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5 steps to a financially-healthy startup

by Wendy Soon on October 11, 2013

hankbarry2Hank Barry’s meetup session was a hit! Not surprising though, for who wouldn’t want to learn from the ex-CEO of Napster, who has over 20 years’ experience funding startups, both as a lawyer and a partner at Hummer Winblad Venture Partners? With his very unique combination of experiences, Hank was able to give a very comprehensive view of the things to consider while seeking funding for your startup. Here are some of his advices:

1. Watch your startup hygiene. Keep your founder’s agreement straight, keep your stocks straight, keep your financial statements up to date. Make sure everything is kept organized and without dispute right from day one. They don’t look urgent, but they are all extremely important. Any mismanagement always comes back to haunt you at the least expected times. Most founders are great friends, so they think it is not necessary to settle such touchy issues early in the startup. They often think that delving too deep into stock options means a lack of trust in their co-founders. That is absolutely the wrong approach, and they are simply waiting for disaster to happen. Having a founder’s agreement is not about “distrust”, but rather establishing a clear understanding of each co-founder’s role in the company. It’s just a piece of paper, just a print out, so why not do it? It’s the first thing you should do when you start a company. Just get it done and get it out.
2. Settle founder’s equity with a lawyer. It’s personal, why get someone else involved? It’s good to have an external lawyer around when you discuss equity, because then you have someone neutral in the discussion. The lawyer can serve as a fire extinguisher if needed. Also, if there is any dispute, you can seek the lawyer’s opinion on what the typical arrangement is. So having a good lawyer who has extensive experience present during your startup founder equity allocation is the most ideal.
3. The VC process can be self-educated. The National Venture Capitalist Association has an extensive and comprehensive collection of all relevant documents related to the VC funding process. These range from the VC industry overview, to VC fund raising stats, to legal documents to note during the funding process. Hank highly recommends you thoroughly educate yourself about every aspect of the whole VC funding process, by going through that website and reading through the documents. Know the process well so you can be in a good position to negotiate and deal with the VCs. Be well prepared.

4. Declare your product’s functionality, but not the secret sauce! It’s common that after you describe what your product does, the investors ask about how you do that. However, it is ok to reject spilling the secret sauce. Check out this animation of how the founder solely describes the product and avoids talking about his secret sauce. Also, investors seriously don’t really care that much about the secret sauce. They ask about it, but the answer is not that critical to them. VCs are busy people, so they won’t drill all the way down into the details. There are many other important things they care about to ensure your startup is poised for success.

5. Be wary of consulting while doing your startup. It is like crack. It is addictive. Why? Because it takes time to generate revenue for your startup’s product, but consulting at the side gives instant money. It is only natural to get drawn to the instant money source. There are tendencies to get more and more involved in taking up consulting opportunities at the side, and neglect the startup’s key product as time passes. Hank warns about the consulting addiction of early stage startups. It is okay to do a little bit just to help you bootstrap, but be extremely cautious of not falling deep into the pit and finding out about the addiction a tad too late.

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7 comments on “5 steps to a financially-healthy startup

  1. Pingback: Hank Barry, Finance Hacking, Lighting Pitch and Beer! - Vorkspace Blog — Vorkspace Blog

  2. Pingback: Beyond the 5 steps to a financially-healthy startup - Vorkspace Blog — Vorkspace Blog

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