Around 15 years ago, a student from India started his own company in Silicon Valley. He was a college dropout and academics were not his strong suit. Nonetheless, he and two friends worked hard on their business idea and were convinced they'd have each other's backs come what may. They were ready to hit the big time, sure that their idea would revolutionise the startup community. Yet, a year later things had changed. The idea no longer seemed to be a surefire winner and the friendship between the three had developed cracks that could not heal. Since they had not thought to get legal papers sorted, the partners bailed from the company with plenty of equity that they claimed was theirs. The boy felt cheated because he was the one who had built the lion's share of the company but was now left with one one-third stake. He had no option but to discontinue the company he was really passionate about. For him, it was hell on earth.
Getting the legalities in place is as important as any other strategy—leave it for too late and you could lose your entire company in a flash.
Take the above story very seriously as such incidents happen more often than you may think in startups. Getting the legalities in place is as important as any other strategy—leave it for too late and you could lose your entire company in a flash. Remember how Steve Jobs was removed from his own company? Or how Facebook co-founder Eduardo Saverin's stake was diluted to nothing? These are just some examples of the types of sticky situations that could lead to the undoing of a startup or its founder(s). Before you register your company, make sure you are well aware of the top five reasons why startups fail.
1. Battles over equity
When co-founders start fighting over equity, it often spells doom. We have seen many startups that got a very good response from the market initially but failed within months due to rifts between the founders.
Equity is so important because it determines how much of the company you own. Always remember, more the equity more the ownership. Further, all your hard work, effort, commitment and everything else is on one side and equity is on another. So chose your equity share wisely.
2. No written terms
If it is not documented then it does not exist. In this cruel world, there is no space left for oral agreements or mutual trust. We have seen various founders stabbing their own team members in the back. Where they once passionately exchanged ideas in coffee shops, they now hurl accusations in district courts. Rather than get embroiled in a legal battle later, make sure that each and every term is documented and agreed upon in writing by the founders. The way to go about this is to get a shareholder agreement drafted—it's a necessity. Else your partners may just snatch the company from under your nose.
3. Lack of commitment
A startup is not a one-person show—it is the outcome of a collective effort by a team. Just like in cricket, no one player can be credited for every aspect of a victory. It is the team that runs and makes a startup successful.
Where founders once passionately exchanged ideas in coffee shops, they now hurl accusations in district courts.
While every founder may not put in the same amount of hard work as the other, it is essential for each of them to be equally committed to the company. If that's not the case, then a less committed founder may be more likely to quit if the going gets tough. They may start looking for other opportunities, leaving the startup in the lurch. This creates rifts between the founders and may result in the startup itself falling apart.
As Mahatma Gandhi once said, "The world has enough for everyone's need, but not enough for everyone's greed." We have seen good startups fail because some founders see initial success as entirely of their own making. They begin to think that it is they who deserve all the accolades and all the profits. It's a myth—and this kind of greed can be dangerous for the business. The founder may try to increase their stake at the cost of other founders and this ultimately spirals into a crisis situation.
5. Not raising funding at the right time
In many cases, startups raise funding very early, even when they don't need it. This leads to high expenditure and low output and due to this, the startup no longer gets the second round and ultimately fails.