a good method to solve general problems but when it comes to your business-specific problems you need the support of someone aware of your Business model.
This helping hand should be a person who has an interest in your business idea or who has the same understanding as yours.
So, you must try to get a co-founder on board who thinks in the same way as you and who has the same knowledge about the business idea as you. I am not saying that nobody can start on his own, what I am saying is that it is better to have a co-founder in the startup.
2. Agreement between co-founders
You may have heard that some of your known persons have started a business and eventually the business got shut down due to a disagreement or difference of opinion between the partners.
You must enter into a formal agreement with your co-founder so that you can avoid these problems for your startup.
A co-founders agreement is a document between the co-founders of a start-up that clearly defines their roles and responsibilities. What they can do and what they are restricted to do etc.
On one hand, this agreement puts certain restrictions on the co-founders, so that they are prohibited to do anything not beneficial for the start-up.
On the other hand, this agreement gives certain powers to co-founders that they can use without asking the other co-founder.
Co-founders do not generally sign an agreement because they usually have the feeling in their minds that my co-founder is my friend or my near and dear person.
This is the first step towards failure because no one knows the type of situation co-founders are going to face in their start-up in the future.
So, it is advised to enter into a co-founders agreement before working on anything relating to your start-up.
If you are also thinking to start up without a co-founders agreement then think again.
3. Non-Disclosure Agreement.
While you are in the initial phase of your start-up you need to share a lot of things about your idea of a start-up.
This may include sharing the steps you are going to take to start your business. This may also include your business plans, the structure of your mobile application or website, the method of working, the method by which you are approaching customers, etc.
The sharing of these business details is necessary because you cannot do everything on your own.
Let us take an example; if you are planning for a new start-up in the online domain then it becomes necessary for you to interact with tech professionals in building your website or mobile application.
For this, you need to discuss everything about your idea with them so that they can build the best application or website.
But what if,
Any person with whom you have discussed your idea finds it fruitful and starts working on his own.
This will impact your business prospects.
As a solution to this, it is advised to sign a “Non-Disclosure Agreement” with every professional with whom you are dealing and share your idea, its working, and other details.
A Non-Disclosure Agreement restricts any such person from sharing the details of your start-up idea with anyone.
4. Non-Compete Agreement.
What if, your co-founder after working with you for some time leaves your company and startup the same business on his own?
Since you have discussed every aspect of your start-up with your co-founder now he has become aware of the idea.
Now how will you restrict him from starting the same business after leaving your start-up?
The way of restriction is through a “Non-Compete Agreement”.
Non-Compete Agreements are generally done between the founders of the start-up.
The purpose of these agreements is to prohibit the co-founders from doing the same business with any other person that they are doing presently.
For example,
If you and your friend thought of doing a start-up named “ABC” then the Non-compete agreement will restrict you as well as your friend (your co-founder) from starting the same business with any other person that “ABC” is doing, if anyone of you quits “ABC”.
5. Types of legal structures of business
At the time of starting up a business, the founders are usually confused about the type of legal structure of their business entity.
This confusion is due to the lack of knowledge about the types of legal structures available for the entity.
Due to this confusion, they start up their business by using their name or by using some fancy name.
Using any fancy name does not mean that you have followed a legal structure.
It is very much important to decide upon the most suitable legal structure from the very first day.
There are five types of legal structures available in the laws of India.
(a) Proprietorship Firm
In this structure, the business is started by using the Permanent Account Number (PAN) of the person who is doing the business.
For example, if MR “B” is starting a business then his income tax return will be filed based on his permanent account number, this is the proprietorship structure.
This structure is not advisable because when you go for raising funds for your startup then the investor will not infuse funds because he will not be able to share the ownership in your business. After all, it is not legally possible to share ownership in proprietorship businesses.
Not recommended for start-ups.
(b) Partnership Firm
In this two persons enter into a partnership which is governed by the Partnership act 1932.
If you are starting the business to make it a big brand name then this is also not advisable.
The business of the partnership is legally separate from its partners.
The income tax return is filed under the separate PAN of the partnership firm.
This structure is also not advisable because the investors will not invest in partnership firms due to the unlimited liability.
Not recommended for start-ups.
(c) Forming a Company
The companies are governed by the Companies Act 2013.
