TRC 044: Early decisions that can complicate your startup's exit

Read time: 5 mins

Most of my work as a start up advisor takes place in the early stages of a founder’s journey.

But sometimes I get to follow people all the way through to the happy days of an exit.

Last week I was on a panel talking about how to prepare for an exit.

While it may seem distant when you're just starting out, the decisions you make in these early stages can significantly impact your ability to exit or sell your business down the line.

Here are key areas where early decisions can complicate future exits—and how to navigate them for a smoother journey ahead:

1. Investment Terms: Aligning Short-Term Gains with Long-Term Flexibility

Securing investment is critical to fuelling growth, but agreeing to restrictive terms early on can limit your options later.

Key issues to watch for are:

• Liquidation preferences: If investors secure multiple times their initial investment upon exit, it could diminish the returns for founders and later investors.
• Control provisions: Giving away too much control to early investors may make it difficult to make strategic decisions down the line, or cause conflict at exit time.
• Anti-dilution clauses: These provisions may protect early investors but can complicate future financing rounds and make the cap table harder to clean up before an exit.

Tip: Work with experienced legal counsel to ensure your term sheets are founder-friendly and won’t lock you into unfavourable terms later on.

2. Equity and Option Schemes: Setting the Right Incentives

Stock options and equity grants are fantastic tools for attracting and retaining talent, but poorly structured plans can cause friction during an acquisition or sale:

• Vesting schedules: If key employees are on long vesting schedules, they may have little incentive to stay on board post-acquisition, impacting negotiations.
• Dilution: Equity pools that are too large or spread too thin can dilute founder shares significantly, leaving founders with less control and lower financial returns.

Tip: Structure equity carefully, keeping an eye on what future acquirers will value, like retaining key team members or having clean equity structures that won’t cause headaches during due diligence.

3. Corporate Structure: Get It Right from the Start

The corporate structure you choose will influence taxes, legal liabilities, and the overall complexity of an eventual exit. It’s important to select a structure that fits your business and future plans, while keeping in mind the expectations of potential investors or acquirers in different markets.

• Legal Entity: The type of legal entity you choose—whether it’s a limited company, private corporation, or partnership—affects everything from governance to tax implications. Make sure to pick one that offers flexibility for future fundraising and acquisitions, and complies with regulations in the countries where you operate.
• Cross-Border Operations: If you’re aiming to expand internationally, it’s important to plan how your business will be structured across borders. Setting up subsidiaries in different regions can be beneficial for tax purposes but may add complexity when it comes to due diligence and compliance during a sale.
• Local Jurisdictions: Some countries have founder-friendly corporate laws that are attractive to investors, while others may impose heavy administrative or tax burdens. Researching which jurisdiction best suits your business needs and exit strategy is critical early on.

Tip: Consult with legal and tax advisors who understand the international aspects of your business. They can help you choose a structure that works globally and ensures you’re well-positioned for a smooth exit, no matter where your buyers are located.

4. Intellectual Property Ownership: Protect What You’ve Built

A common pitfall is failing to secure proper ownership of intellectual property (IP), which can derail a sale.

• IP assignment: Ensure all employees, contractors, and co-founders sign IP assignment agreements early to avoid disputes.
• Patents and trademarks: Start protecting your brand and technology early to build valuable assets that will appeal to potential buyers.

Tip: Getting a handle on IP rights from day one avoids costly disputes or gaps in ownership when you’re ready to sell.

5. Governance and Cap Table Management: Maintain Control and Cleanliness

As your company grows, keeping your cap table clean and your governance tight becomes more important:

• Cap table complexity: A messy cap table with too many stakeholders and individual provisions can scare off potential buyers. Ensure you’re tracking equity ownership accurately and minimising clutter.
• Governance structure: Decisions around the board structure, voting rights, and founder roles should be made with a long-term view. Too much dilution of control can make later-stage decisions difficult to navigate.

Tip: Regularly clean up your cap table and consider bringing in governance expertise early on to avoid issues down the road.

Early Decisions Have Lasting Impacts

The decisions you make now—whether in structuring investments, building out equity incentives, or choosing the right corporate structure—can have profound consequences on your ability to exit smoothly later.

I speak to founders with horrific regularity who gave in to bad terms to maximise valuation or left important admin until too late and lived to regret it.

Taking a long-term view and seeking the right advice now can save you headaches, and potentially millions in value, when it’s time to sell your business.

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