10 mistakes when starting

The purpose of setting up your corporation is usually to protect you from damage (limitation of liability) and to help you generate revenue. In most cases, start-ups therefore start with a UG or GmbH. Establishment requires notarial form and is therefore associated with costs in addition to capital expenditure. It is only understandable that many founders would like to save themselves the hassle of drawing up complex contracts and the associated advice. On the other hand, it is incomprehensible that they do the same, as you have the duty to protect your business from damage.

This article is intended to point out the most important points to consider when setting up a company. Setting up yourself is easy and simple. You go to the notary, who reads out the contract — he also offers a free sample — everyone signs, the whole thing is registered and the company is ready. Since there is little you can do wrong here, founders often go to a notary without legal advice, and many lawyers also advise the “foundation” as there is also little that you can do wrong when giving advice.

A little wrong but a lot right when you know what's important!

The aim of this article is to raise awareness and to protect against unexplained solo action. As shown above, the GmbH should prevent damage and increase liquidity or value. But what about this premise with regard to cost savings and:

• Tax optimization
• Internal liability
• Internal disputes
• Cash outflow due to severance payments
• Cash outflow due to contract changes
• Limited financing opportunities
• High loss of shares when financed
• Etc.

off?

This article is therefore intended, insofar as it is generally possible, to show and explain what needs to be considered in any case and where it may be appropriate to consult one or the other expert on a case-by-case basis.

MISTAKE 1 — NO OR INCOMPLETE ADVICE

Notaries do not advise, but provide clarification. They ensure that the agreement is also legally possible and that none of the parties involved is unduly disadvantaged without their knowledge. Going to the notary is therefore correct and necessary, but does not replace advice.

Very few tax advisors are actively involved and most lawyers do not understand the tax or financial significance and effects of many early decisions. Company law follows tax law, IP transactions and intellectual property protection follow company law and tax law, forms of participation follow tax law and corporate law, and everything follows venture capital with regard to any exits. It is therefore important to always be well advised every step of the way.

As a shareholder and managing director, you also have the duty to prevent damage from the company, which is why it is imperative to have a consultant on hand. However, with a view to increasing the value of the start-up and increasing the value of the shares, it makes sense to look for an advisor who is familiar with the entire process, i.e. who knows what to expect the founders both in financing rounds and in the exit, in order to set the course at an early stage.

MISTAKE 2 — NOT THINKING ABOUT A HOLDING

It should not give the impression that always (!) a holding company can be useful. In most cases, however, it is. However, since you can usually only set up a holding structure retrospectively at a cost, you should at least think about it and find out more beforehand. Because as a rule, the holding company serves to ensure that you only pay 1.5% tax on your sales proceeds, instead of around 27%. You can find out more about the holding company here.

ERROR 3 — REASONS WITH SAMPLE PROTOCOL

In order to save 500€ on notarization, founders often start with the sample protocol instead of a properly drafted statute and forget that important rules of the game for cooperation are omitted. If there is a lack of resolution, this can lead to a standstill in the company, to an outflow of liquidity when a shareholder leaves, or simply to your co-founder being able to easily sell his share of the business to your ex-girlfriend or ex-boyfriend in the event of a dispute and you then have to continue the business with this person.

You can avoid this with an individually drafted statute that sets the rules of the game. However, it is important to advise and coordinate with your individual case. You can find out more about the individual statutes here.

MISTAKE 4 — DON'T FIX SHARES UNTIL LATER

It often goes like this: Two out of three founders found the company and get started. For now, the 3rd co-founder (for whatever reason) remains out of the picture, because: “We can sort this out with the shares later.”

“Later” means that the company is successful and has achieved a certain increase in value. To then get on board, you must either buy the shares at market price or tax them as a gift. However, since you usually cannot (or do not want to) afford purchase price or gift tax, you will end up in the employee pool with all subsequent employees, with a few exceptions. And that is why you should participate in the company right from the start or agree on appropriate option rights.

MISTAKE 5 - JOINT HOLDING

You should always have your own holding company: The founding shareholders establish a joint holding company and then the operative company. This later leads to difficulties with participation agreements, as investors want a so-called “vesting” of the individual founders. But this is not easily possible with a joint holding company. In addition, you want to build up your business with your risk-averse co-founder, but later enjoy the holding benefits alone. Especially in the case of subsequent investments, do not discuss whether and how investments will be made from the holding company.

MISTAKE 6 - TIMING

You should set up in good time and get your setup done early enough. Because the founders usually get started, set up their product or MVP and then legally founded later. Here, too, the following applies: “Later” means that the product was developed outside society and must now “somehow” enter society. This can usually only be achieved with a transfer, which is generally taxable and entails other problems such as authorship and IP transfer, which are usually associated with costs. That is why develop your product within society, and then you save yourself these costs. Because let's be honest, that was actually what you wanted to achieve with the subsequent founding.

FOUNDER - MISTAKE 7 - ADVISOR

You should always choose your advisors and supporters carefully:

Since there is little money at the beginning, management consultants usually take shares for support with a business plan, financial plan or fundraising, which is absolutely fine, as this provides valuable input at an early stage. However, this means that they have a permanent stake in the company, which in turn is no problem if they also participate regularly. However, if the input is more proactive, then you should make sure that you get it back from the company with buyout clauses - with appropriate compensation, of course. Because a passive shareholder with too many rights and an disorderly CapTable regularly scares off investors.

MISTAKE 8 — NO VESTING

Protect yourself when choosing your co-founders:

In the absence of sufficient selection, people often take the first option without paying attention to whether the co-shareholder really has the necessary qualification, motivation and commitment. At Founder's level, however, you would regularly have to make tough business decisions that don't suit everyone's pace or understanding. But that is exactly what the vesting agreement is for, a kind of trial period in order to earn the shares gradually. Because this will also get you a troublemaker out of society before he can block the business.

MISTAKE 9 - TRADEMARK REGISTRATION

You should take care of your trademark application early on:

The company name and product name are determined promptly and with a focus on growth, brand protection is more likely to disappear. Or maybe the trademark was even initially registered, but registered with one of the co-founders and not with the company. In the first case, this means that everyone — including your competition — can use your brand or have it protected. In the 2nd case - as with mistake No. 6 - you have to bring the increase in value to the company. In both cases, we lawyers can solve this legally, but in return you pay our opportunity costs, which you could actually save yourself.

ERROR 10 - LEGAL FORM

You should start with the right legal form:

Since there is usually no advice at the beginning, founders start somehow without worrying about the right structure. Usually with a GbR or UG. It is not a question of what is fast, what is cheap, what do the acquaintances do and what sounds good, but what helps you as an entrepreneur to bring your products and services to the market while optimising liability, financing and tax issues. Because you're doing the whole thing as an entrepreneur to earn money and save money. Then start right from the start to avoid costs and restructuring.

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