Entrepreneurs: Don’t Let Your NDA Be A Self Inflicted Wound That Kills Your Start Up Company

A recent question came up about non-disclosure agreements, the always popular NDA, and whether it was required when seeking outside investment in a start up company.

I have been on both sides of that argument with my own companies and with my clients.

I mentor and consult to a lot of start up companies and one thing is clear – ideas by themselves are not worth very much without a genuinely implementable plan, an experienced team for realistic execution, some kind of traction to demonstrate you can grab wallet share – and the funding to make it real.

Nevertheless, I am often presented with an NDA by my entrepreneur clients – and in most cases, I am usually willing to sign it although I immediately share with them that almost no angel investor or venture capital group will be willing to do so just to see their business plan. (There’s already a ton written about the reasons – just Google “NDA Venture Capital” and you will quickly see why you will instantly lose a lot of credibility just in the asking.)

I can remember one NDA presented to me by a prospective client that I would not sign:  He wanted $400 million in expressed liquidated damages if he, in his sole opinion, felt that I violated the NDA anytime in the next 20 years.

This was for a company that only existed on a single Excel spreadsheet.  I refused to sign, returned his retainer and wished him well.

My intuition is that this guy’s company still only exists on that same single Excel spreadsheet.

Don’t let your own NDA be a self inflicted wound that kills YOUR start up company!

Entrepreneurs: How Can I Raise Angel Investor Money For Start Up Costs?

The following is a question I recently received from a client:

Do you have any ideas how I can raise money legally just for start up expenses?  The only real start up expenses left would be getting through our capital raising phase.  People want to invest – but I know that I can’t take their money as investors due to SEC rules.  What should I do?

As you can imagine, I get this question a LOT from my clients. Generally, this is referred to as seed capital and it is usually the hardest money to raise since it is almost always perceived as a highly risky investment. The inside joke in the investment community is that you can only find this kind of seed capital from three sources – The Three “F’s”: Friends, Family and Fools.

The double whammy is that raising seed capital is usually considered to be like all the other kinds of fundraising pursued by start up companies – meaning that you typically have to go through the usual Reg D offering rules including preparation of a private placement memorandum, or PPM, just like you would to pursue any kind of angel investor.

The one exception I know of: bringing in a co-founder, or co-founders, who contribute time, energy, effort and money to both start AND manage the new venture. Of course, this usually means that the co-founder(s) are going to want a significant ownership position in the company…and the more money they contribute v. your cash contributions, the more of the company they may demand. Plus, when you get around to really raising the capital you need to execute your business plan, you and the other co-founders will almost always be subjected to more dilution of ownership.

One of the keys in this is that the co-founder cannot simply be a passive investor. If they are a passive investor, then we are back to all the Reg D rules. This is based on my three decades of experience as an entrepreneur – since I am not a lawyer you should check with your own securities attorney to see if they have some legal maneuver around this constraint.

All of that being said, you and your idea and your vision – could be the very rare exception to all of the above. But the probabilities are not with you.

My usual suggestion to my clients: Try not to stop for seed capital rounds…do whatever you can to get the company formed and the initial products or services at least fully formulated with a well thought out action plan and business plan with realistic financial projections based on the action plan. Then, do what you have to do in order to combine all of this with a legitimate Reg D PPM.

Armed with this kind of planning, you will know that the numbers work and the idea is sound…and you will be able to offer a much more compelling investment opportunity to angel investors.

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Business Plans: The Second Biggest Mistake Entrepreneurs Make With Their Business Plan For Their Start Up Company

This one mistake is so critical that it jeopardizes the immediate survivability of your start up company – even before you get started.

What IS The Second Biggest Mistake?

Many cost-sensitive entrepreneurs depend on number crunchers, bean counters and newly minted MBAs for their projections – just to save a few dollars.

New start up CEOs doom their new company by pinching pennies in the wrong place. Instead, what they need are pivotal insights from experienced consultants who can provide the guidance the entrepreneur needs for producing a realistic, genuinely implementable business plan.

Your business plan is not some academic document – instead, it is your crucial road map to successful implementation of your vision for your new company.

The Driving Assumptions

The most important part of any business plan is the detailed financial projections that are the basis for the entire business model of every new start up company. There are four sets of underlying assumptions that drive all the projections:

1. Start up costs – what will you need to spend up front to get the company going?
2. Sales forecast – the single most important set of assumptions for your whole plan – how many of what, will you sell, for how much, at what costs, when?
3. Personnel – how many, of what kind of employees, will you need at what cost, when?
4. Operating costs – what will it really cost to be in business, generate sales, give necessary sales support and exemplary customer service and cover all back office expenses?

Every part of your financial projections is just arithmetic – based on those four sets of driving assumptions. Because it is just arithmetic, many entrepreneurs make the often fatal mistake of assuming it is trivial and can be done easily and cheaply.

But – if you guess wrong on any of these assumptions, then most of your projections are wrong – including two of your most important projections: your cash flow and your capital needs. If you guess wrong on your assumptions that impact these, then you will probably run out of money and your new company will fail.

Number Crunchers and Bean Counters

Number crunchers and bean counters are great at arithmetic. So are newly minted MBAs. And, they can be relatively cheap to hire. But this cheap hire may be the most expensive mistake you will make as a start up CEO.

These cheap hires almost never have any experience base or expertises that help entrepreneurs make meaningful assumptions. So, entrepreneurs who use this approach for their business plans end up with GIGO: garbage in, garbage out projections that are misleading at best – but more often, fatal in the end.

As the adage goes, the only thing worse than going the wrong direction – is going the wrong direction enthusiastically. By basing your business plan on the wrong assumptions, you end up going the wrong direction – probably enthusiastically – believing your bean counter-generated plan will be the path to wealth.

Entrepreneurs who have thought they were saving a few hundred dollars by hiring cheap number crunchers or inexperienced MBAs, end up losing everything they’ve invested in their new company – all because they were penny wise – and dollar foolish – or rather, thousands, hundreds of thousands or millions of dollars foolish.

Cash is always limited for start up companies – but this is one place you do not want to get trapped by false savings.

The Right Solution

What’s the best way for you to avoid the second biggest mistake for your new start up company?

Hire an experienced management consultant who specializes in start up companies – particularly a consultant who has started at least a dozen of their own companies. That way, you get insights based on real life experience that will help you end up with a genuinely implementable plan for the future – your future and the future of your new start up company.

Ceo Resource LLC has specialized in cost-effectively helping over 2,000 entrepreneurs and start up companies with their business planning for the past 16 years.

Please check out our services listed in the left column of this blog.