As startup founders, our minds often revolve around the vision of rapid growth, innovation, and dynamically capturing the market. However, in the rush to grow the business, founders can happen to overlook certain fundamental management areas, which can result in serious legal, financial, and operational consequences. Here are a few critical points to keep in mind.
Business Law – Deep Understanding of Management’s Responsibilities
Failing to comply with legal and financial responsibilities can have severe consequences for the company as well as for individual board members, including penalties, lawsuits etc. For that reason Founders should have a good understanding of legal and financial obligations that come with different forms of conducting business.
There are various legal forms of conducting a business, each with its specific implications and consequences. Choosing the right legal form should be based on an informed decision, taking into account not just the potential benefits, but also the legal obligations and risks involved.
A common choice among entrepreneurs is the limited liability company. While an LLC provides certain protections, such as limited personal liability for company debts, these protections can be misleading if the management is unaware of its responsibilities. If the company becomes insolvent and the management fails to file for bankruptcy promptly, the board members can be held personally liable for the company’s debts, regardless of the original legal protections. This liability can extend to the entire personal assets of a board member.
Furthermore, the management must be well-versed in financial reporting requirements to avoid additional risks and penalties.
Financial Controlling and Cash Flow – The Key to Survival
A lack of liquidity is one of the common reasons for startup failures. Good financial management is not only about controlling revenues and expenses but also about continuously analyzing liquidity, forecasting cash flows, and preparing for difficult periods.
If the management loses control over the financial situation, it may lead to sudden staff reductions, necessity to cut down on key activities, or taking desperate measures like costly loans. Running a business “on the edge” without solid financial foundations can finally result in the company’s bankruptcy.
Labor Law and Entrepreneurs’ Mistakes – Costly Oversights
For young startups rapidly building teams, the cost of thoroughly understanding and implementing labor laws is often overlooked. However, non-compliance with regulations can lead to serious problems. Failure to comply with labor law regulations, such as employment conditions, wages, working hours, or terminations, can lead to employee claims, fines, and even legal proceedings. Costly lawsuits, the necessity of paying compensation are deteriorating company atmosphere and image, therefore creating difficulties in maintaining a reputation as an employer.
Compliance with Regulations – Not Just Labor Law
Every business must comply with the applicable legal regulations, but startups often overlook regulations related to data protection, tax laws, or rules for conducting business, as well as industry specific regulations. Neglecting regulations can lead to hefty fines, while tax errors can result in costly audits and sanctions.
Operational and Technological Risk Management
Underestimating risks related to technological operations (e.g., system downtime, IT security issues) can cost a company its customers and revenue. Effective risk management is crucial in fast-growing SaaS startups.
Strategic Planning and Priority Management
Excessive focus on current challenges without a long-term strategy can lead to stagnation and lack of innovation. Effective priority management and efficient resource allocation are key.
Building Organizational Culture
Founders often focus on products and markets, forgetting to build a healthy organizational culture. Neglecting this aspect can lead to high employee turnover, decreased motivation, and team productivity issues.
Remember, growing a startup is not just about rapid growth and investments. It’s crucial to establish solid legal, financial, and organizational foundations to protect your business from unexpected challenges.
About the author:
Agnieszka Węglarz is an experienced ex-corporate ICT manager, a long time practitioner, business consultant and mentor. She helps tech startups and SMEs to streamline their businesses with limited resources. In her workshops and projects she concentrates on practical aspects of business growth. She runs her own consultancy business and cooperates with Google for Startups as an international mentor in business modeling and growth strategies.