This is the best suitable for any business.
You will be able to get funding very easily because there is no legal problem in obtaining funds.
It has limited liability. It is a separate legal entity.
All the big businesses are in the form of corporate structures. The legal documentation is tough to maintain.
(d) Limited Liability Partnership Firm
It is a mixture of both company and partnership firms.
But it is not acceptable for investors for infusing funds. Not recommended for start-ups.
(e) One Person Company (OPC)
It is same as a proprietorship firm but has limited liability.
It is governed by the Companies act 2013.
Not recommended for startups.
6. Proper documentation
Keeping proper documentation is a very important aspect to consider from the very first day.
Start-up founders are seen to be careless in maintaining proper documents because they remain busy increasing sales and expanding business.
This is one of the biggest mistakes which can put them in great trouble and mess over a period of time.
It is recommended to properly maintain a separate place in their office for all the documents relating to their business.
Documentation includes legal documents, documents of clients, documents of vendors, bills and vouchers, bank accounts, etc.
7. Laws relating to intellectual property
Intellectual property includes your website, mobile application, the logo of your business, trademarks, patents, etc.
People are generally aware of the goods and service tax (GST) and income tax act but they are not so much aware of intellectual property laws.
Due to this unawareness, they do not protect their intellectual property under intellectual property laws.
The basic intellectual property of your business is the trademark you are using (in common parlance it is the logo or symbol) in your business.
In the initial phase of a Start-up, founders just use a fancy and well-designed logo on their website without taking any trademark registrations.
Founders generally think that once the business becomes stable then they would get the registration of their brand name or logo. This is a serious mistake because it is your brand name or logo by which the customer knows your product.
How many of you know the name of the company “One97 Communications Ltd? ……only a few.
How many of you know the name “Paytm”? I think the majority of you.
This “Paytm” is the brand name of “One97 communications Ltd” .i.e. the business is known to the public by its brand name, not the name of the company.
So get the registration of intellectual property of your business and protect your business. This will also help you in the growth of your business.
It costs almost nothing in comparison to your hard work and passion for your start-up.
8. Tax consultant and accountant
Not hiring a tax consultant and an accountant is also one of the common mistakes by start-up founders. These are the persons whose advice is necessary for you in your day-to-day operations of the business.
There are various provisions in the “Income Tax” law and the “Goods and Service Tax (GST)” law that you need to follow every day.
Like, how much TDS is to be deducted on payment?
How much expense can be done legally in cash?
How to write an invoice as per GST law? Etc.
In the initial phase of a start-up when the business is very small you are not required to hire these persons on the roll but outsourcing your tax and accounting work to them is sufficient.
So it is advised to outsource the tax and accounting work because hiring a tax consultant and accountant is more expensive than outsourcing the work to them.
9. Employee contracts
The hiring of a few employees is necessary for the start-up because everything cannot be done by the founders themselves.
Initially the founders hire the employees by orally deciding the date of joining of employees, salary and job profiles, etc.
This method of an oral agreement is not recommended and therefore it is advised to issue a formal letter of appointment to the employees mentioning the job profile, salary, notice period, and other necessary details.
Issuing a formal letter of appointment is an easy task and limits the possibility of disputes between the start-up and employees which in turn helps the founders to concentrate only on the business growth.
10. Customer contracts.
To increase sales start-up founders just try to grab the orders from the customers without any written documents and written terms and conditions.
If you are selling a product or providing any service to customers through your start-up and you just take orders through a phone call without any written contract or electronic mail or Whatsapp then you are doing a blunder.
Dealing with customers on oral terms may create disputes.
You must communicate your terms and conditions in writing to the customers and also try to get orders in writing from customers.
For any communication with customers or accepting any orders from the customers, it is recommended to follow the business practices as are followed by the big companies.
This creates a sense of respect for your company in the eyes of customers. This also helps you in laying down the foundation of strong business practices followed in the corporate world.
After reading the above 10 points you are now aware of the common mistakes done by start-ups that may create hurdles in their growth.
These mistakes can even lead to the shutting down of your dream start-up. Try to avoid them as soon as possible because it is easy to rectify the mistakes when your start-up is small.
The repetition of mistakes may lead to big failures.
Stay tuned for more on start-ups.
